EN BANC employees.
—The proper payment of separation pay further falls under the jurisdiction of the
G.R. No. 203355, August 18, 2015
LEO R. ROSALES, EDGAR SOLIS JONATHAN G. RANIOLA, LITO FELICIANO,
RAYMUNDO DIDAL, JR., NESTOR SALIN, ARNULFO S. ABRIL, RUBEN FLORES,
DANTE FERMA AND MELCHOR SELGA, Petitioners, v. NEW A.N.J.H. ENTERPRISES &
N.H. OIL MILL CORPORATION, NOEL AWAYAN, MA. FE AWAYAN, BYRON ILAGAN,
HEIDI A. ILAGAN AND AVELINO AWAYAN, Respondents.
DECISION
Remedial Law; Civil Procedure; Appeals; On the issue of perfecting the appeal, the Court of
Appeals (CA) was correct when it pointed out that Rule VI of the New Rules of Procedure of
the National Labor Relations Commission (NLRC) provides that a motion to reduce bond shall
be entertained “upon the posting of a bond in a reasonable amount in relation to the monetary
award.”—On the issue of perfecting the appeal, the CA was correct when it pointed out that
Rule VI of the New Rules of Procedure of the NLRC provides that a motion to reduce bond
shall be entertained “upon the posting of a bond in a reasonable amount in relation to the
monetary award.” As to what the “reasonable amount” is, the NLRC has wide discretion in
determining the reasonableness of the bond for purposes of perfecting an appeal.
Same; Same; Res Judicata; Requisites of Res Judicata.—On the matter of the application of
the doctrine of res judicata, however, this Court is loath to sustain the finding of the appellate
court and the NLRC. For res judicata to apply, the concurrence of the following requisites
must be verified: (1) the former judgment is final; (2) it is rendered by a court having
jurisdiction over the subject matter and the parties; (3) it is a judgment or an order on the
merits; (4) there is — between the first and the second actions — identity of parties, of subject
matter, and of causes of action.
Labor Law; Labor Disputes; Words and Phrases; Article 219 (previously Article 212) of the
Labor Code defines a “labor dispute” as “any controversy or matter concerning terms and
conditions of employment or the association or representation of persons in negotiating, fixing,
maintaining, changing or arranging the terms and conditions of employment, regardless of
whether the disputants stand in the proximate relation of employer and employee.”—Article
219 (previously Article 212) of the Labor Code defines a “labor dispute” as “any controversy or
matter concerning terms and conditions of employment or the association or representation of
persons in negotiating, fixing, maintaining, changing or arranging the terms and conditions of
employment, regardless of whether the disputants stand in the proximate relation of employer
and employee.” As separation pay concerns a term and condition of employment, Noel’s
request to be guided in the payment thereof is clearly a labor dispute under the Labor Code.
Same; Separation Pay; Labor Arbiters; Jurisdiction; The proper payment of separation pay
falls under the jurisdiction of the labor arbiter (LA) pursuant to Art. 224 (previously Art. 217) of
the Labor Code, as it is mandated as a necessary condition for the termination of
labor arbiter pursuant to Art. 224 (previously Art. 217) of the Labor Code, as it is mandated as
a necessary condition for the termination of employees, viz.: Art. 224. Jurisdiction of the Labor
Arbiters and the Commission. (a) Except as otherwise provided under this Code, the Labor
Arbiters shall have original and exclusive jurisdiction to hear and decide, within thirty (30)
calendar days after the submission of the case by the parties for decision without extension,
even in the absence of stenographic notes, the following cases involving all workers, whether
agricultural or nonagricultural: 1. Unfair labor practice cases; 2. Termination disputes; x x x x
6. Except claims for employees compensation, social security, medicare and maternity
benefits, all other claims arising from employer-employee relations, including those of persons
in domestic or household service, involving an amount exceeding five thousand pesos
(P5,000.00) regardless of whether accompanied with a claim for reinstatement.
Same; Same; Res Judicata; In SME Bank, Inc. v. De Guzman, 707 SCRA 35 (2013), the
Supreme Court (SC) held that the acceptance of separation pay is an issue distinct from the
legality of the dismissal of the employees.—While there may be substantial identity of the
parties, there is no identity of subject matter or cause of action. In SME Bank, Inc. v. De
Guzman, 707 SCRA 35 (2013), this Court held that the acceptance of separation pay is an
issue distinct from the legality of the dismissal of the employees. We held: The conformity of
the employees to the corporation’s act of considering them as terminated and their
subsequent acceptance of separation pay does not remove the taint of illegal dismissal.
Acceptance of separation pay does not bar the employees from subsequently contesting the
legality of their dismissal, nor does it estop them from challenging the legality of their
separation from the service.
Corporations; Piercing the Veil of Corporate Fiction; The application of the doctrine of piercing
the veil of corporate fiction is frowned upon.—The application of the doctrine of piercing the
veil of corporate fiction is frowned upon. However, this Court will not hesitate to disregard the
corporate fiction if it is used to such an extent that injustice, fraud, or crime is committed
against another in disregard of his rights. In this case, petitioners advance the application of
the doctrine because they were terminated from employment on the pretext that there will be
an impending permanent closure of the business as a result of an intended sale of its assets
to an undisclosed corporation, and that there will be a change in the management.
Same; Same; Mere ownership by a single stockholder of all or nearly all of the capital stock of
the corporation does not by itself justify piercing the corporate veil.—Subsequent events
revealed that the buyer of the assets of their employer was a corporation owned by the same
employer and members of his family. Furthermore, the business reopened in less than a
month under the same management. Admittedly, mere ownership by a single stockholder of
all or nearly all of the capital stock of the corporation does not by itself justify piercing the
corporate veil. Nonetheless, in this case, other circumstances show that the buyer of the
assets of petitioners’ employer is none other than his alter ego. Rosales vs. vs. New A.N.J.H.
Enterprises, 767 SCRA 149, G.R. No. 203355 August 18, 2015
VELASCO JR., J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing the
September 5, 2012 Decision1 of the Court of Appeals (CA) in CA-G.R. SP No. 124395, which,
in turn, affirmed the Resolutions of the National Labor Relations Commission (NLRC) dated
December 28, 20112 and February 28, 20123 in NLRC-LAC Case No. 07-001796-11.
Respondent New ANJH Enterprises (New ANJH) is a sole proprietorship owned by
respondent Noel Awayan (Noel). Petitioners are its former employees who worked as
machine operators, drivers, helpers, lead and boiler men.
Allegedly due to dwindling capital, on February 11, 2010, Noel wrote the Director of the
Department of Labor and Employment (DOLE) Region IV-A a letter regarding New ANJH's
impending cessation of operations and the sale of its assets to respondent NH Oil Mill
Corporation (NH Oil), as well as the termination of thirty-three (33) employees by reason
thereof.4 On February 13, 2010, Noel met with the 33 affected employees, which included
petitioners, to inform them of his plan.5 On even date, he gave the employees uniformly-
worded Notices dated February 12, 20106 informing them of the cessation of operations of
New ANJH effective March 15, 2010 and the sale of its assets to a corporation. Noel also
offered the employees, including petitioners, their separation pay.
On March 5, 2010, Noel signed a Deed of Sale selling the equipment, machines, tools and/or
other devices being used by New ANJH Enterprises for the manufacturing and/or extraction of
coconut oil for P950,000 to NH Oil, as represented by respondent Heidi A. Ilagan (Heidi),
Noel's sister.7cralawrednad
Parenthetically, the Articles of Incorporation of NH Oil were prepared on January 27, 2010
with Noel appearing to have more than two-thirds (2/3) of the subscribed capital stock of the
corporation.8 The remaining shares had been subscribed by Heidi and other members of the
Awayan family.9cralawrednad
On March 8, 2010, respondents New ANJH and Noel filed before the NLRC Sub-Regional
Arbitration Branch No. IV (NLRC-SRAB-IV), San Pablo City a "Letter Request for
Intervention," which was docketed as SRAB-IV-03-5066-10-L. The letter request
reads:cralawlawlibrary
Please be informed that the business operations of the New ANJH Enterprises, a single
Proprietorship engaged in oil extraction situated in San Pablo City, will be permanently
closed effective 15 March 2010 due to lack of capital caused by enormous uncollected
receivables/debts and the necessity for the plant to undergo general repairs and maintenance.
xxxx
In this connection, we respectfully request that we be allowed to effect the payment of the
separation benefits to our employees before your Office and with your kind intervention to
ensure that we are properly guided by the provisions of law in this
undertaking.10 (Emphasis supplied)
On March. 16, 2010, petitioners Lito Feliciano (Feliciano), Edgar Solis (Solis), and Nestor
Salin (Salin) received their respective separation pays, signed the corresponding check
vouchers and executed Quitclaims and Release before Labor Arbiter Melchisedek A. Guan
(LA Guan) of NLRC SRAB-IV San Pablo Office.11cralawrednad
On March 27, 2010, petitioner Leo Rosales (Rosales) similarly received his separation pay
from Noel and signed a Quitclaim and Release.12 On March 29, 2010, the other petitioners,
Amulfo Abril (Abril), Raymundo Didal (Didal), Ruben Flores (Flores), Melchor Selga (Selga),
Jonathan Ranola (Ranola), and Dante Ferma (Ferma) also received their separation benefits
and signed their respective Quitclaims and Release and check vouchers.13cralawrednad
Following the payments thus made to petitioners and their execution of Quitclaims and
Release, LA Guan issued four (4) Orders, to wit: three Orders all dated March 22, 2010 for
petitioners Feliciano, Solis, and Salin;14 and one Order dated April 8, 2010 for petitioners Abril,
Flores, Didal, Ferma, Rosales, Selga and Ranola.15 In the said Orders, LA Guan declared the
"labor dispute" between New ANJH and petitioners as "dismissed with prejudice on ground of
settlement."16cralawrednad
Petitioners, however, filed a complaint for illegal dismissal, docketed as NLRC Case No. RAB-
IV-04-00649-10-L, with NLRC Regional Arbitration Branch IV (NLRC-RAB-IV) in Calamba
City. They alleged in their complaint that while New ANJH stopped its operations on March 15,
2010, it resumed its operations as NH Oil using the same machineries and with the same
owners and management.17 Petitioners thus claimed that the sale of the assets of New ANJH
to NH Oil was a circumvention of their security of tenure.
In a Decision dated April 29, 2011,18 Executive Labor Arbiter Generoso V. Santos (ELA
Santos) found that petitioners had been illegally dismissed and ordered their reinstatement
and the payment of One Million Six Thousand Forty-Five and 87/100 Pesos (P1,006,045.87)
corresponding to the petitioners' full backwages less the amount paid to them as their
respective "separation pay." In ruling for the petitioners, ELA Santos ratiocinated that the
buyer "in the 'impending sale' undisclosed in the notices of [petitioners] is divulged by
subsequent development to be practically the same as the seller." Hence, for ELA Santos, it
was extremely difficult to conclude that the sale was genuine and can validly justify the
termination of the petitioners.
Respondents filed their Notice of Appeal with Appeal Memorandum19 along with a Verified
Motion to Reduce Bond20 with the NLRC. They also posted 60% of the award ordered by the
LA, or Six Hundred Three Thousand Six Hundred Twenty-Seven and 52/100 Pesos
(P603,627.52), as their appeal bond.21cralawrednad
Meanwhile, petitioners also filed a Memorandum of Partial Appeal contending that ELA
Santos erred in failing to award them moral and exemplary damages.22cralawrednad
On September 24, 2011, the NLRC issued a Decision23 denying respondents' Verified Motion
to Reduce Bond for lack of merit and so dismissing their appeal for non-perfection. In the
same Decision, the NLRC also granted petitioners' partial appeal by modifying ELA Santos'
Decision to include the award of P20,000.00 to each petitioner as moral and exemplary
damages.24cralawrednad
Respondents filed their Motion for Reconsideration with Motion to Admit Additional Appeal
Cash Bond25cralawred with corresponding payment of additional cash bond.26cralawrednad
While the motion was opposed by petitioners,27 the NLRC, in its Resolution dated December
28, 2011,28 reversed its earlier Decision and ordered the dismissal of petitioners' complaint on
the ground that it was barred by the Orders issued by LA Guan under the doctrine of res
judicata. Further, the NLRC pointed out that the sale of New ANJH's assets to NH Oil Mill was
in the exercise of sound management prerogative and there was no proof that it was made to
defeat petitioners' security of tenure.
In its Resolution dated February 28, 2012,29 the NLRC denied petitioners' Motion for
Reconsideration. Hence, petitioners filed a petition for certiorari with the CA.
In the assailed Decision,30 the appellate court denied the petition for certiorari, thereby
affirming the NLRC's Resolutions dated December 28, 2011 and February 28, 2012.
In its Decision, the appellate court held that private respondents had substantially complied
with the rule requiring the posting of an appeal bond equivalent to the total award given to the
employees. More importantly, so the CA held, the Orders rendered by LA Guan in NLRC
Case No. SRAB IV-03-5066-10-L were considered final and binding upon the parties and had
the force and effect of a judgment rendered by the labor arbiter. Thus, the appellate court
declared that the petitioners' complaint for illegal dismissal was already barred by res judicata.
Aggrieved by the CA's Decision, petitioners are now before this Court on a petition for review
on certiorari.
We find the petition to be with merit.
The suspension of the period to perfect the appeal upon the filing of a motion to reduce
bond
On the issue of perfecting the appeal, the CA was correct when it pointed out that Rule VI of
the New Rules of Procedure of the NLRC provides that a motion to reduce bond shall be
entertained "upon the posting of a bond in a reasonable amount in relation to the monetary
award." As to what the "reasonable amount" is, the NLRC has wide discretion in determining
the reasonableness of the bond for purposes of perfecting an appeal. In Garcia v. KJ
Commercial,31 this Court explained:cralawlawlibrary
The filing of a motion to reduce bond and compliance with the two conditions stop the running
of the period to perfect an appeal. x x x
xxxx
The NLRC has full discretion to grant or deny the motion to reduce bond, and it may
rule on the motion beyond the 10-day period within which to perfect an
appeal. Obviously, at the time of the filing of the motion to reduce bond and posting of a bond
in a reasonable amount, there is no assurance whether the appellant's motion is indeed based
on "meritorious ground" and whether the bond he or she posted is of a "reasonable amount."
Thus, the appellant always runs the risk of failing to perfect an appeal.
x x x In order to give full effect to the provisions on motion to reduce bond, the appellant
must be allowed to wait for the ruling of the NLRC on the motion even beyond the 10-
day period to perfect an appeal. If the NLRC grants the motion and rules that there is
indeed meritorious ground and that the amount of the bond posted is reasonable, then the
appeal is perfected. If the NLRC denies the motion, the appellant may still file a motion
for reconsideration as provided under Section 15, Rule VII of the Rules. If the NLRC
grants the motion for reconsideration and rules that there is indeed meritorious ground
and that the amount of the bond posted is reasonable, then the appeal is perfected. If
the NLRC denies the motion, then the decision of the labor arbiter becomes final and
executory.
xxx
In any case, the rule that the filing of a motion to reduce bond shall not stop the running of the
period to perfect an appeal is not absolute. The Court may relax the rule. In Intertranz
Container Lines, Inc. v. Bautista, the Court held:cralawlawlibrary
"Jurisprudence tells us that in labor cases, an appeal from a decision involving a monetary
award may be perfected only upon the posting of cash or surety bond. The Court, however,
has relaxed this requirement under certain exceptional circumstances in order to resolve
controversies on their merits. These circumstances include: (1) fundamental consideration of
substantial justice; (2) prevention of miscarriage of justice or of unjust enrichment; and (3)
special circumstances of the case combined with its legal merits, and the amount and the
issue involved."32 (emphasis and underscoring supplied)
In this case, the NLRC had reconsidered its original position and declared that the 60% bond
was reasonable given the merits of the justification provided by respondents in their Motion to
Reduce Bond, as supplemented by their Motion for Reconsideration with Motion to Admit
Additional Appeal Cash Bond. The CA affirmed the merits of the grounds cited by respondents
in their motions and the reasonableness of the bond originally posted by respondents. This is
in accord with the guidelines established in McBurnie v. Ganzon,33 where this Court declared
that the posting of a provisional cash or surety bond equivalent to ten percent (10%) of the
monetary award subject of the appeal is sufficient provided that there is meritorious ground
therefor, viz:cralawlawlibrary
[O]n the matter of the filing and acceptance of motions to reduce appeal bond, as provided in
Section 6, Rule VI of the 2011 NLRC Rules of Procedure, the Court hereby RESOLVES that
henceforth, the following guidelines shall be observed:cralawlawlibrary
(a) The filing of a motion to reduce appeal bond shall be entertained by the NLRC subject to
the following conditions: (1) there is meritorious ground; and (2) a bond in a reasonable
amount is posted;
(b) For purposes of compliance with condition no. (2), a motion shall be accompanied by the
posting of a provisional cash or surety bond equivalent to ten percent (10%) of the monetary
award subject of the appeal, exclusive of damages and attorney's fees;
 exclusive jurisdiction to hear and decide, within thirty (30) calendar days after the submission
(c) Compliance with the foregoing conditions shall suffice to suspend the running of the 10- of the case by the parties for decision without extension, even in the absence of stenographic
day reglementary period to perfect an appeal from the labor arbiter's decision to the NLRC; notes, the following cases involving all workers, whether agricultural or non
agricultural:ChanRoblesvirtualLawlibrary
(d) The NLRC retains its authority and duty to resolve the motion to reduce bond and
determine the final amount of bond that shall be posted by the appellant, still in accordance 1. Unfair labor practice cases;
with the standards of meritorious grounds and reasonable amount; and
2. Termination disputes;
(e) In the event that the NLRC denies the motion to reduce bond, or requires a bond
that exceeds the amount of the provisional bond, the appellant shall be given a fresh xxxx
period of ten (10) days from notice of the NLRC order within which to perfect the appeal
by posting the required appeal bond.34 emphasis and underscoring added) 6. Except claims for employees compensation, social security, medicare and maternity
It is noted that the respondents have eventually posted the full amount of the award ordered benefits, all other claims arising from employer-employee relations, including
by the labor arbiter. Thus, given the absence of grave abuse of discretion on the part of the those of persons in domestic or household service, involving an amount exceeding
NLRC and the affirmation of the CA of the reasonableness of the motions and the amount of five thousand pesos (P5,000.00) regardless of whether accompanied with a claim
bond posted, there is no ground for this Court to reverse the CA's finding that the appeal had for reinstatement. (Emphasis supplied)
been perfected.
The invocation of the labor arbiter's jurisdiction by way of a letter request instead of a
Res Judicata does not bar the filing of the complaints for illegal dismissal
complaint is of no moment, as it is well-settled that the application of technical rules of
procedure is relaxed in labor cases.
On the matter of the application of the doctrine of res judicata, however, this Court is loath to
The third requisite, however, is not present. The Orders rendered by LA Guan cannot be
sustain the finding of the appellate court and the NLRC. For res judicata to apply, the
considered as constituting a judgment on the merits. The Orders simply manifest that
concurrence of the following requisites must be verified: (1) the former judgment is final; (2) it
petitioners "are amenable to the computations made by the company respecting their
is rendered by a court having jurisdiction over the subject matter and the parties; (3) it is a
separation pay." Nothing more. They do not clearly state the petitioners' right or New ANJH's
judgment or an order on the merits; (4) there is-between the first and the second actions-
corresponding duty as a result of the termination.36cralawrednad
identity of parties, of subject matter, and of causes of action.35cralawrednad
Similarly, the fourth requisite is- also absent. While there may be substantial identity of the
The petitioners dispute the existence of all of the foregoing requisites. First, petitioners parties, there is no identity of subject matter or cause of action. In SME Bank, Inc. v. De
contend that LA Guan does not have jurisdiction to issue the Orders in SRAB-IV-03-5066-10-L
Guzman,37 this Court held that the acceptance of separation pay is an issue distinct from the
since, in the first place, Noel's letter request for guidance in the payment of separation pay is
legality of the dismissal of the employees. We held:cralawlawlibrary
allegedly not a "labor dispute."
The conformity of the employees to the corporation's act of considering them as terminated
and their subsequent acceptance of separation pay does not remove the taint of illegal
Article 219 (previously Article 212) of the Labor Code defines a "labor dispute" as "any
dismissal. Acceptance of separation pay does not bar the employees from subsequently
controversy or matter concerning terms and conditions of employment or the association
contesting the legality of their dismissal, nor does it estop them from challenging the
or representation of persons in negotiating, fixing, maintaining, changing or arranging the
legality of their separation from the service.38 (Emphasis supplied)
terms and conditions of employment, regardless of whether the disputants stand in the In the absence of the third and fourth requisites, the appellate court should have proceeded to
proximate relation of employer and employee." As separation pay concerns a term and
rule on the validity of petitioners' termination.
condition of employment, Noel's request to be guided in the payment thereof is clearly a labor
dispute under the Labor Code.
Piercing the veil of corporate existence is justified in the present case.
The proper payment of separation pay further falls under the jurisdiction of the labor arbiter
The application of the doctrine of piercing the veil of corporate fiction is frowned upon.
pursuant to Art. 224 (previously Art. 217) of the Labor Code, as it is mandated as a necessary
However, this Court will not hesitate to disregard the corporate fiction if it is used to such an
condition for the termination of employees, viz,:cralawlawlibrary
extent that injustice, fraud, or crime is committed against another in disregard of his
Art. 224. Jurisdiction of the Labor Arbiters and the Commission.
rights.39cralawrednad
(a) Except as otherwise provided under this Code,the Labor Arbiters shall have original and
In this case, petitioners advance the application of the doctrine because they were terminated
from employment on the pretext that there will be an impending permanent closure of the
business as a result of an intended sale of its assets to an undisclosed corporation, and that
there will be a change in the management. The termination notices received by petitioners
identically read:cralawlawlibrary
Nais po naming ipaabot sa inyo na ang New ANJH Enterprises ay ihihinto na ang operasyon
dahil sa nagpasya ako bilang may-ari na ipagbili na ang ari-arian nito sa iba kung kayat
magkakaroon ng pagpapalit sa pamumunuan nito.
Kaugnay po nito at ayon sa itinatadhana ng batas ay nais kong ipaabot sa inyo na 30 araw
matapos ninyong matanggap ang pasabing ito o simula sa Marso 15, 2010 ay ititigil na ang
operasyon ng New ANJH Enterprises at sa nasabi ring petsa ay matatapos na rin ang
pagtratrabaho o "employment" ninyo sa New ANJH Enterprises.40
Subsequent events, however, revealed that the buyer of the assets of their employer was a
corporation owned by the same employer and members of his family. Furthermore, the
business re-opened in less than a month under the same management.
Admittedly, mere ownership by a single stockholder of all or nearly all of the capital stock of
the corporation does not by itself justify piercing the corporate veil. Nonetheless, in this case,
other circumstances show that the buyer of the assets of petitioners' employer is none other
than his alter ego.41 We quote with approval the observations of ELA Santos:cralawlawlibrary
Respondents did not allege that they informed complainants neither did they state in the
notices of termination that the buyer in the "impending sale" is NH Oil Mill. Pondering on these
observations, this Office finds it too difficult to surmise that respondents' omission was not
deliberate, and so this Office holds that Noel was not in good faith in dealing with
complainants. The information disclosed by the Certificate of Registration and Articles of
Incorporation of NH Oil Mill explains respondents' motive. Its stockholders are members of
[Noel's] family known to complainants, and Noel is the controlling stockholder and
director. The immediate resumption of operation after cessation of operation on March 15,
2010 further explains it. While complainants failed to prove that the stockholders in NH Oil Mill
were those who managed ANJH, respondents did not dispute that there was no change
in the management people, premises, tools, devices, equipment, and machinery under
NH Oil Mill. The buyer in the "impending sale" undisclosed in the notices to
complainants is divulged by subsequent development to be practically the same as the
seller. These things are inconsistent with good faith.
The subscribed capital stock of Noel and Heidi [in NH Oil] are worth Php790,000.00 and
Php190,000.00, respectively, or the total of Php980,000.00. Respondents claim that Noel
was managing ANJH and Heidi was its Secretary. The Deed of Sale is signed by Noel
and Heidi, Noel as [sellerl, and Heidi as representative of NH Oil Mill. Respondents did
not enumerate what [were] the equipment etc. subject of the "sale," and how they were
depreciated, and what [were] the equipment/machines owned by Avelino and rented by NH
Oil Mill and for how much? Therefrom, it is extremely difficult to conclude by quantum of
evidence acceptable to [a] reasonable mind, [that] the "sale to a distinct entity" is genuine.
And while the notices of termination state that there would be [a] change in management, this
Office notes that respondents do not deny that Noel and Heidi continue to manage NH
Oil Mill. Therefore, as far as complainants' employment is concerned, this Office pierces the
veil of corporate fiction of NH Oil Mill and finds that the purported sale thereto of the assets of
ANJH is insufficient to validly terminate such employment. This Office cannot rule otherwise
without running afoul to the mandate of the Constitution securing to the workingman his
employment, and guaranteeing to him full protection. So this Office declares that complainants
were illegally dismissed.42 (emphasis and underscoring supplied)
Clearly, the milieu of the present case compels this Court to remove NH Oil's corporate mask
as it had become, and was used as, a shield for fraud, illegality and inequity against the
petitioners.
WHEREFORE, the instant petition is GRANTED and the Decision dated September 5, 2012
of the Court of Appeals in CA-G.R. SP No. 124395, affirming the Resolutions of the National
Labor Relations Commission (NLRC) dated December 28, 2011 and February 28, 2012 in
NLRC-LAC Case No. 07-001796-11, is hereby REVERSED and SET ASIDE. The Decision of
Executive Labor Arbiter Generoso Santos in NLRC Case No. RAB-IV-04-00649-10-L to the
effect that petitioners were illegally dismissed is REINSTATED.
SO ORDERED.chanrobles virtuallawlibrary

xxxx

Here, complainants' employment was terminated for the alleged sale of assets of ANJH to NH
Oil Mill that would allegedly entail [a] change of management. The Deed of Sale dated March
5, 2010 [that] respondents presented (Annex "20", respondents position paper) to prove the
"sale," states that [for] the consideration of Nine Hundred Fifty Thousand Pesos
(Php950,000.00), Noel sold to NH Oil Mill the equipment, machines, tool and/or other devises
being used by ANJH for manufacturing and/or extraction of coconut oil. This Office cannot
simply accept it as sufficient proof of sale by the seller to a distinct and separate entity.

xxxx
 INTERNATIONAL ACADEMY OF MANAGEMENT AND ECONOMICS (I/AME),
PETITIONER, V. LITTON AND COMPANY, INC., RESPONDENT.
Mercantile Law; Corporations; Separate Legal Personality; In general, corporations,
whether stock or nonstock, are treated as separate and distinct legal entities from the
natural persons composing them.—In general, corporations, whether stock or
nonstock, are treated as separate and distinct legal entities from the natural persons
composing them. The privilege of being considered a distinct and separate entity is
confined to legitimate uses, and is subject to equitable limitations to prevent its being
exercised for fraudulent, unfair or illegal purposes. However, once equitable limitations
are breached using the coverture of the corporate veil, courts may step in to pierce the
same.
Same; Same; Same; Piercing the Veil of Corporate Fiction; The piercing of the
corporate veil is premised on the fact that the corporation concerned must have been
properly served with summons or properly subjected to the jurisdiction of the court a
quo.—The piercing of the corporate veil is premised on the fact that the corporation
concerned must have been properly served with summons or properly subjected to the
jurisdiction of the court a quo. Corollary thereto, it cannot be subjected to a writ of
execution meant for another in violation of its right to due process. There exists,
however, an exception to this rule: if it is shown “by clear and convincing proof that the
separate and distinct personality of the corporation was purposefully employed to
evade a legitimate and binding commitment and perpetuate a fraud or like
wrongdoings.” The resistance of the Court to offend the right to due process of a
corporation that is a nonparty in a main case, may disintegrate not only when its
director, officer, shareholder, trustee or member is a party to the main case, but when it
finds facts which show that piercing of the corporate veil is merited.
Same; Same; Same; Same; The Supreme Court (SC) did not put in issue whether the
corporation is a nonstock, nonprofit, nongovernmental corporation in considering the
application of the doctrine of piercing of corporate veil.—In determining the propriety
of applicability of piercing the veil of corporate fiction, this Court, in a number of cases,
did not put in issue whether a corporation is a stock or nonstock corporation. In Sulo
ng Bayan, Inc. v. Gregorio Araneta, Inc., 72 SCRA 347 (1976), we considered but
ultimately refused to pierce the corporate veil of a nonstock, nonprofit corporation
which sought to institute an action for reconveyance of real property on behalf of its
members. This Court held that the nonstock corporation had no personality to institute
a class suit on behalf of its members, considering that the non-stock corporation was
not an assignee or transferee of the real property in question, and did not have an
identity that was one and the same as its members. In another case, this Court did not
put in issue whether the corporation is a non-stock, nonprofit, nongovernmental
corporation in considering the application of the doctrine of piercing of corporate veil.
In Republic of the Philippines v. Institute for Social Concern, 449 SCRA 512 (2005),
while we did not allow the piercing of the corporate veil, this Court affirmed the finding
of the CA that the Chairman of the Institute for Social Concern cannot be held jointly
and severally liable with the aforesaid nongovernmental organization (NGO) at the time
the Memorandum of Agreement was entered into with the Philippine Government. We
found no fraud in that case committed by the Chairman that would have justified the
piercing of the corporate veil of the NGO.
Same; Same; Equitable Owner; Words and Phrases; An equitable owner is an
individual who is a non-shareholder defendant, who exercises sufficient control or
considerable authority over the corporation to the point of completely disregarding the
corporate form and acting as though its assets are his or her alone to manage and
distribute.—The concept of equitable ownership, for stock or nonstock corporations, in
piercing of the corporate veil scenarios, may also be considered. An equitable owner is
an individual who is a non-shareholder defendant, who exercises sufficient control or
considerable authority over the corporation to the point of completely disregarding the
corporate form and acting as though its assets are his or her alone to manage and
distribute.
Same; Same; Separate Legal Personality; Piercing the Veil of Corporate Fiction; The
Supreme Court (SC) has considered a deceased natural person as one and the same
with his corporation to protect the succession rights of his legal heirs to his estate.—
The piercing of the corporate veil may apply to corporations as well as natural persons
involved with corporations. This Court has held that the “corporate mask may be lifted
and the corporate veil may be pierced when a corporation is just but the alter ego of a
person or of another corporation.” We have considered a deceased natural person as
one and the same with his corporation to protect the succession rights of his legal
heirs to his estate. In Cease v. Court of Appeals, 93 SCRA 483 (1979), the predecessor-
in-interest organized a close corporation which acquired properties during its
existence. When he died intestate, trouble ensued amongst his children on whether or
not to consider his company one and the same with his person. The Court agreed with
the trial court when it pierced the corporate veil of the decedent’s corporation. It found
that said corporation was his business conduit and alter ego. Thus, the acquired
properties were actually properties of the decedent and as such, should be divided
among the decedent’s legitimate children in the partition of his estate.
Same; Same; Same; Same; Outsider Reverse Piercing; Insider Reverse Piercing; Words
and Phrases; Outsider reverse piercing occurs when a party with a claim against an
individual or corporation attempts to be repaid with assets of a corporation owned or
substantially controlled by the defendant. In contrast, in insider reverse piercing, the
controlling members will attempt to ignore the corporate fiction in order to take
advantage of a benefit available to the corporation, such as an interest in a lawsuit or
protection of personal assets.—As held in the U.S. Case, C.F. Trust, Inc., v. First Flight
Limited Partnership, “in a traditional veil-piercing action, a court disregards the
existence of the corporate entity so a claimant can reach the assets of a corporate
insider. In a reverse piercing action, however, the plaintiff seeks to reach the assets of
a corporation to satisfy claims against a corporate insider.” “Reverse piercing flows in
the opposite direction (of traditional corporate veil-piercing) and makes the corporation
liable for the debt of the shareholders.” It has two (2) types: outsider reverse piercing
and insider reverse piercing. Outsider reverse piercing occurs when a party with a
claim against an individual or corporation attempts to be repaid with assets of a
International Academy of Management and Economics (I/AME)vs. Litton and Company,
Inc.
corporation owned or substantially controlled by the defendant. In contrast, in insider
reverse piercing, the controlling members will attempt to ignore the corporate fiction in
order to take advantage of a benefit available to the corporation, such as an interest in
a lawsuit or protection of personal assets. International Academy of Management and
Economics (I/AME)vs. Litton and Company, Inc. , 848 SCRA 437, G.R. No. 191525
December 13, 2017
DECISION
SERENO, C.J.:
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court assailing
the Court of Appeals (CA) Decision[1] and Resolution[2] in CA-G.R. SP No. 107727.
The CA affirmed the Judgment[3] and Order[4] of the Regional Trial Court (RTC) of Manila in
Special Civil Action No. 06-115547 reinstating the Order[5] of the Metropolitan Trial Court
(MeTC) of Manila in favor of Litton and Company, Inc. (Litton).
THE FACTS
The facts, as culled from the records, are as follows:
Atty. Emmanuel T. Santos (Santos), a lessee to two (2) buildings owned by Litton, owed the
latter rental arrears as well as his share of the payment of realty taxes.[6]
Consequently, Litton filed a complaint for unlawful detainer against Santos before the MeTC of
Manila. The MeTC ruled in Litton's favor and ordered Santos to vacate A.I.D. Building and
Litton Apartments and to pay various sums of money representing unpaid arrears, realty
taxes, penalty, and attorney's fees.[7]
It appears however that the judgment was not executed. Litton subsequently filed an action for
revival of judgment, which was granted by the RTC.[8] Santos then appealed the RTC decision
to the CA, which nevertheless affirmed the RTC.[9] The said CA decision became final and
executory on 22 March 1994.[10]
On 11 November 1996, the sheriff of the MeTC of Manila levied on a piece of real property
covered by Transfer Certificate of Title (TCT) No. 187565 and registered in the name of
International Academy of Management and Economics Incorporated (I/AME), in order to
execute the judgment against Santos.[11] The annotations on TCT No. 187565 indicated that
such was "only up to the extent of the share of Emmanuel T. Santos."[12]
I/AME filed with MeTC a "Motion to Lift or Remove Annotations Inscribed in TCT No. 187565
of the Register of Deeds of Makati City."[13] I/AME claimed that it has a separate and distinct
personality from Santos; hence, its properties should not be made to answer for the latter's
liabilities. The motion was denied in an Order dated 29 October 2004.
Upon motion for reconsideration of I/AME, the MeTC reversed its earlier ruling and ordered
the cancellation of the annotations of levy as well as the writ of execution. Litton then elevated
the case to the RTC, which in turn reversed the Order granting I/AME's motion for
reconsideration and reinstated the original Order dated 29 October 2004.
I/AME then filed a petition with the CA to contest the judgment of the RTC, which was
eventually denied by the appellate court.
THE CA RULING
The CA upheld the Judgment and Order of the RTC and held that no grave abuse of
discretion was committed when the trial court pierced the corporate veil of I/AME.[14]
It took note of how Santos had utilized I/AME to insulate the Makati real property covered by
TCT No. 187565 from the execution of the judgment rendered against him, for the following
reasons:
First, the Deed of Absolute Sale dated 31 August 1979 indicated that Santos, being the
.President, was representing I/AME as the vendee.[15] However, records show that it was only
in 1985 that I/AME was organized as a juridical entity.[16] Obviously, Santos could not have
been President of a non-existent corporation at that time.[17]
Second, the CA noted that the subject real property was transferred to I/AME during the
pendency of the appeal for the revival of the judgment in the ejectment case in the CA. [18]
Finally, the CA observed that the Register of Deeds of Makati City issued TCT No. 187565
only on 17 November 1993, fourteen (14) years after the execution of the Deed of Absolute
Sale and more than eight (8) years after I/AME was incorporated. [19]
Thus, the CA concluded that Santos merely used I/AME as a shield to protect his property
from the coverage of the writ of execution; therefore, piercing the veil of corporate fiction is
proper.[20]
THE ISSUES
The issues boil down to the alleged denial of due process when the court pierced the
corporate veil of I/AME and its property was made to answer for the liability of Santos.
OUR RULING
We deny the petition.
There was no violation of due process
against I/AME
Petitioner avers that its right to due process was violated when it was dragged into the case
and its real property made an object of a writ of execution in a judgment against Santos. It
argues that since it was not impleaded in the main case, the court a quo never acquired
jurisdiction over it. Indeed, compliance with the recognized modes of acquisition of jurisdiction
cannot be dispensed with even in piercing the veil of corporation.[21]
In a petition for review on certiorari under Rule 45, only questions of law shall be entertained.
This Court considers the determination of the existence of any of the circumstances that
would warrant the piercing of the veil of corporate fiction as a question of fact which ordinarily
cannot be the subject of a petition for review on certiorari under Rule 45. We will only take
cognizance of factual issues if the findings of the lower court are not supported by the
evidence on record or are based on a misapprehension of facts.[22] Once the CA affirms the
factual findings of the trial court, such findings are deemed final and conclusive and thus, may
not be reviewed on appeal, unless the judgment of the CA depends on a misapprehension of
facts, which if properly considered, would justify a different conclusion.[23] Such exception
however, is not applicable in this case.
The 29 October 2004 MeTC judgment, the RTC judgment, and the CA decision are one in
accord on the matters presented before this Court.
In general, corporations, whether stock or non-stock, are treated as separate and distinct legal
entities from the natural persons composing them. The privilege of being considered a distinct
and separate entity is confined to legitimate uses, and is subject to equitable limitations to
prevent its being exercised for fraudulent, unfair or illegal purposes.[24] However, once
equitable limitations are breached using the coverture of the corporate veil, courts may step in
to pierce the same.
As we held in Lanuza, Jr. v. BF Corporation:[25]
Piercing the corporate veil is warranted when "[the separate personality of a corporation] is
used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues." It is also
warranted in alter ego cases "where a corporation is merely a farce since it is a mere alter ego
or business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct
of another corporation."
When [the] corporate veil is pierced, the corporation and persons who are normally treated as
distinct from the corporation are treated as one person, such that when the corporation is
adjudged liable, these persons, too, become liable as if they were the corporation.
The piercing of the corporate veil is premised on the fact that the corporation concerned must
have been properly served with summons or properly subjected to the jurisdiction of the
court a quo. Corollary thereto, it cannot be subjected to a writ of execution meant for another
in violation of its right to due process.[26]
There exists, however, an exception to this rule: if it is shown "by clear and convincing proof
that the separate and distinct personality of the corporation was purposefully employed to
evade a legitimate and binding commitment and perpetuate a fraud or like wrongdoings."[27]
The resistance of the Court to offend the right to due process of a corporation that is a
nonparty in a main case, may disintegrate not only when its director, officer, shareholder,
trustee or member is a party to the main case, but when it finds facts which show that piercing
of the corporate veil is merited.[28]
Thus, as the Court has already ruled, a party whose corporation is vulnerable to piercing of its
corporate veil cannot argue violation of due process.[29]
In this case, the Court confirms the lower courts' findings that Santos had an existing
obligation based on a court judgment that he owed monthly rentals and unpaid realty taxes
under a lease contract he entered into as lessee with the Littons as lessor. He was not able to
comply with this particular obligation, and in fact, refused to comply therewith.
This Court agrees with the CA that Santos used I/AME as a means to defeat judicial
processes and to evade his obligation to Litton.[30] Thus, even while I/AME was not impleaded
in the main case and yet was so named in a writ of execution to satisfy a court judgment
against Santos, it is vulnerable to the piercing of its corporate veil. We will further expound on
this matter.
Piercing the Corporate Veil may Apply to
Non-stock Corporations
Petitioner I/AME argues that the doctrine of piercing the corporate veil applies only to stock
corporations, and not to non-stock, nonprofit corporations such as I/AME since there are no
stockholders to hold liable in such a situation but instead only members. Hence, they do not
have investments or shares of stock or assets to answer for possible liabilities. Thus, no one
in a non-stock corporation can be held liable in case the corporate veil is disregarded or
pierced.[31]
The CA disagreed. It ruled that since the law does not make a distinction between a stock and
non-stock corporation, neither should there be a distinction in case the doctrine of piercing the
veil of corporate fiction has to be applied. While I/AME is an educational institution, the CA
further ruled, it still is a registered corporation conducting its affairs as such.[32]
This Court agrees with the CA.
In determining the propriety of applicability of piercing the veil of corporate fiction, this Court,
in a number of cases, did not put in issue whether a corporation is a stock or non-stock
corporation. In Sulo ng Bayan, Inc. v. Gregorio Araneta, Inc.,[33] we considered but ultimately
refused to pierce the corporate veil of a non-stock non-profit corporation which sought to
institute an action for reconveyance of real property on behalf of its members. This Court held
that the non-stock corporation had no personality to institute a class suit on behalf of its
members, considering that the non-stock corporation was not an assignee or transferee of the
real property in question, and did not have an identity that was one and the same as its
members.
In another case, this Court did not put in issue whether the corporation is a non-stock, non-
profit, non-governmental corporation in considering the application of the doctrine of piercing
of corporate veil. In Republic of the Philippines v. Institute for Social Concern,[34] while we did
not allow the piercing of the corporate veil, this Court affirmed the finding of the CA that the
Chairman of the Institute for Social Concern cannot be held jointly and severally liable with the
aforesaid non-governmental organization (NGO) at the time the Memorandum of Agreement
was entered into with the Philippine Government. We found no fraud in that case committed
by the Chairman that would have justified the piercing of the corporate veil of the NGO.[35]
In the United States, from which we have adopted our law on corporations, non-profit
corporations are not immune from the doctrine of piercing the corporate veil. Their courts view
piercing of the corporation as an equitable remedy, which justifies said courts to scrutinize any
organization however organized and in whatever manner it operates. Moreover, control of
ownership does not hinge on stock ownership.
As held in Barineau v. Barineau:[36]
[t]he mere fact that the corporation involved is a nonprofit corporation does not by itself
preclude a court from applying the equitable remedy of piercing the corporate veil. The
equitable character of the remedy permits a court to look to the substance of the organization,
and its decision is not controlled by the statutory framework under which the corporation was
formed and operated. While it may appear to be impossible for a person to exercise
ownership control over a nonstock, not-for-profit corporation, a person can be held personally
liable under the alter ego theory if the evidence shows that the person controlling the
corporation did in fact exercise control, even though there was no stock ownership.
In another U.S. case, Public Interest Bounty Hunters v. Board of Governors of Federal
Reserve System,[37] the U.S. Court allowed the piercing of the corporate veil of the Foundation
headed by the plaintiff, in order to avoid inequitable results. Plaintiff was found to be the sole
trustee, the sole member of the board, and the sole financial contributor to the Foundation. In
the end, the Court found that the plaintiff used the Foundation to avoid paying attorneys' fees.
The concept of equitable ownership, for stock or non-stock corporations, in piercing of the
corporate veil scenarios, may also be considered. An equitable owner is an individual who is a
non-shareholder defendant, who exercises sufficient control or considerable authority over the
corporation to the point of completely disregarding the corporate form and acting as though its
assets are his or her alone to manage and distribute.[38]
Given the foregoing, this Court sees no reason why a non-stock corporation such as I/AME,
may not be scrutinized for purposes of piercing the corporate veil or fiction.
Piercing the Corporate Veil may Apply to
Natural Persons
The petitioner also insists that the piercing of the corporate veil cannot be applied to a natural
person - in this case, Santos - simply because as a human being, he has no corporate veil
shrouding or covering his person.[39]
a) When the Corporation is the Alter Ego of a Natural Person
As cited in Sulo ng Bayan, Inc. v. Araneta, Inc.,[40] "[t]he doctrine of alter ego is based upon
the misuse of a corporation by an individual for wrongful or inequitable purposes, and in
such case the court merely disregards the corporate entity and holds the individual
responsible for acts knowingly and intentionally done in the name of the corporation." This,
Santos has done in this case. Santos formed I/AME, using the non-stock corporation, to
evade paying his judgment creditor, Litton.
The piercing of the corporate veil may apply to corporations as well as natural persons
involved with corporations. This Court has held that the "corporate mask may be lifted and the
corporate veil may be pierced when a corporation is just but the alter ego of a person or of
another corporation.”[41]
We have considered a deceased natural person as one and the same with his corporation to
protect the succession rights of his legal heirs to his estate. In Cease v. Court of
Appeals,[42] the predecessor-in-interest organized a close corporation which acquired
properties during its existence. When he died intestate, trouble ensued amongst his children
on whether or not to consider his company one and the same with his person. The Court
agreed with the trial court when it pierced the corporate veil of the decedent's corporation. It
found that said corporation was his business conduit and alter ego. Thus, the acquired
properties were actually properties of the decedent and as such, should be divided among the
decedent's legitimate children in the partition of his estate.[43]
In another instance, this Court allowed the piercing of the corporate veil against another
natural person, in Arcilla v. Court of Appeals.[44] The case stemmed from a complaint for sum
of money against Arcilla for his failure to pay his loan from the private respondent. Arcilla, in
his defense, alleged that the loan was in the name of his family corporation, CSAR Marine
Resources, Inc. He further argued that the CA erred in holding CSAR Marine Resources liable
to the private respondent since the latter was not impleaded as a party in the case. This Court
allowed the piercing of the corporate veil and held that Arcilla used "his capacity as President,
x x x [as] a sanctuary for a defense x x x to avoid complying with the liability adjudged against
him x x x.''[45] We held that his liability remained attached even if he was impleaded as a party,
and not the corporation, to the collection case and even if he ceased to be corporate
president.[46] Indeed, even if Arcilla had ceased to be corporate president, he remained
personally liable for the judgment debt to pay his personal loan, for we treated him and the
corporation as one and the same. CSAR Marine was deemed his alter ego.
We find similarities with Arcilla and the instant case. Like Arcilla, Santos: (1) was adjudged
liable to pay on a judgment against him; (2) he became President of a corporation; (3) he
formed a corporation to conceal assets which were supposed to pay for the judgment against
his favor; (4) the corporation which has Santos as its President, is being asked by the court to
pay on the judgment; and (5) he may not use as a defense that he is no longer President of
I/AME (although a visit to the website of the school shows he is the current President).[47]
This Court agrees with the CA that I/AME is the alter ego of Santos and Santos - the natural
person - is the alter ego of I/AME. Santos falsely represented himself as President of I/AME in
the Deed of Absolute Sale when he bought the Makati real property, at a time when I/AME
had not yet existed. Uncontroverted facts in this case also reveal the findings of MeTC
showing Santos and I/AME as being one and the same person:
(1) Santos is the conceptualizer and implementor of I/AME;
(2) Santos' contribution is P1,200,000.00 (One Million Two Hundred Thousand Pesos) out of
the P1,500,000.00 (One Million Five Hundred Thousand Pesos), making him the majority
contributor of I/AME; and,
(3) The building being occupied by I/AME is named after Santos using his known nickname (to
date it is called, the "Noli Santos International Tower").[48]
This Court deems I/AME and Santos as alter egos of each other based on the former's own
admission in its pleadings before the trial court. In its Answer (to Amended Petition) with the
RTC entitled Litton and Company, Inc. v. Hon. Hernandez-Calledo, Civil Case No. 06-115547,
I/AME admitted the allegations found in paragraphs 2, 4 and 5 of the amended petition of
Litton, particularly paragraph number 4 which states:
4. Respondent, International Academy of Management and Economics Inc. (hereinafter
referred to as Respondent I/AME), is a corporation organized and existing under Philippine
laws with address at 1061 Metropolitan Avenue, San Antonio Village, Makati City, where it
may be served with summons and other judicial processes. It is the corporate entity used
by Respondent Santos as his alter ego for the purpose of shielding his assets from the
reach of his creditors, one of which is herein Petitioner.[49] (Emphases ours)
Hence, I/AME is the alter ego of the natural person, Santos, which the latter used to evade the
execution on the Makati property, thus frustrating the satisfaction of the judgment won by
Litton.
b) Reverse Piercing of the Corporate Veil
This Court in Arcilla pierced the corporate veil of CSAR Marine Resources to satisfy a money
judgment against its erstwhile President, Arcilla.
We borrow from American parlance what is called reverse piercing or reverse corporate
piercing or piercing the corporate veil "in reverse."
As held in the U.S. Case, C.F. Trust, Inc., v. First Flight Limited Partnership,[50] "in a traditional immediately choose which property or part thereof may be levied upon to satisfy the judgment.
veil-piercing action, a court disregards the existence of the corporate entity so a claimant can If the judgment obligor does not exercise the option, personal properties, if any, shall be first
reach the assets of a corporate insider. In a reverse piercing action, however, the plaintiff levied and then on real properties if the personal properties are deemed insufficient to answer
seeks to reach the assets of a corporation to satisfy claims against a corporate insider." for the judgment.[58]
"Reverse-piercing flows in the opposite direction (of traditional corporate veil-piercing) and In the instant case, it may be possible for this Court to recommend that Litton run after the
makes the corporation liable for the debt of the shareholders."[51] other properties of Santos that could satisfy the money judgment - first personal, then other
It has two (2) types: outsider reverse piercing and insider reverse piercing. Outsider reverse real properties other than that of the school. However, if we allow this, we frustrate the
piercing occurs when a party with a claim against an individual or corporation attempts to be decades-old yet valid MeTC judgment which levied on the real property now titled under the
repaid with assets of a corporation owned or substantially controlled by the defendant.[52] In name of the school. Moreover, this Court will unwittingly condone the action of Santos in
contrast, in insider reverse piercing, the controlling members will attempt to ignore the hiding all these years behind the corporate form to evade paying his obligation under the
corporate fiction in order to take advantage of a benefit available to the corporation, such as judgment in the court a quo. This we cannot countenance without being a party to the
an interest in a lawsuit or protection of personal assets.[53] injustice.
Outsider reverse veil-piercing is applicable in the instant case. Litton, as judgment creditor, Thus, the reverse piercing of the corporate veil of I/AME to enforce the levy on execution of
seeks the Court's intervention to pierce the corporate veil of I/AME in order to make its Makati the Makati real property where the school now stands is applied.
real property answer for a judgment against Santos, who formerly owned and still substantially
controls I/AME. WHEREFORE, in view of the foregoing, the instant petition is DENIED. The CA Decision in
CA-G.R. SP No. 107727 dated 30 October 2009 and its Resolution on 12 March 2010 are
In the U.S. case Acree v. McMahan,[54] the American court held that "[o]utsider reverse veil- hereby AFFIRMED. The MeTC Order dated 29 October 2004 is hereby REINSTATED.
piercing extends the traditional veil-piercing doctrine to permit a third-party creditor to pierce Accordingly, the MeTC of Manila, Branch 2, is hereby DIRECTED to execute with dispatch the
the veil to satisfy the debts of an individual out of the corporation's assets." MeTC Order dated 29 October 2004 against Santos.
The Court has pierced the corporate veil in a reverse manner in the instances when the SO ORDERED.
scheme was to avoid corporate assets to be included in the estate of a decedent as in the
Cease case and when the corporation was used to escape a judgment to pay a debt as in
the Arcilla case.
In a 1962 Philippine case, this Court also employed what we now call reverse-piercing of the
corporate veil. In Palacio v. Fely Transportation Co.,[55] we found that the president and
general manager of the private respondent company formed the corporation to evade his
subsidiary civil liability resulting from the conviction of his driver who ran over the child of the
petitioner, causing injuries and medical expenses. The Court agreed with the plaintiffs that the
president and general manager, and Fely Transportation, may be regarded as one and the
same person. Thus, even if the president and general manager was not a party to the case,
we reversed the lower court and declared both him and the private respondent company,
jointly and severally liable to the plaintiffs. Thus, this Court allowed the outsider-plaintiffs to
pierce the corporate veil of Fely Transportation to run after its corporate assets and pay the
subsidiary civil liability of the company's president and general manager.
This notwithstanding, the equitable remedy of reverse corporate piercing or reverse piercing
was not meant to encourage a creditor's failure to undertake such remedies that could have
otherwise been available, to the detriment of other creditors.[56]
Reverse corporate piercing is an equitable remedy which if utilized cavalierly, may lead to
disastrous consequences for both stock and non-stock corporations. We are aware that
ordinary judgment collection procedures or other legal remedies are preferred over that which
would risk damage to third parties (for instance, innocent stockholders or voluntary creditors)
with unprotected interests in the assets of the beleaguered corporation.[57]
Thus, this Court would recommend the application of the current 1997 Rules on Civil
Procedure on Enforcement of Judgments. Under the current Rules of Court on Civil
Procedure, when it comes to satisfaction by levy, a judgment obligor is given the option to
G.R. No. 126200 August 16, 2001
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
HONORABLE COURT OF APPEALS and REMINGTON INDUSTRIAL SALES
CORPORATION, respondents.
Corporation Law; “Piercing the Veil of Corporate Fiction” Doctrine; When the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the
law will regard the corporation as an association of persons or in case of two corporations,
merge them into one.—In Yutivo Sons Hardware vs. Court of Tax Appeals, cited by the Court
of Appeals in its decision, this Court declared: It is an elementary and fundamental principle of
corporation law that a corporation is an entity separate and distinct from its stockholders and
from other corporations to which it may be connected. However, when the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the
law will regard the corporation as an association of persons or in case of two corporations,
merge them into one”. (Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher
Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S. vs. Milwaukee Refrigeration
Transit Co., 142 Fed., 247, 255 per Sanborn, J.) x x x In accordance with the foregoing rule,
this Court has disregarded the separate personality of the corporation where the corporate
entity was used to escape liability to third parties. In this case, however, we do not find any
fraud on the part of Marinduque Mining and its transferees to warrant the piercing of the
corporate veil.
Same; Banks and Banking; Development Bank of the Philippines; Philippine National Bank;
P.D. 385; PNB and DBP are mandated to foreclose on the mortgage when the past due
account had incurred arrearages of more than 20% of the total outstanding obligations.—It
bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the past
due account had incurred arrearages of more than 20% of the total outstanding obligation.
Section 1 of Presidential Decree No. 385 (The Law on Mandatory Foreclosure) provides: It
shall be mandatory for government financial institutions, after the lapse of sixty (60) days from
the issuance of this decree, to foreclose the collateral and/or securities for any loan, credit
accommodation, and/or guarantees granted by them whenever the arrearages on such
account, including accrued interest and other charges, amount to at least twenty percent
(20%) of the total outstanding obligations, including interest and other charges, as appearing
in the books of account and/or related records of the financial institution concerned. This shall
be without prejudice to the exercise by the government financial institution of such rights
and/or remedies available to them under their respective contracts with their debtors, including
the right to foreclose on loans, credits, accomodations and/or guarantees on which the
arrearages are less than twenty (20%) percent.
Same; The rule pertaining to transactions between corporations with interlocking directors
resulting in the prejudice to one of the corporations does not apply where the corporation
allegedly prejudiced is a third party, not one of the corporations with interlocking directors.—
The Court of Appeals made reference to two principles in corporation law. The first pertains to
transactions between corporations with interlocking directors resulting in the prejudice to one
of the corporations. This rule does not apply in this case, however, since the corporation
allegedly prejudiced (Remington) is a third party, not one of the corporations with interlocking
directors (Marinduque Mining and DBP).
Same; No bad faith could be discerned in the creation by DBP of three corporations where the
same was necessary to manage and operate assets acquired in the foreclosure sale lest they
deteriorate from non-use and lose their value.—Neither do we discern any bad faith on the
part of DBP by its creation of Nonoc Mining, Maricalum and Island Cement. As Remington
itself concedes, DBP is not authorized by its charter to engage in the mining business. The
creation of the three corporations was necessary to manage and operate the assets acquired
in the foreclosure sale lest they deteriorate from non-use and lose their value. In the absence
of any entity willing to purchase these assets from the bank, what else would itdo with these
properties in the meantime? Sound business practice required that they be utilized for the
purposes for which they were intended. anteed by a chattel mortgage, upon the things
pledged or mortgaged, up to the value thereof. x x x
Same; The doctrine of piercing the veil of corporate fiction applies only when such corporate
fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime—to
disregard juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established.—To reiterate, the doctrine of piercing the veil of corporate fiction
applies only when such corporate fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime. To disregard the separate juridical personality of a corporation,
the wrongdoing must be clearly and convincingly established. It cannot be presumed. In this
case, the Court finds that Remington failed to discharge its burden of proving bad faith on the
part of Marinduque Mining and its transferees in the mortgage and foreclosure of the subject
properties to justify the piercing of the corporate veil.
Concurrence and Preference of Credit; In the absence of liquidation proceedings, the vendor’s
lien on the unpaid purchases cannot be enforced against the transferee of such purchases.—
The Court of Appeals also held that there exists in Remington’s favor a “lien” on the unpaid
purchases of Marinduque Mining, and as transferee of these purchases, DBP should be held
liable for the value thereof. In the absence of liquidation proceedings, however, the claim of
Remington cannot be enforced against DBP. Article 2241 of the Civil Code provides: Article
2241. With reference to specific movable property of the debtor, the following claims or liens
shall be preferred: x x x (3) Claims for the unpaid price of movables sold, on said movables,
so long as they are in the possession of the debtor, up to the value of the same; and if the
movable has been resold by the debtor and the price is still unpaid, the lien may be enforced
on the price; this right is not lost by the immobilization of the thing by destination, provided it
has not lost its form, substance and identity, neither is the right lost by the sale of the thing
together with other property for a lump sum, when the price thereof can be determined
proportionally; (4) Credits guaranteed with a pledge so long as the things pledged are in the
hands of the creditor, or those guaranteed by a chattel mortgage, upon the things pledge or
mortgaged, up to the value thereof.x x x
Same; Same; Same; The ruling in Barretto v. Villanueva, 1 SCRA 288 (1961), although
involving specific immovable property, should apply equally in a case where specific movable
property is involved.—The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon.
Lantin, Jr., etc., et al., and in two cases both entitled Development Bank of the Philippines vs.
NLRC. Although Barretto involved specific immovable property, the ruling therein should apply
equally in this case where specific movable property is involved. As the extra-judicial
foreclosure instituted by PNB and DBP is not the liquidation proceeding contemplated by the
Civil Code, Remington cannot claim its pro rata share from DBP. Development Bank of the
Philippines vs. Court of Appeals, 363 SCRA 307, G.R. No. 126200 August 16, 2001
KAPUNAN, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of Court,
seeking a review of the Decision of the Court of Appeals dated October 6, 1995 and the
Resolution of the same court dated August 29, 1996.
The facts are as follows:
Marinduque Mining-Industrial Corporation (Marinduque Mining), a corporation engaged in the
manufacture of pure and refined nickel, nickel and cobalt in mixed sulfides; copper
ore/concentrates, cement and pyrite conc., obtained from the Philippine National Bank (PNB)
various loan accommodations. To secure the loans, Marinduque Mining executed on October
9, 1978 a Deed of Real Estate Mortgage and Chattel Mortgage in favor of PNB. The mortgage
covered all of Marinduque Mining's real properties, located at Surigao del Norte, Sipalay,
Negros Occidental, and at Antipolo, Rizal, including the improvements thereon. As of
November 20, 1980, the loans extended by PNB amounted to P4 Billion, exclusive of interest
and charges.1
On July 13, 1981, Marinduque Mining executed in favor of PNB and the Development Bank of
the Philippines (DBP) a second Mortgage Trust Agreement. In said agreement, Marinduque
Mining mortgaged to PNB and DBP all its real properties located at Surigao del Norte,
Sipalay, Negros Occidental, and Antipolo, Rizal, including the improvements thereon. The
mortgage also covered all of Marinduque Mining's chattels, as well as assets of whatever
kind, nature and description which Marinduque Mining may subsequently acquire in
substitution or replenishment or in addition to the properties covered by the previous Deed of
Real and Chattel Mortgage dated October 7, 1978. Apparently, Marinduque Mining had also
obtained loans totaling P2 Billion from DBP, exclusive of interest and charges.2
On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an Amendment to
Mortgage Trust Agreement by virtue of which Marinduque Mining mortgaged in favor of PNB
and DBP all other real and personal properties and other real rights subsequently acquired by
Marinduque Mining.3
For failure of Marinduque Mining to settle its loan obligations, PNB and DBP instituted
sometime on July and August 1984 extrajudicial foreclosure proceedings over the mortgaged
properties.
The events following the foreclosure are narrated by DBP in its petition, as follows:
In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP
emerged and were declared the highest bidders over the foreclosed real properties,
buildings, mining claims, leasehold rights together with the improvements thereon
as well as machineries [sic] and equipments [sic] of MMIC located at Nonoc Nickel
Refinery Plant at Surigao del Norte for a bid price of P14,238,048,150.00 [and]
[o]ver the foreclosed chattels of MMIC located at Nonoc Refinery Plant at Surigao
del Norte, PNB and DBP as highest bidders, bidded for P170,577,610.00 (Exhs. "5"
to "5-A", "6", "7" to "7-AA-" PNB/DBP). For the foreclosed real properties together
with all the buildings, major machineries & equipment and other improvements of
MMIC located at Antipolo, Rizal, likewise held on August 31, 1984, were sold to
PNB and DBP as highest bidders in the sum of P1,107,167,950.00 (Exhs. "10" to
"10-X"-PNB/ DBP).
At the auction sale conducted on September 7, 1984[,] over the foreclosed real
properties, buildings, & machineries/equipment of MMIC located at Sipalay, Negros
Occidental were sold to PNB and DBP, as highest bidders, in the amount of
P2,383,534,000.00 and P543,040.000.00 respectively (Exhs. "8" to "8-BB", "9" to
"90-GGGGGG"-PNB/DBP).
Finally, at the public auction sale conducted on September 18, 1984 on the
foreclosed personal properties of MMIC, the same were sold to PNB and DBP as
the highest bidder in the sum of P678,772,000.00 (Exhs. "11" and "12-QQQQQ"-
PNB).
PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984, purposely,
in order to ensure the continued operation of the Nickel refinery plant and to prevent
the deterioration of the assets foreclosed, assigned and transferred to Nonoc Mining
and Industrial Corporation all their rights, interest and participation over the
foreclosed properties of MMIC located at Nonoc Island, Surigao del Norte for an
initial consideration of P14,361,000,000.00 (Exh. "13"-PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP assigned
and transferred in favor of Maricalum Mining Corp. all its rights, interest and
participation over the foreclosed properties of MMIC at Sipalay, Negros Occidental
for an initial consideration of P325,800,000.00 (Exh. "14"-PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as
amended, again assigned, transferred and conveyed to the National Government
thru [sic] the Asset Privatization Trust (APT) all its existing rights and interest over
the assets of MMIC, earlier assigned to Nonoc Mining and Industrial Corporation,
Maricalum Mining Corporation and Island Cement Corporation (Exh. "15" & "15-A"
PNB/DBP).4
In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining purchased
and caused to be delivered construction materials and other merchandise from Remington
Industrial Sales Corporation (Remington) worth P921,755.95. The purchases remained unpaid
as of August 1, 1984 when Remington filed a complaint for a sum of money and damages
against Marinduque Mining for the value of the unpaid construction materials and other
merchandise purchased by Marinduque Mining, as well as interest, attorney's fees and the
costs of suit.
On September 7, 1984, Remington's original complaint was amended to include PNB and
DBP as co-defendants in view of the foreclosure by the latter of the real and chattel
mortgages on the real and personal properties, chattels, mining claims, machinery, equipment
and other assets of Marinduque Mining.5
On September 13, 1984, Remington filed a second amended complaint to include as
additional defendant, the Nonoc Mining and Industrial Corporation (Nonoc Mining). Nonoc
Mining is the assignee of all real and personal properties, chattels, machinery, equipment and
all other assets of Marinduque Mining at its Nonoc Nickel Factory in Surigao del Norte.6
On March 26, 1986, Remington filed a third amended complaint including the Maricalum
Mining Corporation (Maricalum Mining) and Island Cement Corporation (Island Cement) as
co-defendants. Remington asserted that Marinduque Mining, PNB, DBP, Nonoc Mining,
Maricalum Mining and Island Cement must be treated in law as one and the same entity by
disregarding the veil of corporate fiction since:
1. Co-defendants NMIC, Maricalum and Island Cement which are newly created
entities are practically owned wholly by defendants PNB and DBP, and managed by
their officers, aside from the fact that the aforesaid co-defendants NMIC, Maricalum
and Island Cement were organized in such a hurry and in such suspicious
circumstances by co-defendants PNB and DBP after the supposed extrajudicial
foreclosure of MMIC's assets as to make their supposed projects assets,
machineries and equipment which were originally owned by co-defendant MMIC
beyond the reach of creditors of the latter.
2. The personnel, key officers and rank-and-file workers and employees of co-
defendants NMIC, Maricalum and Island Cement creations of co-defendants PNB
and DBP were the personnel of co-defendant MMIC such that . . . practically there
has only been a change of name for all legal purpose and intents
3. The places of business not to mention the mining claims and project premises of
co-defendants NMIC, Maricalum and Island Cement likewise used to be the places
of business, mining claims and project premises of co-defendant MMIC as to make
the aforesaid co-defendants NMIC, Maricalum and Island Cement mere adjuncts
and subsidiaries of co-defendants PNB and DBP, and subject to their control and
management.
On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island
Cement being all corporations created by the government in the pursuit of business
ventures should not be allowed to ignore, x x x or obliterate with impunity nay
illegally, the financial obligations of x x x MMIC whose operations co-defendants
PNB and DBP had highly financed before the alleged extrajudicial foreclosure of
defendant MMIC's assets, machineries and equipment to the extent that major
policies of co-defendant MMIC were being decided upon by co-defendants PNB and
DBP as major financiers who were represented in its board of directors forming part
of the majority thereof which through the alleged extrajudicial foreclosure culminated
in a complete take-over by co-defendants PNB and DBP bringing about the
organization of their co-defendants NMIC, Maricalum and Island Cement to which
were transferred all the assets, machineries and pieces of equipment of co-
defendant MMIC used in its nickel mining project in Surigao del Norte, copper
mining operation in Sipalay, Negros Occidental and cement factory in Antipolo, Rizal
to the prejudice of creditors of co-defendant MMIC such as plaintiff Remington
Industrial Sales Corporation whose stockholders, officers and rank-and-file workers
in the legitimate pursuit of its business activities, invested considerable time, sweat
and private money to supply, among others, co-defendant MMIC with some of its
vital needs for its operation, which co-defendant MMIC during the time of the
transactions material to this case became x x x co-defendants PNB and DBP's
instrumentality, business conduit, alter ego, agency (sic), subsidiary or auxiliary
corporation, by virtue of which it becomes doubly necessary to disregard the
corporation fiction that co-defendants PNB, DBP, MMIC, NMIC, Maricalum and
Island Cement, six (6) distinct and separate entities, when in fact and in law, they
should be treated as one and the same at least as far as plaintiff's transactions with
co-defendant MMIC are concerned, so as not to defeat public convenience, justify
wrong, subvert justice, protect fraud or confuse legitimate issues involving creditors
such as plaintiff, a fact which all defendants were as (sic) still are aware of during all
the time material to the transactions subject of this case.7
On April 3, 1989, Remington filed a motion for leave to file a fourth amended complaint
impleading the Asset Privatization Trust (APT) as co-defendant. Said fourth amended
complaint was admitted by the lower court in its Order dated April 29, 1989.
On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of Remington,
the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the
defendants Marinduque Mining & Industrial Corporation, Philippine National Bank,
Development Bank of the Philippines, Nonoc Mining and Industrial Corporation,
Maricalum Mining Corporation, Island Cement Corporation and Asset Privatization
Trust to pay, jointly and severally, the sum of P920,755.95, representing the
principal obligation, including the stipulated interest as of June 22, 1984, plus ten
percent (10%) surcharge per annum by way of penalty, until the amount is fully paid;
the sum equivalent to 10% of the amount due as and for attorney's fees; and to pay
the costs.8
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and APT, the
Court of Appeals, in its Decision dated October 6, 1995, affirmed the decision of the RTC.
Petitioner filed a Motion for Reconsideration, which was denied in the Resolution dated
August 29, 1996.
Hence, this petition, DBP maintaining that Remington has no cause of action against it or
PNB, nor against their transferees, Nonoc Mining, Island Cement, Maricalum Mining, and the
APT.
On the other hand, private respondent Remington submits that the transfer of the properties
was made in fraud of creditors. The presence of fraud, according to Remington, warrants the
piercing of the corporate veil such that Marinduque Mining and its transferees could be
considered as one and the same corporation. The transferees, therefore, are also liable for
the value of Marinduque Mining's purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals,9 cited by the Court of Appeals in its
decision,10 this Court declared:
It is an elementary and fundamental principle of corporation law that a corporation is
an entity separate and distinct from its stockholders and from other corporations to
which it may be connected. However, when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime, the law will
regard the corporation as an association of persons or in case of two corporations,
merge them into one". (Koppel [Phils.], Inc., vs. Yatco, 71 Phil. 496, citing 1 Fletcher
Encyclopedia of Corporation, Permanent Ed., pp. 135-136; U.S. vs. Milwaukee
Refrigeration Transit Co., 142 Fed., 247, 255 per Sanborn, J.). x x x.
In accordance with the foregoing rule, this Court has disregarded the separate personality of
the corporation where the corporate entity was used to escape liability to third parties.11 In this
case, however, we do not find any fraud on the part of Marinduque Mining and its transferees
to warrant the piercing of the corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose on the mortgage when the
past due account had incurred arrearages of more than 20% of the total outstanding
obligation. Section 1 of Presidential Decree No. 385 (The Law on Mandatory Foreclosure)
provides:
It shall be mandatory for government financial institutions, after the lapse of sixty
(60) days from the issuance of this decree, to foreclose the collateral and/or
securities for any loan, credit accommodation, and/or guarantees granted by them
whenever the arrearages on such account, including accrued interest and other
charges, amount to at least twenty percent (20%) of the total outstanding
obligations, including interest and other charges, as appearing in the books of
account and/or related records of the financial institution concerned. This shall be
without prejudice to the exercise by the government financial institution of such
rights and/or remedies available to them under their respective contracts with their
debtors, including the right to foreclose on loans, credits, accommodations and/or
guarantees on which the arrearages are less than twenty (20%) percent.
Thus, PNB and DBP did not only have a right, but the duty under said law, to foreclose upon
the subject properties. The banks had no choice but to obey the statutory command.
The import of this mandate was lost on the Court of Appeals, which reasoned that under
Article 19 of the Civil Code, "Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe honesty and
good faith." The appellate court, however, did not point to any fact evidencing bad faith on the
part of the Marinduque Mining and its transferees. Indeed, it skirted the issue entirely by
holding that the question of actual fraudulent intent on the part of the interlocking directors of
DBP and Marinduque Mining was irrelevant because:
As aptly stated by the appellee in its brief, "x x x where the corporations have
directors and officers in common, there may be circumstances under which their
interest as officers in one company may disqualify them in equity from representing
both corporations in transactions between the two. Thus, where one corporation
was 'insolvent and indebted to another, it has been held that the directors of the
creditor corporation were disqualified, by reason of self-interest, from acting as
directors of the debtor corporation in the authorization of a mortgage or deed of trust
to the former to secure such indebtedness x x x" (page 105 of the Appellee's Brief).
In the same manner that "x x x when the corporation is insolvent, its directors who
are its creditors can not secure to themselves any advantage or preference over
other creditors. They can not thus take advantage of their fiduciary relation and deal
directly with themselves, to the injury of others in equal right. If they do, equity will
set aside the transaction at the suit of creditors of the corporation or their
representatives, without reference to the question of any actual fraudulent intent on
the part of the directors, for the right of the creditors does not depend upon fraud in
fact, but upon the violation of the fiduciary relation to the directors." x x x (page 106
of the Appellee's Brief)
We also concede that "x x x directors of insolvent corporation, who are creditors of
the company, can not secure to themselves any preference or advantage over other
creditors in the payment of their claims. It is not good morals or good law. The
governing body of officers thereof are charged with the duty of conducting its affairs
strictly in the interest of its existing creditors, and it would be a breach of such trust
for them to undertake to give any one of its members any advantage over any other
creditors in securing the payment of his debts in preference to all others. When
validity of these mortgages, to secure debts upon which the directors were
indorsers, was questioned by other creditors of the corporation, they should have
been classed as instruments rendered void by the legal principle which prevents
directors of an insolvent corporation from giving themselves a preference over
outside creditors. x x x" (page 106-107 of the Appellee's Brief.)12
The Court of Appeals made reference to two principles in corporation law. The first pertains to
transactions between corporations with interlocking directors resulting in the prejudice to one
of the corporations. This rule does not apply in this case, however, since the corporation
allegedly prejudiced (Remington) is a third party, not one of the corporations with interlocking
directors (Marinduque Mining and DBP).
The second principle invoked by respondent court involves "directors x x x who are creditors"
which is also inapplicable herein. Here, the creditor of Marinduque Mining is DBP, not the
directors of Marinduque Mining.
Neither do we discern any bad faith on the part of DBP by its creation of Nonoc Mining,
Maricalum and Island Cement. As Remington itself concedes, DBP is not authorized by its
charter to engage in the mining business.13 The creation of the three corporations was
necessary to manage and operate the assets acquired in the foreclosure sale lest they
deteriorate from non-use and lose their value. In the absence of any entity willing to purchase
these assets from the bank, what else would it do with these properties in the meantime?
Sound business practice required that they be utilized for the purposes for which they were
intended.
Remington also asserted in its third amended complaint that the use of Nonoc Mining,
Maricalum and Island Cement of the premises of Marinduque Mining and the hiring of the
latter's officers and personnel also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining were not among those acquired by DBP in
the foreclosure sale, convenience and practicality dictated that the corporations so created
occupy the premises where these assets were found instead of relocating them. No doubt,
many of these assets are heavy equipment and it may have been impossible to move them.
The same reasons of convenience and practicality, not to mention efficiency, justified the
hiring by Nonoc Mining, Maricalum and Island Cement of Marinduque Mining's personnel to
manage and operate the properties and to maintain the continuity of the mining operations.
To reiterate, the doctrine of piercing the veil of corporate fiction applies only when such
corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend
crime.14 To disregard the separate juridical personality of a corporation, the wrongdoing must
be clearly and convincingly established. It cannot be presumed.15 In this case, the Court finds
that Remington failed to discharge its burden of proving bad faith on the part of Marinduque
Mining and its transferees in the mortgage and foreclosure of the subject properties to justify
the piercing of the corporate veil.
The Court of Appeals also held that there exists in Remington's favor a "lien" on the unpaid
purchases of Marinduque Mining, and as transferee of these purchases, DBP should be held
liable for the value thereof.
In the absence of liquidation proceedings, however, the claim of Remington cannot be
enforced against DBP. Article 2241 of the Civil Code provides:
ARTICLE 2241. With reference to specific movable property of the debtor, the
following claims or liens shall be preferred:
xxx xxx xxx
(3) Claims for the unpaid price of movables sold, on said movables, so long as they
are in the possession of the debtor, up to the value of the same; and if the movable
has been resold by the debtor and the price is still unpaid, the lien may be enforced
on the price; this right is not lost by the immobilization of the thing by destination,
provided it has not lost its form, substance and identity, neither is the right lost by
the sale of the thing together with other property for a lump sum, when the price
thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things pledged are in the hands
of the creditor, or those guaranteed by a chattel mortgage, upon the things pledged
or mortgaged, up to the value thereof;
xxx xxx xxx
In Barretto vs. Villanueva,16 the Court had occasion to construe Article 2242, governing claims
or liens over specific immovable property. The facts that gave rise to the case were
summarized by this Court in its resolution as follows:
x x x Rosario Cruzado sold all her right, title, and interest and that of her children in
the house and lot herein involved to Pura L. Villanueva for P19,000.00. The
purchaser paid P1,500 in advance, and executed a promissory note for the balance
of P17,500.00. However, the buyer could only pay P5,500 on account of the note,
for which reason the vendor obtained judgment for the unpaid balance. In the
meantime, the buyer Villanueva was able to secure a clean certificate of title (No.
32626), and mortgaged the property to appellant Magdalena C. Barretto, married to
Jose C. Baretto, to secure a loan of P30,000.03, said mortgage having been duly
recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter
foreclosed the mortgage in her favor, obtained judgment, and upon its becoming
final asked for execution on 31 July 1958. On 14 August 1958, Cruzado filed a
motion for recognition for her "vendor's lien" in the amount of P12,000.00, plus legal
interest, invoking Articles 2242, 2243, and 2249 of the new Civil Code. After
hearing, the court below ordered the "lien" annotated on the back of Certificate of
Title No. 32526, with the proviso that in case of sale under the foreclosure decree
the vendor's lien and the mortgage credit of appellant Barretto should be paid pro
rata from the proceeds. Our original decision affirmed this order of the Court of First
Instance of Manila.
In its decision upholding the order of the lower court, the Court ratiocinated thus:
 Article 2242 of the new Civil Code enumerates the claims, mortgages and liens that
constitute an encumbrance on specific immovable property, and among them are:
"(2) For the unpaid price of real property sold, upon the immovable sold"; and
"(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits with
respect to the same specific real property or real rights, they shall be satisfied pro-
rata, after the payment of the taxes and assessments upon the immovable property
or real rights."
Application of the above-quoted provisions to the case at bar would mean that the
herein appellee Rosario Cruzado as an unpaid vendor of the property in question
has the right to share pro-rata with the appellants the proceeds of the foreclosure
sale.
xxx xxx xxx
As to the point made that the articles of the Civil Code on concurrence and
preference of credits are applicable only to the insolvent debtor, suffice it to say that
nothing in the law shows any such limitation. If we are to interpret this portion of the
Code as intended only for insolvency cases, then other creditor-debtor relationships
where there are concurrence of credits would be left without any rules to govern
them, and it would render purposeless the special laws on insolvency.17
Upon motion by appellants, however, the Court reconsidered its decision. Justice J.B.L.
Reyes, speaking for the Court, explained the reasons for the reversal:
A. The previous decision failed to take fully into account the radical changes
introduced by the Civil Code of the Philippines into the system of priorities among
creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled to preference as to
specific real property under Article 1923 were to be resolved according to an order
of priorities established by Article 1927, whereby one class of creditors could
exclude the creditors of lower order until the claims of the former were fully satisfied
out of the proceeds of the sale of the real property subject of the preference, and
could even exhaust proceeds if necessary.
The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr., etc., et
Under the system of the Civil Code of the Philippines, however, only taxes enjoy a
al.,18 and in two cases both entitled Development Bank of the Philippines vs. NLRC.19
similar absolute preference. All the remaining thirteen classes of preferred creditors
under Article 2242 enjoy no priority among themselves, but must be paid pro rata,
Although Barretto involved specific immovable property, the ruling therein should apply
equally in this case where specific movable property is involved. As the extrajudicial
i.e., in proportion to the amount of the respective credits. Thus, Article 2249
provides:
"If there are two or more credits with respect to the same specific real property or
real rights, they shall be satisfied pro rata, after the payment of the taxes and
assessments upon the immovable property or real rights."
But in order to make this prorating fully effective, the preferred creditors enumerated
in Nos. 2 to 14 of Article 2242 (or such of them as have credits outstanding) must
necessarily be convened, and the import of their claims ascertained. It is thus
apparent that the full application of Articles 2249 and 2242 demands that there must
be first some proceeding where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency, the settlement of decedent's estate under
Rule 87 of the Rules of Court, or other liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that —
"The claims or credits enumerated in the two preceding articles shall be considered
as mortgages or pledges of real or personal property, or liens within the purview of
legal provisions governing insolvency x x x (Italics supplied).
And the rule is further clarified in the Report of the Code Commission, as follows
"The question as to whether the Civil Code and the Insolvency Law can be
harmonized is settled by this Article (2243). The preferences named in Articles 2261
and 2262 (now 2241 and 2242) are to be enforced in accordance with the
Insolvency Law." (Italics supplied)
Thus, it becomes evident that one preferred creditor's third-party claim to the
proceeds of a foreclosure sale (as in the case now before us) is not the proceeding
contemplated by law for the enforcement of preferences under Article 2242, unless
the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of
the claims is for taxes, a dispute between two creditors will not enable the Court to
ascertain the pro rata dividend corresponding to each, because the rights of the
other creditors likewise enjoying preference under Article 2242 can not be
ascertained. Wherefore, the order of the Court of First Instance of Manila now
appealed from, decreeing that the proceeds of the foreclosure sale be apportioned
only between appellant and appellee, is incorrect, and must be reversed. [Emphasis
supplied]
foreclosure instituted by PNB and DBP is not the liquidation proceeding contemplated by the
Civil Code, Remington cannot claim its pro rata share from DBP.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals dated October
6, 1995 and its Resolution promulgated on August 29, 1996 is REVERSED and SET ASIDE.
The original complaint filed in the Regional Trial Court in CV Case No. 84-25858 is hereby
DISMISSED.

SO ORDERED.
 G.R. No. 51765 March 3, 1997
REPUBLIC PLANTERS BANK, Petitioner, v. HON. ENRIQUE A. AGANA, SR., as Presiding
Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay City, ROBES-FRANCISCO
REALTY & DEVELOPMENT CORPORATION and ADALIA F. ROBES, Respondents.
Corporation Law; Shares of Stock; Preferred Shares of Stock; Words and Phrases; A
preferred share of stock is one which entitles the holder thereof to certain preferences over
the holders of common stock.—Before passing upon the merits of this petition, it may be
pertinent to provide an overview on the nature of preferred shares and the redemption thereof,
considering that these issues lie at the heart of the dispute. A preferred share of stock, on one
hand, is one which entitles the holder thereof to certain preferences over the holders of
common stock. The preferences are designed to induce persons to subscribe for shares of a
corporation. Preferred shares take a multiplicity of forms. The most common forms may be
classified into two: (1) preferred shares as to assets; and (2) preferred shares as to dividends.
The former is a share which gives the holder thereof preference in the distribution of the
assets of the corporation in case of liquidation; the latter is a share the holder of which is
entitled to receive dividends on said share to the extent agreed upon before any dividends at
all are paid to the holders of common stock. There is no guaranty, however, that the share will
receive any dividends.
Same; Same; Same; Preferences granted to preferred stockholders do not give them a lien
upon the property of the corporation nor make them creditors of the corporation, the right of
the former being always subordinate to the latter; Shareholders, both common and preferred,
are considered risk takers who invest capital in the business and who can look only to what is
left after corporate debts and liabilities are fully paid.—Thus, the declaration of dividends is
dependent upon the availability of surplus profit or unrestricted retained earnings, as the case
may be. Preferences granted to preferred stockholders, moreover, do not give them a lien
upon the property of the corporation nor make them creditors of the corporation, the right of
the former being always subordinate to the latter. Dividends are thus payable only when there
are profits earned by the corporation and as a general rule, even if there are existing profits,
the board of directors has the discretion to determine whether or not dividends are to be
declared. Shareholders, both common and preferred, are considered risk takers who invest
capital in the business and who can look only to what is left after corporate debts and liabilities
are fully paid.
Same; Same; Same; Redeemable Shares; Words and Phrases; Redeemable shares are
shares usually preferred, which by their terms are redeemable at a fixed date, or at the option
of either issuing corporation, or the stockholder, or both at a certain redemption price;
Redemption may not be made where the corporation is insolvent or if such redemption will
cause insolvency or inability of the corporation to meet its debts as they mature.—
Redeemable shares, on the other hand, are shares usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or
both at a certain redemption price. A redemption by the corporation of its stock is, in a sense,
a repurchase of it for cancellation. The present Code allows redemption of shares even if
there are no unrestricted retained earnings on the books of the corporation. This is a new
provision which in effect qualifies the general rule that the corporation cannot purchase its
own shares except out of current retained earnings. However, while redeemable shares may
be redeemed regardless of the existence of unrestricted retained earnings, this is subject to
the condition that the corporation has, after such redemption, assets in its books to cover
debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where
the corporation is insolvent or if such redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.
Same; Same; Same; Same; Statutory Construction; It is settled doctrine in statutory
construction that the word “may” denotes discretion, and cannot be construed as having a
mandatory effect.—What respondent judge failed to recognize was that while the stock
certificate does allow redemption, the option to do so was clearly vested in the petitioner bank.
The redemption therefore is clearly the type known as “optional.” Thus, except as otherwise
provided in the stock certificate, the redemption rests entirely with the corporation and the
stockholder is without right to either compel or refuse the redemption of its stock. Furthermore,
the terms and conditions set forth therein use the word “may.” It is a settled doctrine in
statutory construction that the word “may” denotes discretion, and cannot be construed as
having a mandatory effect. We fail to see how respondent judge can ignore what, in his words,
are the “very wordings of the terms and conditions in said stock certificates” and construe
what is clearly a mere option to be his legal basis for compelling the petitioner to redeem the
shares in question.
Same; Same; Same; Same; Banks and Banking; A directive issued by the Central Bank
Governor obviously meant to preserve the status quo and to prevent the financial ruin of a
banking institution, limiting the exercise of a right granted by law to a corporate entity, may be
considered as an exercise of police power.—The redemption of said shares cannot be
allowed. As pointed out by the petitioner, the Central Bank made a finding that said petitioner
has been suffering from chronic reserve deficiency, and that such finding resulted in a
directive, issued on January 31, 1973 by then Gov. G.S. Licaros of the Central Bank, to the
President and Acting Chairman of the Board of the petitioner bank prohibiting the latter from
redeeming any preferred share, on the ground that said redemption would reduce the assets
of the Bank to the prejudice of its depositors and creditors. Redemption of preferred shares
was prohibited for a just and valid reason. The directive issued by the Central Bank Governor
was obviously meant to preserve the status quo, and to prevent the financial ruin of a banking
institution that would have resulted in adverse repercussions, not only to its depositors and
creditors, but also to the banking industry as a whole. The directive, in limiting the exercise of
a right granted by law to a corporate entity, may thus be considered as an exercise of police
power. The respondent judge insists that the directive constitutes an impairment of the
obligation of contracts. It has, however, been settled that the Constitutional guaranty of non-
impairment of obligations of contract is limited by the exercise of the police power of the state,
the reason being that public welfare is superior to private rights.
Same; Same; Same; “Interest bearing stocks,” on which the corporation agrees absolutely to
pay interest before dividends are paid to common stockholders, is legal only when construed
as requiring payment of interest as dividends from net earnings or surplus only.— Both Sec.
16 of the Corporation Law and Sec. 43 of the present Corporation Code prohibit the issuance
of any stock dividend without the approval of stockholders, representing not less than two-
thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the
purpose. These provisions underscore the fact that payment of dividends to a stockholder is
not a matter of right but a matter of consensus. Furthermore, “interest bearing stocks,” on
which the corporation agrees absolutely to pay interest before dividends are paid to common
stockholders, is legal only when construed as requiring payment of interest as dividends from
net earnings or surplus only. Clearly, the respondent judge, in compelling the petitioner to
redeem the shares in question and to pay the corresponding dividends, committed grave
abuse of discretion amounting to lack or excess of jurisdiction in ignoring both the terms and
conditions specified in the stock certificate, as well as the clear mandate of the law.
Action; Prescription; A right of action that is founded upon a written contract prescribes in ten
(10) years.—Anent the issue of prescription, this Court so holds that the claim of private
respondent is already barred by prescription as well as laches. Art. 1144 of the New Civil
Code provides that a right of action that is founded upon a written contract prescribes in ten
(10) years. The letter-demand made by the private respondents to the petitioner was made
only on January 5, 1979, or almost eighteen years after receipt of the written contract in the
form of the stock certificate. As noted earlier, this letter-demand, significantly, was not formally
offered in evidence, nor were any other evidence of demand presented. Therefore, we
conclude that the only time the private respondents saw it fit to assert their rights, if any, to the
preferred shares of stock, was after the lapse of almost eighteen years. The same clearly
indicates that the right of the private respondents to any relief under the law has already
prescribed.
Same; Laches, Defined; Words and Phrases.—Moreover, the claim of the private respondents
is also barred by laches. Laches has been defined as the failure or neglect, for an
unreasonable length of time, to do that which by exercising due diligence could or should have
been done earlier; it is negligence or omission to assert a right within a reasonable time,
warranting a presumption that the party entitled to assert it either has abandoned it or declined
to assert it. Republic Planters Bank vs. Agana, Sr., 269 SCRA 1, G.R. No. 51765 March 3,
1997
HERMOSISIMA, JR., J.:
This is a petition for certiorari seeking the annulment of the Decision 1 of the then Court of First
Instance of Rizal 2 for having been rendered in grave abuse of discretion. Private respondents
Robes-Francisco Realty and Development Corporation (hereafter, "the Corporation") and
Adalia F. Robes filed in the court a quo, an action for specific performance to compel
petitioner to redeem 800 preferred shares of stock with a face value of P8,000.00 and to pay
1% quarterly interest thereon as quarterly dividend owing them under the terms and
conditions of the certificates of stock.
The court a quo rendered judgment in favor of private respondents; hence, this instant
petition.
Herein parties debate only legal issues, no issues of fact having been raised by them in the
court a quo. For ready reference, however, the following narration of pertinent transactions
and events is in order:
On September 18, 1961, private respondent Corporation secured a loan from petitioner in the
amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were
issued to private respondent Corporation, through its officers then, private respondent Adalia
F. Robes and one Carlos F. Robes. In other words, instead of giving the legal tender totaling
to the full amount of the loan, which is P120,000.00, petitioner lent such amount partially in the
form of money and partially in the form of stock certificates numbered 3204 and 3205, each
for 400 shares with a par value of P10.00 per share, or for P4,000.00 each, for a total of
P8,000.00. Said stock certificates were in the name of private respondent Adalia F. Robes
and Carlos F. Robes, who subsequently, however, endorsed his shares in favor of Adalia F.
Robes.
Said certificates of stock bear the following terms and conditions:
The Preferred Stock shall have the following rights, preferences, qualifications and limitations,
to wit:
1. Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative and
participating.
xxx xxx xxx
2. That such preferred shares may be redeemed, by the system of drawing lots, at any time
after two (2) years from the date of issue at the option of the Corporation. . . .
On January 31, 1979, private respondents proceeded against petitioner and filed a Complaint
anchored on private respondents' alleged rights to collect dividends under the preferred
shares in question and to have petitioner redeem the same under the terms and conditions of
the stock certificates. Private respondents attached to their complaint, a letter-demand dated
January 5, 1979 which, significantly, was not formally offered in evidence.
Petitioner filed a Motion to Dismiss 3 private respondents' Complaint on the following grounds:
(1) that the trial court had no jurisdiction over the subject-matter of the action; (2) that the
action was unenforceable under substantive law; and (3) that the action was barred by the
statute of limitations and/or laches.
Petitioner's Motion to Dismiss was denied by the trial court in an Order dated March 16,
1979. 4 Petitioner then filed its Answer on May 2, 1979. 5 Thereafter, the trial court gave the
parties ten (10) days from July 30, 1979 to submit their respective memoranda after the
submission of which the case would be deemed submitted for resolution. 6
On September 7, 1979, the trial court rendered the herein assailed decision in favor of private
respondents. In ordering petitioner to pay private respondents the face value of the stock
certificates as redemption price, plus 1% quarterly interest thereon until full payment, the trial
court ruled:
There being no issue of fact raised by either of the parties who filed their respective
memoranda delineating their respective contentions, a judgment on the pleadings,
conformably with an earlier order of the Court, appears to be in order.
From a further perusal of the pleadings, it appears that the provision of the stock certificates in
question to the effect that the plaintiffs shall have the right to receive a quarterly dividend of
One Per Centum (1%), cumulative and participating, clearly and unequivocably [sic] indicates
that the same are "interest bearing stocks" which are stocks issued by a corporation under an
agreement to pay a certain rate of interest thereon (5 Thompson, Sec. 3439). As such,
plaintiffs become entitled to the payment thereof as a matter of right without necessity of a
prior declaration of dividend.
On the question of the redemption by the defendant of said preferred shares of stock, the very
wordings of the terms and conditions in said stock certificates clearly allows the same.
To allow the herein defendant not to redeem said preferred shares of stock and/or pay the
interest due thereon despite the clear import of said provisions by the mere invocation of
alleged Central Bank Circulars prohibiting the same is tantamount to an impairment of the
obligation of contracts enshrined in no less than the fundamental law itself.
Moreover, the herein defendant is considered in estoppel from taking shelter behind a General
Banking Act provision to the effect that it cannot buy its own shares of stocks considering that
the very terms and conditions in said stock certificates allowing their redemption are its own
handiwork.
As to the claim by the defendant that plaintiffs' cause of action is barred by prescription,
suffice it to state that the running of the prescriptive period was considered interrupted by the
written extrajudicial demands made by the plaintiffs from the defendant. 7
Aggrieved by the decision of the trial court, petitioner elevated the case before us essentially
on pure questions of law. Petitioner's statement of the issues that it submits for us to
adjudicate upon, is as follows:
A. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION IN ORDERING PETITIONER TO PAY
RESPONDENT ADALIA F. ROBES THE AMOUNT OF P8213.69 AS INTERESTS FROM
1961 TO 1979 ON HER PREFERRED SHARES.
B. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION IN ORDERING PETITIONER TO REDEEM
RESPONDENT ADALIA F. ROBES' PREFERRED SHARES FOR P8,000.00.
C. RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF DISCRETION AMOUNTING
TO LACK OR EXCESS OF JURISDICTION IN DISREGARDING THE ORDER OF THE
CENTRAL BANK TO PETITIONER TO DESIST FROM REDEEMING ITS PREFERRED
SHARES AND FROM PAYING DIVIDENDS THEREON . . . .
D. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE COMPLAINT DOES NOT
STATE A CAUSE OF ACTION.
E. THE TRIAL COURT ERRED IN NOT HOLDING THAT THE CLAIM OF RESPONDENT
ADALIA F. ROBES IS BARRED BY PRESCRIPTION OR LACHES. 8
The petition is meritorious.
Before passing upon the merits of this petition, it may be pertinent to provide an overview on
the nature of preferred shares and the redemption thereof, considering that these issues lie at
the heart of the dispute.
A preferred share of stock, on one hand, is one which entitles the holder thereof to certain
preferences over the holders of common stock. The preferences are designed to induce
persons to subscribe for shares of a corporation. 9 Preferred shares take a multiplicity of
forms. The most common forms may be classified into two: (1) preferred shares as to assets;
and (2) preferred shares as to dividends. The former is a share which gives the holder thereof
preference in the distribution of the assets of the corporation in case of liquidation; 10 the latter
is a share the holder of which is entitled to receive dividends on said share to the extent
agreed upon before any dividends at all are paid to the holders of common stock. 11 There is
no guaranty, however, that the share will receive any dividends. Under the old Corporation
Law in force at the time the contract between the petitioner and the private respondents was
entered into, it was provided that "no corporation shall make or declare any dividend except
from the surplus profits arising from its business, or distribute its capital stock or property other
than actual profits among its members or stockholders until after the payment of its debts and
the termination of its existence by limitation or lawful dissolution." 12 Similarly, the present
Corporation Code 13 provides that the board of directors of a stock corporation may declare
dividends only out of unrestricted retained earnings. 14 The Code, in Section 43, adopting the
change made in accounting terminology, substituted the phrase "unrestricted retained
earnings," which may be a more precise term, in place of "surplus profits arising from its
business" in the former law. Thus, the declaration of dividends is dependent upon the
availability of surplus profit or unrestricted retained earnings, as the case may be. Preferences
granted to preferred stockholders, moreover, do not give them a lien upon the property of the
corporation nor make them creditors of the corporation, the right of the former being always
subordinate to the latter. Dividends are thus payable only when there are profits earned by the
corporation and as a general rule, even if there are existing profits, the board of directors has
the discretion to determine whether or not dividends are to be declared. 15 Shareholders, both
common and preferred, are considered risk takers who invest capital in the business and who
can look only to what is left after corporate debts and liabilities are fully paid. 16
Redeemable shares, on the other hand, are shares usually preferred, which by their terms are
redeemable at a fixed date, or at the option of either issuing corporation, or the stockholder, or
both at a certain redemption price. 17 A redemption by the corporation of its stock is, in a
sense, a repurchase of it for cancellation. 18 The present Code allows redemption of shares
even if there are no unrestricted retained earnings on the books of the corporation. This is a
new provision which in effect qualifies the general rule that the corporation cannot purchase
its own shares except out of current retained earnings. 19 However, while redeemable shares
may be redeemed regardless of the existence of unrestricted retained earnings, this is subject
to the condition that the corporation has, after such redemption, assets in its books to cover
debts and liabilities inclusive of capital stock. Redemption, therefore, may not be made where
the corporation is insolvent or if such redemption will cause insolvency or inability of the
corporation to meet its debts as they mature. 20
We come now to the merits of the case. The petitioner argues that it cannot be compelled to
redeem the preferred shares issued to the private respondent. We agree. Respondent judge,
in ruling that petitioner must redeem the shares in question, stated that:
On the question of the redemption by the defendant of said preferred shares of stock, the very
wordings of the terms and conditions in said stock certificates clearly allows the same. 21
What respondent judge failed to recognize was that while the stock certificate does allow
redemption, the option to do so was clearly vested in the petitioner bank. The redemption
therefore is clearly the type known as "optional". Thus, except as otherwise provided in the
stock certificate, the redemption rests entirely with the corporation and the stockholder is
without right to either compel or refuse the redemption of its stock. 22 Furthermore, the terms
and conditions set forth therein use the word "may". It is a settled doctrine in statutory
construction that the word "may" denotes discretion, and cannot be construed as having a
mandatory effect. We fail to see how respondent judge can ignore what, in his words, are the
"very wordings of the terms and conditions in said stock certificates" and construe what is
clearly a mere option to be his legal basis for compelling the petitioner to redeem the shares in
question.
The redemption of said shares cannot be allowed. As pointed out by the petitioner, the Central
Bank made a finding that said petitioner has been suffering from chronic reserve
deficiency, 23 and that such finding resulted in a directive, issued on January 31, 1973 by then
Gov. G.S. Licaros of the Central Bank, to the President and Acting Chairman of the Board of
the petitioner bank prohibiting the latter from redeeming any preferred share, on the ground
that said redemption would reduce the assets of the Bank to the prejudice of its depositors
and creditors. 24 Redemption of preferred shares was prohibited for a just and valid reason.
The directive issued by the Central Bank Governor was obviously meant to preserve the
status quo, and to prevent the financial ruin of a banking institution that would have resulted in
adverse repercussions, not only to its depositors and creditors, but also to the banking
industry as a whole. The directive, in limiting the exercise of a right granted by law to a
corporate entity, may thus be considered as an exercise of police power. The respondent
judge insists that the directive constitutes an impairment of the obligation of contracts. It has,
however, been settled that the Constitutional guaranty of non-impairment of obligations of
contract is limited by the exercise of the police power of the state, the reason being that public
welfare is superior to private rights. 25
The respondent judge also stated that since the stock certificate granted the private
respondents the right to receive a quarterly dividend of One Per Centum (1%) cumulative and
participating, it "clearly and unequivocably (sic) indicates that the same are "interest bearing
stocks" or stocks issued by a corporation under an agreement to pay a certain rate of interest
thereon. As such, plaintiffs (private respondents herein) become entitled to the payment
thereof as a matter of right without necessity of a prior declaration of dividend." 26 There is no
legal basis for this observation. Both Sec. 16 of the Corporation Law and Sec. 43 of the
present Corporation Code prohibit the issuance of any stock dividend without the approval of
stockholders, representing not less than two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose. These provisions underscore the fact
that payment of dividends to a stockholder is not a matter of right but a matter of consensus.
Furthermore, "interest bearing stocks", on which the corporation agrees absolutely to pay
interest before dividends are paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or surplus only. 27 Clearly, the
respondent judge, in compelling the petitioner to redeem the shares in question and to pay the
corresponding dividends, committed grave abuse of discretion amounting to lack or excess of
jurisdiction in ignoring both the terms and conditions specified in the stock certificate, as well
as the clear mandate of the law.
Anent the issue of prescription, this Court so holds that the claim of private respondent is
already barred by prescription as well as laches. Art. 1144 of the New Civil Code provides that
a right of action that is founded upon a written contract prescribes in ten (10) years. The letter-
demand made by the private respondents to the petitioner was made only on January 5, 1979,
or almost eighteen years after receipt of the written contract in the form of the stock certificate.
As noted earlier, this letter-demand, significantly, was not formally offered in evidence, nor
were any other evidence of demand presented. Therefore, we conclude that the only time the
private respondents saw it fit to assert their rights, if any, to the preferred shares of stock, was
after the lapse of almost eighteen years. The same clearly indicates that the right of the
private respondents to any relief under the law has already prescribed. Moreover, the claim of
the private respondents is also barred by laches. Laches has been defined as the failure or
neglect, for an unreasonable length of time, to do that which by exercising due diligence could
or should have been done earlier; it is negligence or omission to assert a right within a
reasonable time, warranting a presumption that the party entitled to assert it either has
abandoned it or declined to assert it. 28
Considering that the terms and conditions set forth in the stock certificate clearly indicate that
redemption of the preferred shares may be made at any time after the lapse of two years from
the date of issue, private respondents should have taken it upon themselves, after the lapse of
the said period, to inquire from the petitioner the reason why the said shares have not been
redeemed. As it is, not only two years had lapsed, as agreed upon, but an additional sixteen
years passed before the private respondents saw it fit to demand their right. The petitioner, at
the time it issued said preferred shares to the private respondents in 1961, could not have
known that it would be suffering from chronic reserve deficiency twelve years later. Had the
private respondents been vigilant in asserting their rights, the redemption could have been
effected at a time when the petitioner bank was not suffering from any financial crisis.

WHEREFORE, the instant petition, being impressed with merit, is hereby GRANTED. The
challenged decision of respondent judge is set aside and the complaint against the petitioner
is dismissed.

Costs against the private respondents.

SO ORDERED.
G.R. No. 195580 April 21, 2014 Another MPSA application of SMMI was filed with the DENR Region IV-B, labeled as MPSA-
AMA-IVB-154 (formerly EPA-IVB-47) over 3,402 hectares in Barangays Malinao and Princesa
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND Urduja, Municipality of Narra, Province of Palawan. SMMI subsequently conveyed, transferred
DEVELOPMENT, INC., and MCARTHUR MINING, INC., Petitioners, and assigned its rights and interest over the said MPSA application to Tesoro.
vs.
REDMONT CONSOLIDATED MINES CORP., Respondent. On January 2, 2007, Redmont filed before the Panel of Arbitrators (POA) of the DENR three
(3) separate petitions for the denial of petitioners’ applications for MPSA designated as AMA-
DECISION IVB-153, AMA-IVB-154 and MPSA IV-1-12.

VELASCO, JR., J.: In the petitions, Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro
and Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100% Canadian
corporation. Redmont reasoned that since MBMI is a considerable stockholder of petitioners,
Before this Court is a Petition for Review on Certiorari under Rule 45 filed by Narra Nickel and
it was the driving force behind petitioners’ filing of the MPSAs over the areas covered by
Mining Development Corp. (Narra), Tesoro Mining and Development, Inc. (Tesoro), and
applications since it knows that it can only participate in mining activities through corporations
McArthur Mining Inc. (McArthur), which seeks to reverse the October 1, 2010 Decision1 and
which are deemed Filipino citizens. Redmont argued that given that petitioners’ capital stocks
the February 15, 2011 Resolution of the Court of Appeals (CA).
were mostly owned by MBMI, they were likewise disqualified from engaging in mining
activities through MPSAs, which are reserved only for Filipino citizens.
The Facts
In their Answers, petitioners averred that they were qualified persons under Section 3(aq) of
Sometime in December 2006, respondent Redmont Consolidated Mines Corp. (Redmont), a Republic Act No. (RA) 7942 or the Philippine Mining Act of 1995 which provided:
domestic corporation organized and existing under Philippine laws, took interest in mining and
exploring certain areas of the province of Palawan. After inquiring with the Department of
Sec. 3 Definition of Terms. As used in and for purposes of this Act, the following terms,
Environment and Natural Resources (DENR), it learned that the areas where it wanted to
whether in singular or plural, shall mean:
undertake exploration and mining activities where already covered by Mineral Production
Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
xxxx
Petitioner McArthur, through its predecessor-in-interest Sara Marie Mining, Inc. (SMMI), filed
an application for an MPSA and Exploration Permit (EP) with the Mines and Geo-Sciences (aq) "Qualified person" means any citizen of the Philippines with capacity to contract, or a
Bureau (MGB), Region IV-B, Office of the Department of Environment and Natural Resources corporation, partnership, association, or cooperative organized or authorized for the purpose
(DENR). of engaging in mining, with technical and financial capability to undertake mineral resources
development and duly registered in accordance with law at least sixty per cent (60%) of the
capital of which is owned by citizens of the Philippines: Provided, That a legally organized
Subsequently, SMMI was issued MPSA-AMA-IVB-153 covering an area of over 1,782
foreign-owned corporation shall be deemed a qualified person for purposes of granting an
hectares in Barangay Sumbiling, Municipality of Bataraza, Province of Palawan and EPA-IVB-
exploration permit, financial or technical assistance agreement or mineral processing permit.
44 which includes an area of 3,720 hectares in Barangay Malatagao, Bataraza, Palawan. The
MPSA and EP were then transferred to Madridejos Mining Corporation (MMC) and, on
November 6, 2006, assigned to petitioner McArthur.2 Additionally, they stated that their nationality as applicants is immaterial because they also
applied for Financial or Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-
09 for McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted to
Petitioner Narra acquired its MPSA from Alpha Resources and Development Corporation and
foreign-owned corporations. Nevertheless, they claimed that the issue on nationality should
Patricia Louise Mining & Development Corporation (PLMDC) which previously filed an
not be raised since McArthur, Tesoro and Narra are in fact Philippine Nationals as 60% of
application for an MPSA with the MGB, Region IV-B, DENR on January 6, 1992. Through the
their capital is owned by citizens of the Philippines. They asserted that though MBMI owns
said application, the DENR issued MPSA-IV-1-12 covering an area of 3.277 hectares in
40% of the shares of PLMC (which owns 5,997 shares of Narra),3 40% of the shares of MMC
barangays Calategas and San Isidro, Municipality of Narra, Palawan. Subsequently, PLMDC
(which owns 5,997 shares of McArthur)4 and 40% of the shares of SLMC (which, in turn, owns
conveyed, transferred and/or assigned its rights and interests over the MPSA application in
5,997 shares of Tesoro),5 the shares of MBMI will not make it the owner of at least 60% of the
favor of Narra.
capital stock of each of petitioners. They added that the best tool used in determining the
nationality of a corporation is the "control test," embodied in Sec. 3 of RA 7042 or the Foreign
Investments Act of 1991. They also claimed that the POA of DENR did not have jurisdiction
over the issues in Redmont’s petition since they are not enumerated in Sec. 77 of RA 7942.
Finally, they stressed that Redmont has no personality to sue them because it has no pending
claim or application over the areas applied for by petitioners.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from gaining
MPSAs. It held:
[I]t is clearly established that respondents are not qualified applicants to engage in mining
activities. On the other hand, [Redmont] having filed its own applications for an EPA over the
areas earlier covered by the MPSA application of respondents may be considered if and when
they are qualified under the law. The violation of the requirements for the issuance and/or
grant of permits over mining areas is clearly established thus, there is reason to believe that
the cancellation and/or revocation of permits already issued under the premises is in order
and open the areas covered to other qualified applicants.
xxxx
WHEREFORE, the Panel of Arbitrators finds the Respondents, McArthur Mining Inc., Tesoro
Mining and Development, Inc., and Narra Nickel Mining and Development Corp. as,
DISQUALIFIED for being considered as Foreign Corporations. Their Mineral Production
Sharing Agreement (MPSA) are hereby x x x DECLARED NULL AND VOID.6
The POA considered petitioners as foreign corporations being "effectively controlled" by
MBMI, a 100% Canadian company and declared their MPSAs null and void. In the same
Resolution, it gave due course to Redmont’s EPAs. Thereafter, on February 7, 2008, the POA
issued an Order7 denying the Motion for Reconsideration filed by petitioners.
Aggrieved by the Resolution and Order of the POA, McArthur and Tesoro filed a joint Notice of
Appeal8 and Memorandum of Appeal9 with the Mines Adjudication Board (MAB) while Narra
separately filed its Notice of Appeal10 and Memorandum of Appeal.11
In their respective memorandum, petitioners emphasized that they are qualified persons under
the law. Also, through a letter, they informed the MAB that they had their individual MPSA
applications converted to FTAAs. McArthur’s FTAA was denominated as AFTA-IVB-0912 on
May 2007, while Tesoro’s MPSA application was converted to AFTA-IVB-0813 on May 28,
2007, and Narra’s FTAA was converted to AFTA-IVB-0714 on March 30, 2006.
Pending the resolution of the appeal filed by petitioners with the MAB, Redmont filed a
Complaint15 with the Securities and Exchange Commission (SEC), seeking the revocation of
the certificates for registration of petitioners on the ground that they are foreign-owned or
controlled corporations engaged in mining in violation of Philippine laws. Thereafter, Redmont
filed on September 1, 2008 a Manifestation and Motion to Suspend Proceeding before the
MAB praying for the suspension of the proceedings on the appeals filed by McArthur, Tesoro
and Narra.
Subsequently, on September 8, 2008, Redmont filed before the Regional Trial Court of
Quezon City, Branch 92 (RTC) a Complaint16 for injunction with application for issuance of a
temporary restraining order (TRO) and/or writ of preliminary injunction, docketed as Civil Case
No. 08-63379. Redmont prayed for the deferral of the MAB proceedings pending the
resolution of the Complaint before the SEC.
But before the RTC can resolve Redmont’s Complaint and applications for injunctive reliefs,
the MAB issued an Order on September 10, 2008, finding the appeal meritorious. It held:
WHEREFORE, in view of the foregoing, the Mines Adjudication Board hereby REVERSES
and SETS ASIDE the Resolution dated 14 December 2007 of the Panel of Arbitrators of
Region IV-B (MIMAROPA) in POA-DENR Case Nos. 2001-01, 2007-02 and 2007-03, and its
Order dated 07 February 2008 denying the Motions for Reconsideration of the Appellants. The
Petition filed by Redmont Consolidated Mines Corporation on 02 January 2007 is hereby
ordered DISMISSED.17
Belatedly, on September 16, 2008, the RTC issued an Order18 granting Redmont’s application
for a TRO and setting the case for hearing the prayer for the issuance of a writ of preliminary
injunction on September 19, 2008.
Meanwhile, on September 22, 2008, Redmont filed a Motion for Reconsideration19 of the
September 10, 2008 Order of the MAB. Subsequently, it filed a Supplemental Motion for
Reconsideration20 on September 29, 2008.
Before the MAB could resolve Redmont’s Motion for Reconsideration and Supplemental
Motion for Reconsideration, Redmont filed before the RTC a Supplemental Complaint21 in
Civil Case No. 08-63379.
On October 6, 2008, the RTC issued an Order22 granting the issuance of a writ of preliminary
injunction enjoining the MAB from finally disposing of the appeals of petitioners and from
resolving Redmont’s Motion for Reconsideration and Supplement Motion for Reconsideration
of the MAB’s September 10, 2008 Resolution.
On July 1, 2009, however, the MAB issued a second Order denying Redmont’s Motion for
Reconsideration and Supplemental Motion for Reconsideration and resolving the appeals filed
by petitioners.
Hence, the petition for review filed by Redmont before the CA, assailing the Orders issued by
the MAB. On October 1, 2010, the CA rendered a Decision, the dispositive of which reads:
WHEREFORE, the Petition is PARTIALLY GRANTED. The assailed Orders, dated September
10, 2008 and July 1, 2009 of the Mining Adjudication Board are reversed and set aside. The
findings of the Panel of Arbitrators of the Department of Environment and Natural Resources
that respondents McArthur, Tesoro and Narra are foreign corporations is upheld and,
therefore, the rejection of their applications for Mineral Product Sharing Agreement should be
recommended to the Secretary of the DENR.
With respect to the applications of respondents McArthur, Tesoro and Narra for Financial or
Technical Assistance Agreement (FTAA) or conversion of their MPSA applications to FTAA,
the matter for its rejection or approval is left for determination by the Secretary of the DENR
and the President of the Republic of the Philippines.
SO ORDERED.23
In a Resolution dated February 15, 2011, the CA denied the Motion for Reconsideration filed
by petitioners.
After a careful review of the records, the CA found that there was doubt as to the nationality of
petitioners when it realized that petitioners had a common major investor, MBMI, a corporation
composed of 100% Canadians. Pursuant to the first sentence of paragraph 7 of Department of
Justice (DOJ) Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules which
implemented the requirement of the Constitution and other laws pertaining to the exploitation
of natural resources, the CA used the "grandfather rule" to determine the nationality of
petitioners. It provided:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than 60%, only the number of
shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if
100,000 shares are registered in the name of a corporation or partnership at least 60% of the
capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall
be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or
capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000
shares shall be recorded as belonging to aliens.24 (emphasis supplied)
In determining the nationality of petitioners, the CA looked into their corporate structures and
their corresponding common shareholders. Using the grandfather rule, the CA discovered that
MBMI in effect owned majority of the common stocks of the petitioners as well as at least 60%
equity interest of other majority shareholders of petitioners through joint venture agreements.
The CA found that through a "web of corporate layering, it is clear that one common
controlling investor in all mining corporations involved x x x is MBMI."25 Thus, it concluded that
petitioners McArthur, Tesoro and Narra are also in partnership with, or privies-in-interest of,
MBMI.
Furthermore, the CA viewed the conversion of the MPSA applications of petitioners into FTAA
applications suspicious in nature and, as a consequence, it recommended the rejection of
petitioners’ MPSA applications by the Secretary of the DENR.
With regard to the settlement of disputes over rights to mining areas, the CA pointed out that
the POA has jurisdiction over them and that it also has the power to determine the of
nationality of petitioners as a prerequisite of the Constitution prior the conferring of rights to
"co-production, joint venture or production-sharing agreements" of the state to mining rights.
However, it also stated that the POA’s jurisdiction is limited only to the resolution of the
dispute and not on the approval or rejection of the MPSAs. It stipulated that only the Secretary
of the DENR is vested with the power to approve or reject applications for MPSA.
Finally, the CA upheld the findings of the POA in its December 14, 2007 Resolution which
considered petitioners McArthur, Tesoro and Narra as foreign corporations. Nevertheless, the
CA determined that the POA’s declaration that the MPSAs of McArthur, Tesoro and Narra are
void is highly improper.
While the petition was pending with the CA, Redmont filed with the Office of the President
(OP) a petition dated May 7, 2010 seeking the cancellation of petitioners’ FTAAs. The OP
rendered a Decision26 on April 6, 2011, wherein it canceled and revoked petitioners’ FTAAs
for violating and circumventing the "Constitution x x x[,] the Small Scale Mining Law and
Environmental Compliance Certificate as well as Sections 3 and 8 of the Foreign Investment
Act and E.O. 584."27 The OP, in affirming the cancellation of the issued FTAAs, agreed with
Redmont stating that petitioners committed violations against the abovementioned laws and
failed to submit evidence to negate them. The Decision further quoted the December 14, 2007
Order of the POA focusing on the alleged misrepresentation and claims made by petitioners of
being domestic or Filipino corporations and the admitted continued mining operation of PMDC
using their locally secured Small Scale Mining Permit inside the area earlier applied for an
MPSA application which was eventually transferred to Narra. It also agreed with the POA’s
estimation that the filing of the FTAA applications by petitioners is a clear admission that they
are "not capable of conducting a large scale mining operation and that they need the financial
and technical assistance of a foreign entity in their operation, that is why they sought the
participation of MBMI Resources, Inc."28 The Decision further quoted:
The filing of the FTAA application on June 15, 2007, during the pendency of the case only
demonstrate the violations and lack of qualification of the respondent corporations to engage
in mining. The filing of the FTAA application conversion which is allowed foreign corporation of
the earlier MPSA is an admission that indeed the respondent is not Filipino but rather of
foreign nationality who is disqualified under the laws. Corporate documents of MBMI
Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are
conducting operation only through their local counterparts.29
The Motion for Reconsideration of the Decision was further denied by the OP in a
Resolution30 dated July 6, 2011. Petitioners then filed a Petition for Review on Certiorari of the
OP’s Decision and Resolution with the CA, docketed as CA-G.R. SP No. 120409. In the CA
Decision dated February 29, 2012, the CA affirmed the Decision and Resolution of the OP.
Thereafter, petitioners appealed the same CA decision to this Court which is now pending with
a different division.
Thus, the instant petition for review against the October 1, 2010 Decision of the CA.
Petitioners put forth the following errors of the CA:
I.
The Court of Appeals erred when it did not dismiss the case for mootness despite
the fact that the subject matter of the controversy, the MPSA Applications, have
already been converted into FTAA applications and that the same have already
been granted.
II.
The Court of Appeals erred when it did not dismiss the case for lack of jurisdiction
considering that the Panel of Arbitrators has no jurisdiction to determine the
nationality of Narra, Tesoro and McArthur.
III.
The Court of Appeals erred when it did not dismiss the case on account of
Redmont’s willful forum shopping.
IV.
The Court of Appeals’ ruling that Narra, Tesoro and McArthur are foreign
corporations based on the "Grandfather Rule" is contrary to law, particularly the
express mandate of the Foreign Investments Act of 1991, as amended, and the FIA
Rules.
V.
The Court of Appeals erred when it applied the exceptions to the res inter alios acta
rule.
VI.
The Court of Appeals erred when it concluded that the conversion of the MPSA
Applications into FTAA Applications were of "suspicious nature" as the same is
based on mere conjectures and surmises without any shred of evidence to show the
same.31
We find the petition to be without merit.
This case not moot and academic
The claim of petitioners that the CA erred in not rendering the instant case as moot is without
merit.
Basically, a case is said to be moot and/or academic when it "ceases to present a justiciable
controversy by virtue of supervening events, so that a declaration thereon would be of no
practical use or value."32 Thus, the courts "generally decline jurisdiction over the case or
dismiss it on the ground of mootness."33
The "mootness" principle, however, does accept certain exceptions and the mere raising of an
issue of "mootness" will not deter the courts from trying a case when there is a valid reason to
do so. In David v. Macapagal-Arroyo (David), the Court provided four instances where courts
can decide an otherwise moot case, thus:
1.) There is a grave violation of the Constitution;
2.) The exceptional character of the situation and paramount public interest is
involved;
3.) When constitutional issue raised requires formulation of controlling principles to
guide the bench, the bar, and the public; and
4.) The case is capable of repetition yet evading review.34
All of the exceptions stated above are present in the instant case. We of this Court note that a
grave violation of the Constitution, specifically Section 2 of Article XII, is being committed by a
foreign corporation right under our country’s nose through a myriad of corporate layering
under different, allegedly, Filipino corporations. The intricate corporate layering utilized by the
Canadian company, MBMI, is of exceptional character and involves paramount public interest
since it undeniably affects the exploitation of our Country’s natural resources. The
corresponding actions of petitioners during the lifetime and existence of the instant case raise
questions as what principle is to be applied to cases with similar issues. No definite ruling on
such principle has been pronounced by the Court; hence, the disposition of the issues or
errors in the instant case will serve as a guide "to the bench, the bar and the public."35 Finally,
the instant case is capable of repetition yet evading review, since the Canadian company,
MBMI, can keep on utilizing dummy Filipino corporations through various schemes of
corporate layering and conversion of applications to skirt the constitutional prohibition against
foreign mining in Philippine soil.
Conversion of MPSA applications to FTAA applications
We shall discuss the first error in conjunction with the sixth error presented by petitioners
since both involve the conversion of MPSA applications to FTAA applications. Petitioners
propound that the CA erred in ruling against them since the questioned MPSA applications
were already converted into FTAA applications; thus, the issue on the prohibition relating to
MPSA applications of foreign mining corporations is academic. Also, petitioners would want us
to correct the CA’s finding which deemed the aforementioned conversions of applications as
suspicious in nature, since it is based on mere conjectures and surmises and not supported
with evidence.
We disagree.
The CA’s analysis of the actions of petitioners after the case was filed against them by
respondent is on point. The changing of applications by petitioners from one type to another
just because a case was filed against them, in truth, would raise not a few sceptics’ eyebrows.
What is the reason for such conversion? Did the said conversion not stem from the case
challenging their citizenship and to have the case dismissed against them for being "moot"? It
is quite obvious that it is petitioners’ strategy to have the case dismissed against them for
being "moot."
Consider the history of this case and how petitioners responded to every action done by the
court or appropriate government agency: on January 2, 2007, Redmont filed three separate
petitions for denial of the MPSA applications of petitioners before the POA. On June 15, 2007,
petitioners filed a conversion of their MPSA applications to FTAAs. The POA, in its December
14, 2007 Resolution, observed this suspect change of applications while the case was
pending before it and held:
The filing of the Financial or Technical Assistance Agreement application is a clear admission
that the respondents are not capable of conducting a large scale mining operation and that
they need the financial and technical assistance of a foreign entity in their operation that is
why they sought the participation of MBMI Resources, Inc. The participation of MBMI in the
corporation only proves the fact that it is the Canadian company that will provide the finances
and the resources to operate the mining areas for the greater benefit and interest of the same
and not the Filipino stockholders who only have a less substantial financial stake in the
corporation.
xxxx
x x x The filing of the FTAA application on June 15, 2007, during the pendency of the case
only demonstrate the violations and lack of qualification of the respondent corporations to
engage in mining. The filing of the FTAA application conversion which is allowed foreign
corporation of the earlier MPSA is an admission that indeed the respondent is not Filipino but
rather of foreign nationality who is disqualified under the laws. Corporate documents of MBMI
Resources, Inc. furnished its stockholders in their head office in Canada suggest that they are
conducting operation only through their local counterparts.36
On October 1, 2010, the CA rendered a Decision which partially granted the petition, reversing
and setting aside the September 10, 2008 and July 1, 2009 Orders of the MAB. In the said
Decision, the CA upheld the findings of the POA of the DENR that the herein petitioners are in
fact foreign corporations thus a recommendation of the rejection of their MPSA applications
were recommended to the Secretary of the DENR. With respect to the FTAA applications or
conversion of the MPSA applications to FTAAs, the CA deferred the matter for the
determination of the Secretary of the DENR and the President of the Republic of the
Philippines.37
In their Motion for Reconsideration dated October 26, 2010, petitioners prayed for the
dismissal of the petition asserting that on April 5, 2010, then President Gloria Macapagal-
Arroyo signed and issued in their favor FTAA No. 05-2010-IVB, which rendered the petition
moot and academic. However, the CA, in a Resolution dated February 15, 2011 denied their
motion for being a mere "rehash of their claims and defenses."38 Standing firm on its Decision,
the CA affirmed the ruling that petitioners are, in fact, foreign corporations. On April 5, 2011,
petitioners elevated the case to us via a Petition for Review on Certiorari under Rule 45,
questioning the Decision of the CA. Interestingly, the OP rendered a Decision dated April 6,
2011, a day after this petition for review was filed, cancelling and revoking the FTAAs, quoting
the Order of the POA and stating that petitioners are foreign corporations since they needed
the financial strength of MBMI, Inc. in order to conduct large scale mining operations. The OP
Decision also based the cancellation on the misrepresentation of facts and the violation of the
"Small Scale Mining Law and Environmental Compliance Certificate as well as Sections 3 and
8 of the Foreign Investment Act and E.O. 584."39 On July 6, 2011, the OP issued a Resolution,
denying the Motion for Reconsideration filed by the petitioners.
Respondent Redmont, in its Comment dated October 10, 2011, made known to the Court the
fact of the OP’s Decision and Resolution. In their Reply, petitioners chose to ignore the OP
Decision and continued to reuse their old arguments claiming that they were granted FTAAs
and, thus, the case was moot. Petitioners filed a Manifestation and Submission dated October
19, 2012,40 wherein they asserted that the present petition is moot since, in a remarkable turn
of events, MBMI was able to sell/assign all its shares/interest in the "holding companies" to
DMCI Mining Corporation (DMCI), a Filipino corporation and, in effect, making their respective
corporations fully-Filipino owned.
Again, it is quite evident that petitioners have been trying to have this case dismissed for
being "moot." Their final act, wherein MBMI was able to allegedly sell/assign all its shares and
interest in the petitioner "holding companies" to DMCI, only proves that they were in fact not
Filipino corporations from the start. The recent divesting of interest by MBMI will not change
the stand of this Court with respect to the nationality of petitioners prior the suspicious change
in their corporate structures. The new documents filed by petitioners are factual evidence that
this Court has no power to verify.
The only thing clear and proved in this Court is the fact that the OP declared that petitioner
corporations have violated several mining laws and made misrepresentations and falsehood
in their applications for FTAA which lead to the revocation of the said FTAAs, demonstrating
that petitioners are not beyond going against or around the law using shifty actions and
strategies. Thus, in this instance, we can say that their claim of mootness is moot in itself
because their defense of conversion of MPSAs to FTAAs has been discredited by the OP
Decision.
Grandfather test
The main issue in this case is centered on the issue of petitioners’ nationality, whether Filipino
or foreign. In their previous petitions, they had been adamant in insisting that they were
Filipino corporations, until they submitted their Manifestation and Submission dated October
19, 2012 where they stated the alleged change of corporate ownership to reflect their Filipino
ownership. Thus, there is a need to determine the nationality of petitioner corporations.
Basically, there are two acknowledged tests in determining the nationality of a corporation: the
control test and the grandfather rule. Paragraph 7 of DOJ Opinion No. 020, Series of 2005,
adopting the 1967 SEC Rules which implemented the requirement of the Constitution and
other laws pertaining to the controlling interests in enterprises engaged in the exploitation of
natural resources owned by Filipino citizens, provides:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of
Filipino ownership in the corporation or partnership is less than 60%, only the number of
shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if
100,000 shares are registered in the name of a corporation or partnership at least 60% of the
capital stock or capital, respectively, of which belong to Filipino citizens, all of the shares shall
be recorded as owned by Filipinos. But if less than 60%, or say, 50% of the capital stock or
capital of the corporation or partnership, respectively, belongs to Filipino citizens, only 50,000
shares shall be counted as owned by Filipinos and the other 50,000 shall be recorded as
belonging to aliens.
The first part of paragraph 7, DOJ Opinion No. 020, stating "shares belonging to corporations
or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality," pertains to the control test or the liberal rule. On the
other hand, the second part of the DOJ Opinion which provides, "if the percentage of the
Filipino ownership in the corporation or partnership is less than 60%, only the number of
shares corresponding to such percentage shall be counted as Philippine nationality," pertains
to the stricter, more stringent grandfather rule.
Prior to this recent change of events, petitioners were constant in advocating the application of
the "control test" under RA 7042, as amended by RA 8179, otherwise known as the Foreign
Investments Act (FIA), rather than using the stricter grandfather rule. The pertinent provision
under Sec. 3 of the FIA provides:
SECTION 3. Definitions. - As used in this Act:
a.) The term Philippine national shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by the citizens of the Philippines; a corporation
organized under the laws of the Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is wholly owned by Filipinos or a trustee of funds for
pension or other employee retirement or separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine
nationals: Provided, That were a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent
(60%) of the capital stock outstanding and entitled to vote of each of both corporations must
be owned and held by citizens of the Philippines and at least sixty percent (60%) of the
members of the Board of Directors, in order that the corporation shall be considered a
Philippine national. (emphasis supplied)
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case since the
definition of a "Philippine National" under Sec. 3 of the FIA does not provide for it. They further
claim that the grandfather rule "has been abandoned and is no longer the applicable
rule."41 They also opined that the last portion of Sec. 3 of the FIA admits the application of a
"corporate layering" scheme of corporations. Petitioners claim that the clear and unambiguous
wordings of the statute preclude the court from construing it and prevent the court’s use of
discretion in applying the law. They said that the plain, literal meaning of the statute meant the
application of the control test is obligatory.
We disagree. "Corporate layering" is admittedly allowed by the FIA; but if it is used to
circumvent the Constitution and pertinent laws, then it becomes illegal. Further, the
pronouncement of petitioners that the grandfather rule has already been abandoned must be
discredited for lack of basis.
Art. XII, Sec. 2 of the Constitution provides:
Sec. 2. All lands of the public domain, waters, minerals, coal, petroleum and other mineral
oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and
other natural resources are owned by the State. With the exception of agricultural lands, all
other natural resources shall not be alienated. The exploration, development, and utilization of
natural resources shall be under the full control and supervision of the State. The State may
directly undertake such activities, or it may enter into co-production, joint venture or
production-sharing agreements with Filipino citizens, or corporations or associations at least
sixty per centum of whose capital is owned by such citizens. Such agreements may be for a
period not exceeding twenty-five years, renewable for not more than twenty-five years, and
under such terms and conditions as may be provided by law.
xxxx
The President may enter into agreements with Foreign-owned corporations involving either
technical or financial assistance for large-scale exploration, development, and utilization of
minerals, petroleum, and other mineral oils according to the general terms and conditions
provided by law, based on real contributions to the economic growth and general welfare of
the country. In such agreements, the State shall promote the development and use of local
scientific and technical resources. (emphasis supplied)
The emphasized portion of Sec. 2 which focuses on the State entering into different types of
agreements for the exploration, development, and utilization of natural resources with entities
who are deemed Filipino due to 60 percent ownership of capital is pertinent to this case, since
the issues are centered on the utilization of our country’s natural resources or specifically,
mining. Thus, there is a need to ascertain the nationality of petitioners since, as the
Constitution so provides, such agreements are only allowed corporations or associations "at
least 60 percent of such capital is owned by such citizens." The deliberations in the Records
of the 1986 Constitutional Commission shed light on how a citizenship of a corporation will be
determined:
Mr. BENNAGEN: Did I hear right that the Chairman’s interpretation of an independent national
economy is freedom from undue foreign control? What is the meaning of undue foreign
control?
MR. VILLEGAS: Undue foreign control is foreign control which sacrifices national sovereignty
and the welfare of the Filipino in the economic sphere.
MR. BENNAGEN: Why does it have to be qualified still with the word "undue"? Why not
simply freedom from foreign control? I think that is the meaning of independence, because as
phrased, it still allows for foreign control.
MR. VILLEGAS: It will now depend on the interpretation because if, for example, we retain the
60/40 possibility in the cultivation of natural resources, 40 percent involves some control; not
total control, but some control.
MR. BENNAGEN: In any case, I think in due time we will propose some amendments.
MR. VILLEGAS: Yes. But we will be open to improvement of the phraseology.
Mr. BENNAGEN: Yes.
Thank you, Mr. Vice-President.
xxxx
MR. NOLLEDO: In Sections 3, 9 and 15, the Committee stated local or Filipino equity and
foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9, and 2/3-1/3 in Section 15.
MR. VILLEGAS: That is right.
MR. NOLLEDO: In teaching law, we are always faced with the question: ‘Where do we base
the equity requirement, is it on the authorized capital stock, on the subscribed capital stock, or
on the paid-up capital stock of a corporation’? Will the Committee please enlighten me on
this?
MR. VILLEGAS: We have just had a long discussion with the members of the team from the
UP Law Center who provided us with a draft. The phrase that is contained here which we
adopted from the UP draft is ‘60 percent of the voting stock.’
MR. NOLLEDO: That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.
MR. VILLEGAS: That is right.
MR. NOLLEDO: Thank you.
With respect to an investment by one corporation in another corporation, say, a corporation
with 60-40 percent equity invests in another corporation which is permitted by the Corporation
Code, does the Committee adopt the grandfather rule?
MR. VILLEGAS: Yes, that is the understanding of the Committee.
MR. NOLLEDO: Therefore, we need additional Filipino capital?
MR. VILLEGAS: Yes.42 (emphasis supplied)
It is apparent that it is the intention of the framers of the Constitution to apply the grandfather
rule in cases where corporate layering is present.
Elementary in statutory construction is when there is conflict between the Constitution and a
statute, the Constitution will prevail. In this instance, specifically pertaining to the provisions
under Art. XII of the Constitution on National Economy and Patrimony, Sec. 3 of the FIA will
have no place of application. As decreed by the honorable framers of our Constitution, the
grandfather rule prevails and must be applied.
Likewise, paragraph 7, DOJ Opinion No. 020, Series of 2005 provides:
The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a
corporation for purposes, among others, of determining compliance with nationality
requirements (the ‘Investee Corporation’). Such manner of computation is necessary since the
shares in the Investee Corporation may be owned both by individual stockholders (‘Investing
Individuals’) and by corporations and partnerships (‘Investing Corporation’). The said rules
thus provide for the determination of nationality depending on the ownership of the Investee
Corporation and, in certain instances, the Investing Corporation.
Under the above-quoted SEC Rules, there are two cases in determining the nationality of the
Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control
Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967
SEC Rules which states, ‘(s)hares belonging to corporations or partnerships at least 60% of
the capital of which is owned by Filipino citizens shall be considered as of Philippine Obviously, the instant case presents a situation which exhibits a scheme employed by
nationality.’ Under the liberal Control Test, there is no need to further trace the ownership of stockholders to circumvent the law, creating a cloud of doubt in the Court’s mind. To
the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation determine, therefore, the actual participation, direct or indirect, of MBMI, the grandfather rule
which is at least 60% Filipino-owned is considered as Filipino. must be used.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion McArthur Mining, Inc.
in said Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares To establish the actual ownership, interest or participation of MBMI in each of petitioners’
corresponding to such percentage shall be counted as of Philippine nationality." Under the corporate structure, they have to be "grandfathered."
Strict Rule or Grandfather Rule Proper, the combined totals in the Investing Corporation and
the Investee Corporation must be traced (i.e., "grandfathered") to determine the total
As previously discussed, McArthur acquired its MPSA application from MMC, which acquired
percentage of Filipino ownership.
its application from SMMI. McArthur has a capital stock of ten million pesos (PhP 10,000,000)
divided into 10,000 common shares at one thousand pesos (PhP 1,000) per share, subscribed
Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the to by the following:44
Investing Corporation and added to the shares directly owned in the Investee Corporation x x
x.
Name Nationality Number of Amount Amount Paid
Shares Subscribed
xxxx
Madridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the Corporation
second part of the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is
in doubt (i.e., in cases where the joint venture corporation with Filipino and foreign MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60
stockholders with less than 60% Filipino stockholdings [or 59%] invests in other joint venture Inc.
corporation which is either 60-40% Filipino-alien or the 59% less Filipino). Stated differently, Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
where the 60-40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will
not apply. (emphasis supplied) Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
Esguerra
After a scrutiny of the evidence extant on record, the Court finds that this case calls for the Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
application of the grandfather rule since, as ruled by the POA and affirmed by the OP, doubt
prevails and persists in the corporate ownership of petitioners. Also, as found by the CA, Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
doubt is present in the 60-40 Filipino equity ownership of petitioners Narra, McArthur and
Tesoro, since their common investor, the 100% Canadian corporation––MBMI, funded them. Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
However, petitioners also claim that there is "doubt" only when the stockholdings of Filipinos
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
are less than 60%.43
(emphasis supplied)

The assertion of petitioners that "doubt" only exists when the stockholdings are less than 60%
fails to convince this Court. DOJ Opinion No. 20, which petitioners quoted in their petition, only
made an example of an instance where "doubt" as to the ownership of the corporation exists.
It would be ludicrous to limit the application of the said word only to the instances where the
stockholdings of non-Filipino stockholders are more than 40% of the total stockholdings in a
corporation. The corporations interested in circumventing our laws would clearly strive to have
"60% Filipino Ownership" at face value. It would be senseless for these applying corporations
to state in their respective articles of incorporation that they have less than 60% Filipino
stockholders since the applications will be denied instantly. Thus, various corporate schemes
and layerings are utilized to circumvent the application of the Constitution.
Interestingly, looking at the corporate structure of MMC, we take note that it has a similar
structure and composition as McArthur. In fact, it would seem that MBMI is also a major
investor and "controls"45 MBMI and also, similar nominal shareholders were present, i.e.
Fernando B. Esguerra (Esguerra), Lauro L. Salazar (Salazar), Michael T. Mason (Mason) and
Kenneth Cawkell (Cawkell):
Madridejos Mining Corporation
 Name Nationality Number of Shares Amount Subscribed Amount Paid milestones, the Company may earn up to a 100% interest, subject to a 2.5% net revenue
royalty.47 (emphasis supplied)
Olympic Mines & Filipino 6,663 PhP 6,663,000.00 PhP 0
Thus, as demonstrated in this first corporation, McArthur, when it is "grandfathered," company
Development layering was utilized by MBMI to gain control over McArthur. It is apparent that MBMI has
more than 60% or more equity interest in McArthur, making the latter a foreign corporation.
Corp.
Tesoro Mining and Development, Inc.
MBMI Resources, Canadian 3,331 PhP 3,331,000.00 PhP 2,803,900.00
Tesoro, which acquired its MPSA application from SMMI, has a capital stock of ten million
Inc. pesos (PhP 10,000,000) divided into ten thousand (10,000) common shares at PhP 1,000 per
share, as demonstrated below:
Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00 [[reference
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf
Esguerra ]]

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Name Nationality Number Amount Amount Paid
Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00 of
Subscribed
Hernando Shares
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Sara Marie Filipino 5,997 PhP PhP 825,000.00
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00 5,997,000.00
Mining, Inc.
Total 10,000 PhP 10,000,000.00 PhP 2,809,900.00
MBMI Canadian 3,998 PhP PhP 1,878,174.60
(emphasis supplied) 3,998,000.00
Resources, Inc.
Noticeably, Olympic Mines & Development Corporation (Olympic) did not pay any amount with
respect to the number of shares they subscribed to in the corporation, which is quite absurd Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
since Olympic is the major stockholder in MMC. MBMI’s 2006 Annual Report sheds light on
why Olympic failed to pay any amount with respect to the number of shares it subscribed to. It Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
states that Olympic entered into joint venture agreements with several Philippine companies,
wherein it holds directly and indirectly a 60% effective equity interest in the Olympic Esguerra
Properties.46 Quoting the said Annual report:
Manuel A. Filipino 1 PhP 1,000.00 PhP 1,000.00
On September 9, 2004, the Company and Olympic Mines & Development Corporation
("Olympic") entered into a series of agreements including a Property Purchase and Agcaoili
Development Agreement (the Transaction Documents) with respect to three nickel laterite
properties in Palawan, Philippines (the "Olympic Properties"). The Transaction Documents Michael T. American 1 PhP 1,000.00 PhP 1,000.00
effectively establish a joint venture between the Company and Olympic for purposes of Mason
developing the Olympic Properties. The Company holds directly and indirectly an initial 60%
interest in the joint venture. Under certain circumstances and upon achieving certain
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00 Emmanuel G. Filipino 1 PhP 1,000.00 PhP 1,000.00

Total 10,000 PhP PhP 2,708,174.60 Hernando

10,000,000.00
(emphasis Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
supplied)
Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Except for the name "Sara Marie Mining, Inc.," the table above shows exactly the same
Total 10,000 PhP PhP 2,809,900.00
figures as the corporate structure of petitioner McArthur, down to the last centavo. All the
10,000,000.00
other shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and Cawkell.
The figures under "Nationality," "Number of Shares," "Amount Subscribed," and "Amount (emphasis
Paid" are exactly the same. Delving deeper, we scrutinize SMMI’s corporate structure: supplied)

Sara Marie Mining, Inc. After subsequently studying SMMI’s corporate structure, it is not farfetched for us to spot the
glaring similarity between SMMI and MMC’s corporate structure. Again, the presence of
[[reference identical stockholders, namely: Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar,
= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf Hernando, Mason and Cawkell. The figures under the headings "Nationality," "Number of
]] Shares," "Amount Subscribed," and "Amount Paid" are exactly the same except for the
amount paid by MBMI which now reflects the amount of two million seven hundred ninety four
thousand pesos (PhP 2,794,000). Oddly, the total value of the amount paid is two million eight
Name Nationality Number Amount Amount Paid hundred nine thousand nine hundred pesos (PhP 2,809,900).
of
Subscribed Accordingly, after "grandfathering" petitioner Tesoro and factoring in Olympic’s participation in
Shares SMMI’s corporate structure, it is clear that MBMI is in control of Tesoro and owns 60% or
more equity interest in Tesoro. This makes petitioner Tesoro a non-Filipino corporation and,
Olympic Mines & Filipino 6,663 PhP PhP 0 thus, disqualifies it to participate in the exploitation, utilization and development of our natural
6,663,000.00 resources.
Development
Narra Nickel Mining and Development Corporation
Corp.
Moving on to the last petitioner, Narra, which is the transferee and assignee of PLMDC’s
MBMI Canadian 3,331 PhP PhP 2,794,000.00 MPSA application, whose corporate structure’s arrangement is similar to that of the first two
Resources, 3,331,000.00 petitioners discussed. The capital stock of Narra is ten million pesos (PhP 10,000,000), which
is divided into ten thousand common shares (10,000) at one thousand pesos (PhP 1,000) per
Inc. share, shown as follows:

Amanti Limson Filipino 1 PhP 1,000.00 PhP 1,000.00 [[reference

= http://sc.judiciary.gov.ph/pdf/web/viewer.html?file=/jurisprudence/2014/april2014/195580.pdf
Fernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00 ]]

Esguerra

Lauro Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

 Name Nationality Number Amount Amount Paid Cawkell 1,000.00
of
Subscribed Total 10,000 PhP PhP
Shares 10,000,000.00 2,800,000.00
(emphasis
Patricia Filipino 5,997 PhP PhP supplied)
Louise 5,997,000.00 1,677,000.00
Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and Esguerra, is
Mining & present in this corporate structure.

Development Patricia Louise Mining & Development Corporation

Corp. Using the grandfather method, we further look and examine PLMDC’s corporate structure:

MBMI Canadian 3,998 PhP PhP

3,996,000.00 1,116,000.00 Name Nationality Number of Amount Amount Paid
Shares Subscribed
Resources,
Inc. Palawan Alpha South Filipino 6,596 PhP PhP 0
Resources Development 6,596,000.00
Higinio C. Filipino 1 PhP 1,000.00 PhP Corporation
1,000.00
Mendoza, Jr. MBMI Resources, Canadian 3,396 PhP PhP
3,396,000.00 2,796,000.00
Henry E. Filipino 1 PhP 1,000.00 PhP Inc.
1,000.00 Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00
Fernandez
Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Filipino 1 PhP 1,000.00 PhP
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
1,000.00
Agcaoili Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Ma. Elena A. Filipino 1 PhP 1,000.00 PhP
1,000.00 Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
Bocalan
Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
Bayani H. Filipino 1 PhP 1,000.00 PhP Kenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
Agabin 1,000.00
Total 10,000 PhP PhP
Robert L. American 1 PhP 1,000.00 PhP 10,000,000.00 2,708,174.60
1,000.00 (emphasis
McCurdy supplied)

Kenneth Canadian 1 PhP 1,000.00 PhP

Yet again, the usual players in petitioners’ corporate structures are present. Similarly, the
amount of money paid by the 2nd tier majority stock holder, in this case, Palawan Alpha South
Resources and Development Corp. (PASRDC), is zero.
Studying MBMI’s Summary of Significant Accounting Policies dated October 31, 2005
explains the reason behind the intricate corporate layering that MBMI immersed itself in:
JOINT VENTURES The Company’s ownership interests in various mining ventures engaged
in the acquisition, exploration and development of mineral properties in the Philippines is
described as follows:
(a) Olympic Group
The Philippine companies holding the Olympic Property, and the ownership and interests
therein, are as follows:
Olympic- Philippines (the "Olympic Group")
Sara Marie Mining Properties Ltd. ("Sara Marie") 33.3%
Tesoro Mining & Development, Inc. (Tesoro) 60.0%
Pursuant to the Olympic joint venture agreement the Company holds directly and indirectly an
effective equity interest in the Olympic Property of 60.0%. Pursuant to a shareholders’
agreement, the Company exercises joint control over the companies in the Olympic Group.
(b) Alpha Group
The Philippine companies holding the Alpha Property, and the ownership interests therein, are
as follows:
Alpha- Philippines (the "Alpha Group")
Patricia Louise Mining Development Inc. ("Patricia") 34.0%
Narra Nickel Mining & Development Corporation (Narra) 60.4%
Under a joint venture agreement the Company holds directly and indirectly an effective equity
interest in the Alpha Property of 60.4%. Pursuant to a shareholders’ agreement, the Company
exercises joint control over the companies in the Alpha Group.48 (emphasis supplied)
Concluding from the above-stated facts, it is quite safe to say that petitioners McArthur,
Tesoro and Narra are not Filipino since MBMI, a 100% Canadian corporation, owns 60% or
more of their equity interests. Such conclusion is derived from grandfathering petitioners’
corporate owners, namely: MMI, SMMI and PLMDC. Going further and adding to the picture,
MBMI’s Summary of Significant Accounting Policies statement– –regarding the "joint venture"
agreements that it entered into with the "Olympic" and "Alpha" groups––involves SMMI,
Tesoro, PLMDC and Narra. Noticeably, the ownership of the "layered" corporations boils
down to MBMI, Olympic or corporations under the "Alpha" group wherein MBMI has joint
venture agreements with, practically exercising majority control over the corporations
mentioned. In effect, whether looking at the capital structure or the underlying relationships
between and among the corporations, petitioners are NOT Filipino nationals and must be
considered foreign since 60% or more of their capital stocks or equity interests are owned by
MBMI.
Application of the res inter alios acta rule
Petitioners question the CA’s use of the exception of the res inter alios acta or the "admission
by co-partner or agent" rule and "admission by privies" under the Rules of Court in the instant
case, by pointing out that statements made by MBMI should not be admitted in this case since
it is not a party to the case and that it is not a "partner" of petitioners.
Secs. 29 and 31, Rule 130 of the Revised Rules of Court provide:
Sec. 29. Admission by co-partner or agent.- The act or declaration of a partner or agent of the
party within the scope of his authority and during the existence of the partnership or agency,
may be given in evidence against such party after the partnership or agency is shown by
evidence other than such act or declaration itself. The same rule applies to the act or
declaration of a joint owner, joint debtor, or other person jointly interested with the party.
Sec. 31. Admission by privies.- Where one derives title to property from another, the act,
declaration, or omission of the latter, while holding the title, in relation to the property, is
evidence against the former.
Petitioners claim that before the above-mentioned Rule can be applied to a case, "the
partnership relation must be shown, and that proof of the fact must be made by evidence
other than the admission itself."49 Thus, petitioners assert that the CA erred in finding that a
partnership relationship exists between them and MBMI because, in fact, no such partnership
exists.
Partnerships vs. joint venture agreements
Petitioners claim that the CA erred in applying Sec. 29, Rule 130 of the Rules by stating that
"by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.
They challenged the conclusion of the CA which pertains to the close characteristics of
"partnerships" and "joint venture agreements." Further, they asserted that before this
particular partnership can be formed, it should have been formally reduced into writing since
the capital involved is more than three thousand pesos (PhP 3,000). Being that there is no filing its petition against petitioners, is asserting the right of Filipinos over mining areas in the
evidence of written agreement to form a partnership between petitioners and MBMI, no Philippines against alleged foreign-owned mining corporations. Such claim constitutes a
partnership was created. "dispute" found in Sec. 77 of RA 7942:

We disagree.
A partnership is defined as two or more persons who bind themselves to contribute money,
property, or industry to a common fund with the intention of dividing the profits among
themselves.50 On the other hand, joint ventures have been deemed to be "akin" to
partnerships since it is difficult to distinguish between joint ventures and partnerships. Thus:
Within thirty (30) days, after the submission of the case by the parties for the decision, the
panel shall have exclusive and original jurisdiction to hear and decide the following:
(a) Disputes involving rights to mining areas
(b) Disputes involving mineral agreements or permits

[T]he relations of the parties to a joint venture and the nature of their association are so similar We held in Celestial Nickel Mining Exploration Corporation v. Macroasia Corp.:53
and closely akin to a partnership that it is ordinarily held that their rights, duties, and liabilities
are to be tested by rules which are closely analogous to and substantially the same, if not
The phrase "disputes involving rights to mining areas" refers to any adverse claim, protest, or
exactly the same, as those which govern partnership. In fact, it has been said that the trend in
opposition to an application for mineral agreement. The POA therefore has the jurisdiction to
the law has been to blur the distinctions between a partnership and a joint venture, very little
resolve any adverse claim, protest, or opposition to a pending application for a mineral
law being found applicable to one that does not apply to the other.51
agreement filed with the concerned Regional Office of the MGB. This is clear from Secs. 38
and 41 of the DENR AO 96-40, which provide:
Though some claim that partnerships and joint ventures are totally different animals, there are
very few rules that differentiate one from the other; thus, joint ventures are deemed "akin" or
Sec. 38.
similar to a partnership. In fact, in joint venture agreements, rules and legal incidents
governing partnerships are applied.52
xxxx
Accordingly, culled from the incidents and records of this case, it can be assumed that the
relationships entered between and among petitioners and MBMI are no simple "joint venture Within thirty (30) calendar days from the last date of publication/posting/radio announcements,
agreements." As a rule, corporations are prohibited from entering into partnership the authorized officer(s) of the concerned office(s) shall issue a certification(s) that the
agreements; consequently, corporations enter into joint venture agreements with other publication/posting/radio announcement have been complied with. Any adverse claim, protest,
corporations or partnerships for certain transactions in order to form "pseudo partnerships." opposition shall be filed directly, within thirty (30) calendar days from the last date of
publication/posting/radio announcement, with the concerned Regional Office or through any
concerned PENRO or CENRO for filing in the concerned Regional Office for purposes of its
Obviously, as the intricate web of "ventures" entered into by and among petitioners and MBMI
resolution by the Panel of Arbitrators pursuant to the provisions of this Act and these
was executed to circumvent the legal prohibition against corporations entering into
implementing rules and regulations. Upon final resolution of any adverse claim, protest or
partnerships, then the relationship created should be deemed as "partnerships," and the laws
opposition, the Panel of Arbitrators shall likewise issue a certification to that effect within five
on partnership should be applied. Thus, a joint venture agreement between and among
(5) working days from the date of finality of resolution thereof. Where there is no adverse
corporations may be seen as similar to partnerships since the elements of partnership are
claim, protest or opposition, the Panel of Arbitrators shall likewise issue a Certification to that
present.
effect within five working days therefrom.

Considering that the relationships found between petitioners and MBMI are considered to be
xxxx
partnerships, then the CA is justified in applying Sec. 29, Rule 130 of the Rules by stating that
"by entering into a joint venture, MBMI have a joint interest" with Narra, Tesoro and McArthur.
No Mineral Agreement shall be approved unless the requirements under this Section are fully
complied with and any adverse claim/protest/opposition is finally resolved by the Panel of
Panel of Arbitrators’ jurisdiction
Arbitrators.

We affirm the ruling of the CA in declaring that the POA has jurisdiction over the instant case.
Sec. 41.
The POA has jurisdiction to settle disputes over rights to mining areas which definitely involve
the petitions filed by Redmont against petitioners Narra, McArthur and Tesoro. Redmont, by
 xxxx
Within fifteen (15) working days form the receipt of the Certification issued by the Panel of
Arbitrators as provided in Section 38 hereof, the concerned Regional Director shall initially
evaluate the Mineral Agreement applications in areas outside Mineral reservations. He/She
shall thereafter endorse his/her findings to the Bureau for further evaluation by the Director
within fifteen (15) working days from receipt of forwarded documents. Thereafter, the Director
shall endorse the same to the secretary for consideration/approval within fifteen working days
from receipt of such endorsement.
In case of Mineral Agreement applications in areas with Mineral Reservations, within fifteen
(15) working days from receipt of the Certification issued by the Panel of Arbitrators as
provided for in Section 38 hereof, the same shall be evaluated and endorsed by the Director
to the Secretary for consideration/approval within fifteen days from receipt of such
endorsement. (emphasis supplied)
It has been made clear from the aforecited provisions that the "disputes involving rights to
mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right
application is further elucidated by Secs. 219 and 43 of DENR AO 95-936, which read:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of
Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said
sections may also be filed directly with the Panel of Arbitrators within the concerned periods
for filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the
proposed contract area is located once a week for two (2) consecutive weeks in a language
generally understood in the locality. After forty-five (45) days from the last date of
publication/posting has been made and no adverse claim, protest or opposition was filed
within the said forty-five (45) days, the concerned offices shall issue a certification that
publication/posting has been made and that no adverse claim, protest or opposition of
whatever nature has been filed. On the other hand, if there be any adverse claim, protest or
opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional Offices concerned, or through the Department’s
Community Environment and Natural Resources Officers (CENRO) or Provincial Environment
and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of
the Panel of Arbitrators. However previously published valid and subsisting mining claims are
exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and
resolved by the Panel of Arbitrators. (Emphasis supplied.)
It has been made clear from the aforecited provisions that the "disputes involving rights to
mining areas" under Sec. 77(a) specifically refer only to those disputes relative to the
applications for a mineral agreement or conferment of mining rights.
The jurisdiction of the POA over adverse claims, protest, or oppositions to a mining right
application is further elucidated by Secs. 219 and 43 of DENRO AO 95-936, which reads:
Sec. 219. Filing of Adverse Claims/Conflicts/Oppositions.- Notwithstanding the provisions of
Sections 28, 43 and 57 above, any adverse claim, protest or opposition specified in said
sections may also be filed directly with the Panel of Arbitrators within the concerned periods
for filing such claim, protest or opposition as specified in said Sections.
Sec. 43. Publication/Posting of Mineral Agreement Application.-
xxxx
The Regional Director or concerned Regional Director shall also cause the posting of the
application on the bulletin boards of the Bureau, concerned Regional office(s) and in the
concerned province(s) and municipality(ies), copy furnished the barangays where the
proposed contract area is located once a week for two (2) consecutive weeks in a language
generally understood in the locality. After forty-five (45) days from the last date of
publication/posting has been made and no adverse claim, protest or opposition was filed
within the said forty-five (45) days, the concerned offices shall issue a certification that
publication/posting has been made and that no adverse claim, protest or opposition of
whatever nature has been filed. On the other hand, if there be any adverse claim, protest or
opposition, the same shall be filed within forty-five (45) days from the last date of
publication/posting, with the Regional offices concerned, or through the Department’s
Community Environment and Natural Resources Officers (CENRO) or Provincial Environment
and Natural Resources Officers (PENRO), to be filed at the Regional Office for resolution of
the Panel of Arbitrators. However, previously published valid and subsisting mining claims are
exempted from posted/posting required under this Section.
No mineral agreement shall be approved unless the requirements under this section are fully
complied with and any opposition/adverse claim is dealt with in writing by the Director and
resolved by the Panel of Arbitrators. (Emphasis supplied.)
These provisions lead us to conclude that the power of the POA to resolve any adverse claim,
opposition, or protest relative to mining rights under Sec. 77(a) of RA 7942 is confined only to
adverse claims, conflicts and oppositions relating to applications for the grant of mineral rights.
POA’s jurisdiction is confined only to resolutions of such adverse claims, conflicts and
oppositions and it has no authority to approve or reject said applications. Such power is
vested in the DENR Secretary upon recommendation of the MGB Director. Clearly, POA’s
jurisdiction over "disputes involving rights to mining areas" has nothing to do with the
cancellation of existing mineral agreements. (emphasis ours)
Accordingly, as we enunciated in Celestial, the POA unquestionably has jurisdiction to resolve
disputes over MPSA applications subject of Redmont’s petitions. However, said jurisdiction
does not include either the approval or rejection of the MPSA applications, which is vested
only upon the Secretary of the DENR. Thus, the finding of the POA, with respect to the
rejection of petitioners’ MPSA applications being that they are foreign corporation, is valid.
Justice Marvic Mario Victor F. Leonen, in his Dissent, asserts that it is the regular courts, not
the POA, that has jurisdiction over the MPSA applications of petitioners.
This postulation is incorrect.
It is basic that the jurisdiction of the court is determined by the statute in force at the time of
the commencement of the action.54
Sec. 19, Batas Pambansa Blg. 129 or "The Judiciary Reorganization
Act of 1980" reads:
Sec. 19. Jurisdiction in Civil Cases.—Regional Trial Courts shall exercise exclusive original
jurisdiction:
1. In all civil actions in which the subject of the litigation is incapable of pecuniary estimation.
On the other hand, the jurisdiction of POA is unequivocal from Sec. 77 of RA 7942:
Section 77. Panel of Arbitrators.—
x x x Within thirty (30) days, after the submission of the case by the parties for the
decision, the panel shall have exclusive and original jurisdiction to hear and decide
the following:
(c) Disputes involving rights to mining areas
(d) Disputes involving mineral agreements or permits
It is clear that POA has exclusive and original jurisdiction over any and all disputes involving
rights to mining areas. One such dispute is an MPSA application to which an adverse claim,
protest or opposition is filed by another interested applicant.1âwphi1 In the case at bar, the
dispute arose or originated from MPSA applications where petitioners are asserting their rights
to mining areas subject of their respective MPSA applications. Since respondent filed 3
separate petitions for the denial of said applications, then a controversy has developed
between the parties and it is POA’s jurisdiction to resolve said disputes.
Moreover, the jurisdiction of the RTC involves civil actions while what petitioners filed with the
DENR Regional Office or any concerned DENRE or CENRO are MPSA applications. Thus
POA has jurisdiction.
Furthermore, the POA has jurisdiction over the MPSA applications under the doctrine of
primary jurisdiction. Euro-med Laboratories v. Province of Batangas55 elucidates:
The doctrine of primary jurisdiction holds that if a case is such that its determination requires
the expertise, specialized training and knowledge of an administrative body, relief must first be
obtained in an administrative proceeding before resort to the courts is had even if the matter
may well be within their proper jurisdiction.
Whatever may be the decision of the POA will eventually reach the court system via a resort
to the CA and to this Court as a last recourse.
Selling of MBMI’s shares to DMCI
As stated before, petitioners’ Manifestation and Submission dated October 19, 2012 would
want us to declare the instant petition moot and academic due to the transfer and conveyance
of all the shareholdings and interests of MBMI to DMCI, a corporation duly organized and
existing under Philippine laws and is at least 60% Philippine-owned.56 Petitioners reasoned
that they now cannot be considered as foreign-owned; the transfer of their shares supposedly
cured the "defect" of their previous nationality. They claimed that their current FTAA contract
with the State should stand since "even wholly-owned foreign corporations can enter into an
FTAA with the State."57 Petitioners stress that there should no longer be any issue left as
regards their qualification to enter into FTAA contracts since they are qualified to engage in
mining activities in the Philippines. Thus, whether the "grandfather rule" or the "control test" is
used, the nationalities of petitioners cannot be doubted since it would pass both tests.
The sale of the MBMI shareholdings to DMCI does not have any bearing in the instant case
and said fact should be disregarded. The manifestation can no longer be considered by us
since it is being tackled in G.R. No. 202877 pending before this Court.1âwphi1 Thus, the
question of whether petitioners, allegedly a Philippine-owned corporation due to the sale of
MBMI's shareholdings to DMCI, are allowed to enter into FTAAs with the State is a non-issue
in this case.
In ending, the "control test" is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 Constitution,
entitled to undertake the exploration, development and utilization of the natural resources of
the Philippines. When in the mind of the Court there is doubt, based on the attendant facts
and circumstances of the case, in the 60-40 Filipino-equity ownership in the corporation, then
it may apply the "grandfather rule."

WHEREFORE, premises considered, the instant petition is DENIED. The assailed Court of
Appeals Decision dated October 1, 2010 and Resolution dated February 15, 2011 are hereby
AFFIRMED.

SO ORDERED.