Buss ORG II

Republic of the PhilippinesSUPREME COURT

Baguio City

THIRD DIVISION

G.R. No. 139371 April 4, 2001

INDIANA AEROSPACE UNIVERSITY, petitioner, vs.COMMISSION ON HIGHER EDUCATION (CHED), respondent.

PANGANIBAN, J.:

When the delayed filing of an answer causes no prejudice to the plaintiff, default orders should be avoided. Inasmuch as herein respondent was improvidently declared in default, its Petition for Certiorari to annul its default may be given due course. The act of the Commission on Higher Education enjoining petitioner from using the word "university" in its corporate name and ordering it to revert to its authorized name does not violate its proprietary rights or constitute irreparable damage to the school. Indeed, petitioner has no vested right to misrepresent itself to the public. An injunction is a remedy in equity and should not be used to perpetuate a falsehood.

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, challenging the July 21, 1999 Decision1 of the Court of Appeals (CA) in CA-GR SP No. 51346. The appellate court directed the Regional Trial Court (RTC) of Makati City, Branch 136, to cease and desist from proceeding with Civil Case No. 98-811 and to dismiss the Complaint for Damages filed by the "Indiana Aerospace University" against the Commission on Higher Education (CHED). The dispositive portion of the CA Decision reads as follows:

"WHEREFORE, in the light of the foregoing consideration, and pursuant to pertinent existing laws and jurisprudence on the matter, [the trial court] is hereby DIRECTED to cease and desist from proceeding with Civil Case No. 98-811 and to order the dismissal of [petitioner's] Petition dated March 31, 1999 in Civil Case No. 98-911 for lack of merit and valid cause of action."2

The Facts

The facts of this case are summarized by the CA, as follows:

"Sometime in October 1996, Dr. Reynaldo B. Vera, Chairman, Technical Panel for Engineering, Architecture, and Maritime Education (TPRAM) of [CHED], received a letter dated October 18, 1998 (Annex 'C') from Douglas R. Macias, Chairman, Board of Aeronautical Engineering, Professional Regulat[ory] Commission (PRC) and Chairman, Technical Committee for Aeronautical Engineering (TPRAME) inquiring whether [petitioner] had already acquired [u]niversity status in view of the latter's advertisement in [the] Manila Bulletin.

"In a letter dated October 24, 1996, Dr. Vera formally referred the aforesaid letter to Chairman Alcala with a request that the concerned Regional Office of [CHED] be directed to

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conduct appropriate investigation on the alleged misrepresentation by [petitioner]. Thereafter, [CHED] referred the matter to its Regional Director in Cebu City, requesting said office to conduct an investigation and submit its report. The [R]eport submitted in January 1997, stated in substance:

'x x x x x x x x x

'To recall it was in the month of May 1996, [that] Director Ma. Lilia Gaduyon met the school [p]resident in the regional office and verbally talked [with] and advised them not to use University when it first came out in an advertisement column of a local daily newspaper in Cebu City. It was explained that there was a violation [committed by] his institution [when it used] the term university unless the school ha[d] complied [with] the basic requirement of being a university as prescribed in CHED Memorandum Order No. 48, s. 1996.'

x x x x x x x x x.'

"As a consequence of said Report, [respondent's] Legal Affairs Service was requested to take legal action against [petitioner]. Subsequently, on February 3, 1997, [respondent] directed [petitioner] to desist from using the term University, including the use of the same in any of its alleged branches. In the course of its investigation, [respondent] was able to verify from the Securities and Exchange Commission (SEC) that [petitioner had] filed a proposal to amend its corporate name from Indiana School of Aeronautics to Indiana Aerospace University, which was supposedly favorably recommended by the Department of Education, Culture and Sports (DECS) per its Indorsement dated 17 July 1995, and on [that] basis, SEC issued to [petitioner] Certificate of Registration No. AS-083-002689 dated August 7, 1995. Surprisingly, however, it ought to be noted, that SEC Chairman Perfecto R. Yasay, Jr. wrote the following letter to the [c]hairman of [respondent]:

'Hon. Angel C. AlcalaChairmanCommission on Higher EducationDAP Bldg., San Miguel AvenueOrtigas Center, Pasig City

Dear Chairman Alcala:

This refers to your letter dated September 18, 1997 requesting this Commission to make appropriate changes in the Articles of Incorporation of Indiana School of Aeronautics, Inc. due to its unauthorized use of the term 'University' in its corporate name.

Relative thereto, please be informed that our records show that the above-mentioned corporation has not filed any amended articles of incorporation that changed its corporate name to include the term 'University.'

In case the corporation submit[s] an application for change of name, your Cease and Desist Order shall be considered accordingly.

Very Truly yours,

(SGD.) PERFECTO R. YASAY, JR.Chairman'

"In reaction to [respondent's] order for [petitioner] to desist from using the word 'University', Jovenal Toring, [c]hairman and [f]ounder of [petitioner] wrote a letter dated February 24, 1997 (Annex 'G') appealing for reconsideration of [respondent's] Order, with a promise to follow the provisions of CMO No. 48, pertinent portions of which have been quoted in the Petition, to wit:

'On 07 August 1995, in line with the call of the government to go for global competitiveness and our vision to help in the development of aerospace technology, the Board of Directors applied with the SEC for the amendment of Article I of the Articles of Incorporation to read as 'Indiana Aerospace University' instead of 'Indiana School of Aeronautics, Inc.'

x x x x x x x x x

'In view thereof, we would like to appeal to you Fr. Delagoza to please reconsider your order of February 3, 1997, otherwise the school will encounter financial difficulties and suffer damages which will eventually result in the mass dislocation of x x x thousand[s] of students. The undersigned, being the [c]hairman and [f]ounder, will try our very best to follow the provisions of CHED MEMO No. 48, series of 1996 that took effect last June 18, 1996.

x x x x x x x x x

Thank you very much for giving me a copy of said CHED MEMO Order No. 48. More power and God Bless You.

x x x x x x x x x

"The appeal of [petitioner] was however rejected by [respondent] in its decision dated July 30, 1998 and [the latter] ordered the former to cease and desist from using the word 'University.' However, prior to said date, on April 2, 1998, [petitioner] filed a Complaint for Damages with prayer for Writ of Preliminary and Mandatory Injunction and Temporary Restraining Order against [respondent], docketed as Civil Case No. 98-811 before public respondent judge.

"On April 7, 1998, [respondent] filed a Special Appearance with Motion to Dismiss, based on 1) improper venue; 2) lack of authority of the person instituting the action; and 3) lack of cause of action. On April 17, 1998, [petitioner] filed its Opposition to the Motion to Dismiss [on] grounds stated therein, to which [respondent] filed a Reply on April 21, 1998, reiterating the same arguments in its Motion to Dismiss. After due hearing, [petitioner] formally offered its evidence on July 23, 1998 while [respondent] made a formal offer of evidence on July 28, 1998 to which [petitioner] filed its Comments/Objections and finally, [respondent] submitted its Memorandum relative thereto on October 1, 1998.

"Public respondent judge, in an Order dated August 14, 1998, denied [respondent's] Motion to Dismiss and at the same time, issued a Writ of Preliminary Injunction in favor of [petitioner]. [Respondent], in the same Order, was directed to file its Answer within fifteen (15) days from receipt of said Order, which was August 15, 1998.

x x x x x x x x x

'WHEREFORE, and in consideration of all the foregoing, [respondent's] Motion to Dismiss is hereby denied, and the [respondent] is directed to file its [A]nswer to the [C]omplaint within fifteen (15) days from receipt of this order.

In the meantime, [respondent], its officials, employees and all parties acting under its authority are hereby enjoined to observe the following during the pendency of this case:

1. Not to publish or circulate any announcement in the newspaper, radio or television regarding its Cease and Desist Order against x x x [petitioner];

2. Not to enforce the Cease and Desist Order issued against x x x [petitioner];

3. To maintain the status quo by not withholding the issuance of yearly school permits and special order to all graduates.

Let a Writ of Preliminary Injunction to that effect issue upon posting by [petitioner] of an injunction bond in the amount of One Hundred Thousand Pesos (P100,000.00), and subject to the approval of the Court.

SO ORDERED.'

"On September 22, 1998, [petitioner] filed before public respondent a Motion To Declare [Respondent] in [D]efault pursuant to Section 3, Rule 9 in relation to Section 4, Rule 16 of the Rules of Court, as amended, and at the same time praying [for] the Motion to [S]et for [H]earing on October 30, 1998 at 8:30 a.m. On the same date, [respondent] filed a Motion For Extension of Time to File its Answer, x x x until November 18, 1998. On November 17, 1998, [respondent] filed its [A]nswer.

"[Petitioner], on November 11, 1998 filed its Opposition to the Motion for Extension of Time to File [Respondent's] Answer and on November 9, 1998, a Motion to Expunge [Respondent's] Answer and at the same time praying that its [M]otion be heard on November 27, 1998 at 9:00 a.m. On even date, public respondent judge issued an Order directing the Office of the Solicitor General to file within a period of ten (10) days from date its written Opposition to the Motion to Expunge [Respondent's] Answer and within the same period to file a written [N]otice of [A]ppearance in the case. Unable to file their written Opposition to the Motion to Expunge within the period given by public respondent, the OSG filed a Motion to Admit Written Opposition stating the reasons for the same, attaching thereto the Opposition with [F]ormal [E]ntry of [A]ppearance.

"In an Order dated December 9, 1998, (Annex 'A'), public respondent judge ruled on [Petitioner's] Motion to Declare [Respondent in Default], to wit:

"WHEREFORE, and in view of all the foregoing, the present motion is granted. [Petitioner] is hereby directed to present its evidence ex-parte before the [b]ranch [c]lerk of [c]ourt, who is designated as [c]ommissioner for the purpose, within ten (10) days from receipt of this [O]rder, and for the latter to submit his report within twenty (20) days from the date the case is submitted for decision."

SO ORDERED.'"3

On February 23, 1999, respondent filed with the CA a Petition for Certiorari, arguing that the RTC had committed grave abuse of discretion (a) in denying the former's Motion to Dismiss, (b) in issuing a Writ of Preliminary Injunction, and (c) in declaring respondent in default despite its filing an Answer.

Ruling of the Court of Appeals

The CA ruled that petitioner had no cause of action against respondent. Petitioner failed to show any evidence that it had been granted university status by respondent as required under existing law and CHED rules and regulations. A certificate of incorporation under an unauthorized name does not confer upon petitioner the right to use the word "university" in its name. The evidence submitted by respondent showed that the Securities and Exchange Commission (SEC) had denied that petitioner had ever amended its Articles of Incorporation to include "university" in its corporate name. For its part, the Department of Education, Culture and Sports (DECS) denied having issued the alleged Certification dated May 18, 1998, indorsing the change in petitioner's corporate name. Besides, neither the Corporation Code nor the SEC Charter vests the latter with the authority to confer university status on a corporation that it regulates.

For the same reason, the appellate court also ruled that the Writ of Preliminary Injunction had improvidently been issued. The doubtful right claimed by petitioner is subordinate to the public interest to protect unsuspecting students and their parents from the unauthorized operation and misrepresentation of an educational institution.

Respondent should not have been declared in default, because its Answer had been filed long before the RTC ruled upon petitioner's Motion to declare respondent in default. Thus, respondent had not obstinately refused to file an Answer; on the contrary, its failure to do so on time was due to excusable negligence. Declaring it in default did not serve the ends of justice, but only prevented it from pursuing the merits of its case.1âwphi1.nêt

Hence, this Petition.4

Issues

Petitioner alleges that the appellate court committed the following reversible errors:

"A. In giving due course to respondent CHED's Petition for Certiorari filed way beyond the 60-day reglementary period prescribed by Section 4, Rule 65 of the Rules of Court;

B. In not requiring Respondent CHED to first file a Motion to Set Aside the Order of Default dated December 9, 1998; and

C. In ordering the dismissal of Civil Case No. 98-811."5

In its Memorandum, petitioner adds that the CA erred in dissolving the Writ of Preliminary Injunction issued by the RTC. We shall take up these issues in the following order: (1) timeliness of the certiorari petition, (2) validity of the default order, 93) validity of the preliminary injunction, and (4) dismissal of the Complaint.

This Court's Ruling



The Petition is partly meritorious.

First Issue:Timeliness of Certiorari

Petitioner claims that the Petition for Certiorari of respondent should have been dismissed by the CA, because it was filed out of time and was not preceded by a motion for reconsideration in the RTC. The copy of the Order of August 14, 1998 had been served at respondent's office on August 15, 1998, but its Answer was filed only after 180 days which, according to petitioner, could not be considered a reasonable period. On the other hand, the Office of the Solicitor General (OSG) argues that the Order is null and void and, hence, may be assailed at any time.

We hold that respondent's Petition for Certiorari was seasonably filed. In computing its timeliness, what should have been considered was not the Order of august 14, 1998, but the date when respondent received the December 9, 1998 Order declaring it in default. Since it received this Order only on January 13, 1999, and filed its Petition for Certiorari on February 23, 1999, it obviously complied with the sixty-day reglementary period stated in Section 4, Rule 65 of the 1997 Rules of Court. Moreover, the August 14, 1998 Order was not a proper subject of certiorari or appeal, since it was merely an interlocutory order.

Exhaustion of Available Remedies

Petitioner also contends that certiorari cannot prosper in this case, because respondent did not file a motion for reconsideration before filing its Petition for Certiorari with the CA. Respondent counters that reconsideration should be dispensed with, because the December 9, 1998 Order is a patent nullity.

The general rule is that, in order to give the lower court the opportunity to correct itself, a motion for reconsideration is a prerequisite to certiorari. It is also basic that a petitioner must exhaust all other available remedies before resorting to certiorari. This rule, however, is subject to certain exceptions such as any of the following: (1) the issues raised are purely legal in nature, (2) public interest is involved, (3) extreme urgency is obvious or (4) special circumstances warrant immediate or more direct action.6 It is patently clear that the regulation or administration of educational institutions, especially on the tertiary level, is invested with public interest. Hence, the haste with which the solicitor general raised these issues before the appellate court is understandable. For the reason mentioned, we rule that respondent's Petition for Certiorari did not require prior resort to a motion for reconsideration.

Second Issue:Validity of the Default Order

Petitioner avers that the RTC was justified in declaring respondent in default, because the August 14, 1998 Order directing the filing of an answer had been served on August 25, 1998. And as late as October 30, 1998, respondent could only file a Motion for Extension of Time, which the trial court denied because of the expiry of the fifteen-day period. Petitioner adds that respondent's proper remedy would have been a Motion to Set Aside the Order of Default, pursuant to Section 3(b), Rule 9 of the Rules of Court.

Respondent, in turn, avers that certiorari was the only plain, speedy and adequate remedy in the ordinary course of law, because the default Order had improvidently been issued.

We agree with respondent. Lina v. Court of Appeals7 discussed the remedies available to a defendant declared in default, as follows: (1) a motion to set aside the order of default under Section 3(b), Rule 9 of the Rules of Court, if the default was discovered before judgment could be rendered; (2) a motion for new trial under Section 1(a) of Rule 37, if the default was discovered after judgment but while appeal is still available; (3) a petition for relief under Rule 38, if judgment has become final and executory; and (4) an appeal from the judgment under Section 1, Rule 41, even if no petition to set aside the order of default has been resorted to.

These remedies, however, are available only to a defendant who has been validly declared in default. Such defendant irreparably loses the right to participate in the trial. On the other hand, a defendant improvidently declared in default may retain and exercise such right after the order of default and the subsequent judgment by default are annulled, and the case remander to the court of origin. The former is limited to the remedy set forth in Section 2, paragraph 3 of Rule 41 of the pre 997 Rules of Court, and can therefore contest only the judgment by default on the designated ground that it is contrary to evidence or law. The latter, however, has the following options: to resort to this same remedy; to interpose a petition for certiorari seeking the nullification of the order of default, even before the promulgation of a judgment by default; or in the event that judgment has been rendered, to have such order and judgment declared void.

In prohibiting appeals from interlocutory orders, the law does not intend to accord executory force to such writs, particularly when the effect would be to cause irreparable damage. If, in the course of trial, a judge proceeds without or in excess of jurisdiction, this rule prohibiting an appeal does not leave the aggrieved party without any remedy.8 In a case like this, a special civil action of certiorari is the plain, speedy and adequate remedy.

Herein respondent controverts the judgment by default, not on the ground that it is unsubstantiated by evidence or that it is contrary to law, but on the ground that it is intrinsically void for having been rendered pursuant to a patently invalid order of default.9

Grave Abuse of Discretion

Petitioner claims that in issuing the default Order, the RTC did not act with grave abuse of discretion, because respondent had failed to file its answer within fifteen days after receiving the August 14, 1998 Order.

We disagree. Quite the contrary, the trial court gravely abused its discretion when it declared respondent in default despite the latter's filing of an Answer.10 Placing respondent in default thereafter served no practical purpose.

Petitioner was lax in calling the attention of the Court to the fifteen-day period for filing an Answer. It moved to declare respondent in default only on September 20, 1998, when the filing period had expired on August 30, 1998. The only conclusion in this case is that petitioner has not been prejudiced by the delay. The same leniency can also be accorded to the RTC, which declared respondent in default only on December 9, 1998, or twenty-two days after the latter had filed its Answer on November 17, 1998. Defendant's Answer should be admitted, because it had been filed before it was declared in default, and no prejudice was caused to plaintiff. The hornbook rule is that default judgments are generally disfavored.11

While there are instances when a party may be properly declared in default, these cases should be deemed exceptions to the rule and should be resorted to only in clear cases of obstinate refusal or inordinate neglect in complying with the orders of the court.12 In the present case, however, no such refusal or neglect can be attributed to respondent.




It appears that respondent failed to file its Answer because of excusable negligence. Atty. Joel Voltaire Mayo, director of the Legal Affairs Services of CHED, had to relinquish his position in accordance with the Memorandum dated July 7, 1998, requiring all non-CESO eligibles holding non-career positions to vacate their respective offices. It was only on September 25, 1998, after CHED Special Order No. 63 had been issued, when he resumed his former position. Respondent also presented a meritorious defense in its Answer – that it was duty-bound to pursue the state policy of protecting, fostering and promoting the right of all citizens to affordable quality education at all levels. In stark contrast, petitioner neither qualified for nor was ever conferred university status by respondent.

Judges, as a rule, should avoid issuing default orders that deny litigants the chance to be heard. Instead, the former should give the latter every opportunity to present their conflicting claims on the merits of the controversy, as much as possible avoiding any resort to procedural technicalities.13

Third Issue:Preliminary Injunction

Petitioner contends that the RTC validly issued the Writ of Preliminary Injunction. According to the trial court, respondent's actions adversely affected petitioner's interests, faculty and students. In fact, the very existence of petitioner as a business concern would have been jeopardized had its proprietary rights not been protected.

We disagree. We concur with the CA that the trial court acted with grave abuse of discretion in issuing the Writ of Preliminary Injunction against respondent. Petitioner failed to establish a clear right to continue representing itself to the public as a university. Indeed, it has no vested right to misrepresent itself. Before an injunction can be issued, it is essential that (1) there must be a right in esse to be protected, and (2) the act against which the injunction is to be directed must have violated such right.14 The establishment and the operation of schools are subject to prior authorization from the government. No school may claim to be a university unless it has first complied with the prerequisites provided in Section 34 of the Manual of Regulations for Private Schools. Section 3, Rule 58 of the Rules of Court, limits the grant of preliminary injunction to cases in which the plaintiff is clearly entitled to the relief prayed for.

We also agree with the finding of the CA that the act sought to be enjoined by petitioner is not violative of the latter's rights. Respondent's Cease and Desist Order of July 30, 1997 merely restrained petitioner from using the term "university" in its name. It was not ordered to close, but merely to revert to its authorized name; hence, its proprietary rights were not violated.

Fourth Issue:Dismissal of the Complaint

Petitioner claims that the CA went beyond its limited jurisdiction under Rule 65 when it reversed the trial court and dismissed the Complaint on the ground that petitioner had failed to state a cause of action. The RTC had yet to conduct trial, but the CA already determined the factual issue regarding petitioner's acquisition of university status, a determination that is not permitted in certiorari proceedings.

The CA ruled that the trial court gravely abused its discretion in denying respondent's Motion to Dismiss on the ground of lack of cause of action because of petitioner's lack of legal authority or right to use the word "university." Said the appellate court:



"x x x. No matter how we interpret the Corporation Code and the law granting the Securities and Exchange Commission its powers and duties, there is nothing there which grants it the power or authority to confer University Status to an educational institution. Fundamental is the rule that when there is no power granted, none exist[s], not even implied ones for there is none from where to infer. The mere fact of securing an alleged Certificate of Incorporation under an unauthorized name does not confer the right to use such name.

"But what makes the conclusion of [the trial court] even anomalous, to say the least, is that no less than the Chairman of the SEC in his letter to the [respondent] (Exh. "J") expressly said that [petitioner] never filed any Amended Articles of Incorporation so as to have a change of corporate name to include the term "University". Worse, the records officer of DECS issued a Certification dated May 18, 1998 (Annex "AA") to the effect that there was no Indorsement made by that office addressed to the SEC or the Proposed Amended Article of Incorporation of Indiana Aeronautics. x x x.

"Under such clear pattern of deceitful maneuvering to circumvent the requirement for acquiring University Status, it is [a] patently reversible error for [the trial court] to hold that [petitioner] has a right to use the word "University" which must be protected. Dismissal of [petitioner's] Complaint for lack of a valid cause of action should have been the proper action taken by [the trial court] judge."15

An order denying a motion to dismiss is interlocutory, and so the proper remedy in such a case is to appeal after a decision has been rendered. A writ of certiorari is not intended to correct every controversial interlocutory ruling; it is resorted to only to correct a grave abuse of discretion or a whimsical exercise of judgment equivalent to lack of jurisdiction. Its function is limited to keeping an inferior court within its jurisdiction and to relieve persons from arbitrary acts – acts which courts or judges have no power or authority in law to perform. It is not designed to correct erroneous findings and conclusions made by the court.16

In the case at bar, we find no grave abuse of discretion in the RTC's denial of the Motion to Dismiss, as contained in the August 14, 1998 Order. The CA erred in ruling otherwise. The trial court stated in its Decision that petitioner was an educational institution, originally registered with the Securities and Exchange Commission as the "Indiana School of Aeronautics, Inc." That name was subsequently changed to "Indiana Aerospace University" after the Department of Education, Culture and Sports had interposed no objection to such change.17

Respondent issued a formal Cease and Desist Order directing petitioner to stop using the word "university" in its corporate name. The former also published an announcement in the March 21, 1998 issue of Freeman, a local newspaper in Cebu City, that there was no institution of learning by that name. The counsel of respondent was quoted as saying in the March 28, 1998 issue of the newspaper Today that petitioner had been ordered closed by the respondent for illegal advertisement, fraud and misrepresentation of itself as a university. Such acts, according to the RTC undermined the public's confidence in petitioner as an educational institution.18 This was a clear statement of a sufficient cause of action.

When a motion to dismiss is grounded on the failure to state a cause of action, a ruling thereon should be based only on the facts alleged in the complaint.19 The court must pass upon this issue based solely on such allegations, assuming them to be true. For it to do otherwise would be a procedural error and a denial of plaintiff's right to due process.20

WHEREFORE, the Petition is hereby GRANTED IN PART, and the assailed Decision MODIFIED. The trial court isDIRECTED to SET ASIDE the Order of Default of December







9, 1998; to ADMIT the Answer dated November 5, 1998; to LIFT the preliminary injunction; and to CONTINUE, with all deliberate speed, the proceedings in Civil Case NO. 98-811. 1âwphi1.nêt

SO ORDERED.

Melo, Vitug, Gonzaga-Reyes, Sandoval-Gutierrez, JJ., concur.


Manila

SECOND DIVISION

G.R. No. 122452 January 29, 2001

TAM WING TAK, petitioner, vs.HON. RAMON P. MAKASIAR (in his Capacity as Presiding Judge of the Regional Trial Court of Manila, Branch 35) and ZENON DE GUIA (in his capacity as Chief State Prosecutor), respondents.

QUISUMBING, J.:

This is a petition for review on certiorari of the decision of the Regional Trial Court of Manila, Branch 35, dated September 14, 1995, which dismissed herein petitioner's special civil action for mandamus and sustained the Letter-Order of respondent Chief State Prosecutor. The latter dismissed petitioner's appeal from the resolution of the City Prosecutor of Quezon City, which, in turn, dismissed petitioner's complaint against Vic Ang Siong for violation of the Bouncing Checks Law or B.P. Blg. 22.

The factual background of this case is as follows:

On November 11, 1992, petitioner, in his capacity as director of Concord-World Properties, Inc., (Concord for brevity), a domestic corporation, filed an affidavit-complaint with the Quezon City Prosecutor's Office, charging Vic Ang Siong with violation of B.P. Blg. 22. Docketed by the Prosecutor as I.S. No. 93-15886, the complaint alleged that a check for the amount of P83,550,000.00, issued by Vic Ang Siong in favor of Concord, was dishonored when presented for encashment.

Vic Ang Siong sought the dismissal of the case on two grounds: First, that petitioner had no authority to file the case on behalf of Concord, the payee of the dishonored check, since the firm's board of directors had not empowered him to act on its behalf. Second, he and Concord had already agreed to amicably settle the issue after he made a partial payment of P19,000,000.00 on the dishonored check.1âwphi1.nêt

On March 23, 1994, the City Prosecutor dismissed I.S. No. 93-15886 on the following grounds: (1) that petitioner lacked the requisite authority to initiate the criminal complaint for and on Concord's behalf; and (2) that Concord and Vic Ang Siong had already agreed upon the payment of the latter's balance on the dishonored check.

A copy of the City Prosecutor's resolution was sent by registered mail to petitioner in the address he indicated in his complaint-affidavit. Notwithstanding that petitioner was represented by counsel, the latter was not furnished a copy of the resolution.

On June 27, 1994, petitioner's counsel was able to secure a copy of the resolution dismissing I.S. No. 93-15886. Counting his 15-day appeal period from said date, petitioner moved for reconsideration on July 7, 1994.

On October 21, 1994, the City Prosecutor denied petitioner's motion for reconsideration. Petitioner's counsel received a copy of the denial order on November 3, 1994.

On November 7, 1994, petitioner's lawyer filed a motion to extend the period to appeal by an additional 15 days counted from November 3, 1994 with the Chief State Prosecutor. He manifested that it would take time to communicate with petitioner who is a Hong Kong resident and enable the latter to verify the appeal as procedurally required.

On November 8, 1994, petitioner appealed the dismissal of his complaint by the City Prosecutor to the Chief State Prosecutor. The appeal was signed by petitioner's attorney only and was not verified by petitioner until November 23, 1994.

On December 8, 1994, the Chief State Prosecutor dismissed the appeal for having been filed out of time. Petitioner's lawyer received a copy of the letter-resolution dismissing the appeal on January 20, 1995.

On January 30, 1995, petitioner moved for reconsideration.

On March 9, 1995, respondent Chief State Prosecutor denied the motion for reconsideration.

Petitioner then filed Civil Case No. 95-74394 for mandamus with the Regional Trial Court of Quezon City to compel the Chief State Prosecutor to file or cause the filing of an information charging Vic Ang Siong with violation of B.P. Blg. 22.

On September 14, 1995, the trial court disposed of the action as follows:

WHEREFORE, for utter lack of merit, the petition for mandamus of petitioner is DENIED and DISMISSED.

SO ORDERED.1

Petitioner moved for reconsideration, but the trial court denied this motion in its order dated October 24, 1995.

Hence, the instant petition.

Before this Court, petitioner claims respondent judge committed grave errors of law in sustaining respondent Chief State Prosecutor whose action flagrantly contravenes: (1) the established rule on service of pleadings and orders upon parties represented by counsel; (b) the basic principle that except in private crimes, any competent person may initiate a criminal case; and (3) the B.P. Blg. 22 requirement that arrangement for full payment of a bounced check must be made by the drawer with the drawee within five (5) banking days from notification of the check's dishonor.2

We find pertinent for our resolution the following issues:

(1) Was there valid service of the City Prosecutor's resolution upon petitioner?

(2) Will mandamus lie to compel the City Prosecutor to file the necessary information in court?

In upholding respondent Chief State Prosecutor, the court a quo held:

It is generally accepted principle in the service of orders, resolutions, processes and other papers to serve them on the party or his counsel, either in his office, if known, or else in the residence, also if known. As the party or his counsel is not expected to be present at all times in his office or residence, service is allowed to be made with a person in charge of the office, or with a person of sufficient discretion to receive the same in the residence.

In the case under consideration, it is not disputed that the controverted Resolution dismissing the complaint of the petitioner against Vic Ang Siong was served on the former by registered mail and was actually delivered by the postmaster on April 9, 1994 at said petitioner's given address in the record at No. 5 Kayumanggi Street, West Triangle, Quezon City. The registered mail was in fact received by S. Ferraro. The service then was complete and the period for filing a motion for reconsideration or appeal began to toll from that date. It expired on April 24, 1994. Considering that his motion for reconsideration was filed only on July 7, 1994, the same was filed beyond the prescribed period, thereby precluding further appeal to the Office of the respondent.3

Petitioner, before us, submits that there is no such "generally accepted practice" which gives a tribunal the option of serving pleadings, orders, resolutions, and other papers to either the opposing party himself or his counsel. Petitioner insists that the fundamental rule in this jurisdiction is that if a party appears by counsel, then service can only be validly made upon counsel and service upon the party himself becomes invalid and without effect. Petitioner relies upon Rule 13, Section 2 of the Rules of Court4 and our ruling in J.M. Javier Logging Corp. v. Mardo, 24 SCRA 776 (1968) to support his stand. In the J.M. Javier case, we held:

[W]here a party appears by attorney, notice to the former is not a notice in law, unless service upon the party himself is ordered by the court…5

The Solicitor General, for respondents, contends that the applicable rule on service in the present case is Section 2 of the Department of Justice (DOJ) Order No. 223,6 which allows service to be made upon either party or his counsel. Respondents argue that while a preliminary investigation has been considered as partaking of the nature of a judicial proceeding,7 nonetheless, it is not a court proceeding and hence, falls outside of the ambit of the Rules of Court.

We agree with petitioner that there is no "generally accepted practice" in the service of orders, resolutions, and processes, which allows service upon either the litigant or his lawyer. As a rule, notice or service made upon a party who is represented by counsel is a nullity,8 However, said rule admits of exceptions, as when the court or tribunal order service upon the party9 or when the technical defect is waived.10

To resolve the issue on validity of service, we must make a determination as to which is the applicable rule – the on service in the Rules of Court, as petitioner insists or the rule on service in DOJ Order No. 223?

The Rules of Court were promulgated by this Court pursuant to Section 13, Article VII of the 1935 Constitution11(now Section 5 [5], Article VIII of the Constitution)12 to govern "pleadings, practice and procedure in all courts of the Philippines." The purpose of the Rules is clear and does not need any interpretation. The Rules were meant to govern court (stress supplied) procedures and pleadings. As correctly pointed out by the Solicitor General, a preliminary investigation, notwithstanding its judicial nature, is not a court proceeding. The holding of a preliminary investigation is a function of the Executive Department and not of the Judiciary.13 Thus, the rule on service provided for in the Rules of Court cannot be made to apply to the service of resolutions by public prosecutors, especially as

the agency concerned, in this case, the Department of Justice, has its own procedural rules governing said service.

A plain reading of Section 2 of DOJ Order No. 223 clearly shows that in preliminary investigation, service can be made upon the party himself or through his counsel. It must be assumed that when the Justice Department crafted the said section, it was done with knowledge of the pertinent rule in the Rules of Court and of jurisprudence interpreting it. The DOJ could have just adopted the rule on service provided for in the Rules of Court, but did not. Instead, it opted to word Section 2 of DOJ Order No. 223 in such a way as to leave no doubt that in preliminary investigations, service of resolutions of public prosecutors could be made upon either the party or his counsel.

Moreover, the Constitution provides that "Rules of procedure of special courts and quasi-judicial bodies shall remain effective unless disapproved by the Supreme Court."14 There is naught in the records to show that we have disapproved and nullified Section 2 of DOJ Order No. 223 and since its validity is not an issue in the instant case, we shall refrain from ruling upon its validity.

We hold that there was valid service upon petitioner pursuant to Section 2 of DOJ Order No. 223.

On the issue of whether mandamus will lie. In general, mandamus may be resorted to only where one's right is founded clearly in law and not when it is doubtful.15 The exception is to be found in criminal cases where mandamus is available to compel the performance by the public prosecutor of an ostensibly discretionary function, where by reason of grave abuse of discretion on his part, he willfully refuses to perform a duty mandated by law.16Thus, mandamus may issue to compel a prosecutor to file an information when he refused to do so in spite of theprima facie evidence of guilt.17

Petitioner takes the stance that it was grave abuse for discretion on the part of respondent Chief State Prosecutor to sustain the dismissal of I.S. No. 93-15886 on the grounds that: (1) Vic Ang Siong's obligation which gave rise to the bounced check had already been extinguished by partial payment and agreement to amicably settle balance, and (2) petitioner had no standing to file the criminal complaint since he was neither the payee nor holder of the bad check. Petitioner opines that neither ground justifies dismissal of his complaint.

Petitioner's stand is unavailing. Respondent Chief State Prosecutor in refusing to order the filing of an information for violation of B.P. Blg. 22 against Vic Ang Siong did not act without or in excess of jurisdiction or with grave abuse of discretion.

First, with respect to the agreement between Concord and Victor Ang Siong to amicably settle their difference, we find this resort to an alternative dispute settlement mechanism as not contrary to law, public policy, or public order. Efforts of parties to solve their disputes outside of the courts are looked on with favor, in view of the clogged dockets of the judiciary.

Second, it is not disputed in the instant case that Concord, a domestic corporation, was the payee of the bum check, not petitioner. Therefore, it is Concord, as payee of the bounced check, which is the injured party. Since petitioner was neither a payee nor a holder of the bad check, he had neither the personality to sue nor a cause of action against Vic Ang Siong. Under Section 36 of the Corporation Code18, read in relation to Section 23,19 it is clear that where a corporation is an injured party, its power to sue is lodged with its board of directors or turstees.20 Note that petitioner failed to show any proof that he was authorized or deputized or granted specific powers by Concord's board of director to sue Victor And Siong for and on behalf of the firm. Clearly, petitioner as a minority stockholder and member of the board of directors had no such power or authority to sue on Concord's behalf. Nor can we uphold his act as a derivative suit. For a derivative suit to prosper, it is required that the

minority stockholder suing for and on behalf of the corporation must allege in his complaint that he is suing on a derivative cause of action on behalf of the corporation and all other stockholders similarly situated who may wish to join him in the suit.21 There is no showing that petitioner has complied with the foregoing requisites. It is obvious that petitioner has not shown any clear legal right which would warrant the overturning of the decision of public respondents to dismiss the complaint against Vic Ang Siong. A public prosecutor, by the nature of his office, is under no compulsion to file a criminal information where no clear legal justification has been shown, and no sufficient evidence of guilt nor prima facie case has been presented by the petitioner.22 No reversible error may be attributed to the court a quo when it dismissed petitioner's special civil action for mandamus. 1âwphi1.nêt

WHEREFORE, the instant petition is DISMISSED for lack of merit. Costs against petitioner.

SO ORDERED.

Bellosillo, Mendoza, Buena, and De Leon, Jr., JJ., concur.


Manila

FIRST DIVISION

G.R. No. 99398 & 104625 January 26, 2001

CHESTER BABST, petitioner, vs.COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, ELIZALDE STEEL CONSOLIDATED, INC., and PACIFIC MULTI-COMMERCIAL CORPORATION, respondents.x ------------------------------------------------ xELIZALDE STEEL CONSOLIDATED, INC., petitioner, vs.COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, PACIFIC MULTI-COMMERCIAL CORPORATION and CHESTER BABST, respondents.

YNARES-SANTIAGO, J.:

These consolidated petitions seek the review of the Decision dated April 29, 1991 of the Court of Appeals in CA-G.R. CV No. 172821 entitled, "Bank of the Philippine Islands, Plaintiff-Appellee versus Elizalde Steel Consolidated, Inc., Pacific Multi-Commercial Corporation, and Chester G. Babst, Defendants-Appellants."

The complaint was commenced principally to enforce payment of a promissory note and three domestic letters of credit which Elizalde Steel Consolidated, Inc. (ELISCON) executed and opened with the Commercial Bank and Trust Company (CBTC).

On June 8, 1973, ELISCON obtained from CBTC a loan in the amount of P 8,015,900.84, with interest at the rate of 14% per annum, evidenced by a promissory note.2 ELISCON defaulted in its payments, leaving an outstanding indebtedness in the amount of P2,795,240.67 as of October 31, 1982.3

The letters of credit, on the other hand, were opened for ELISCON by CBTC using the credit facilities of Pacific Multi-Commercial Corporation (MULTI) with the said bank, pursuant to the Resolution of the Board of Directors of MULTI adopted on August 31, 1977 which reads:

WHEREAS, at least 90% of the Company's gross sales is generated by the sale of tin-plates manufactured by Elizalde Steel Consolidated, Inc.;

WHEREAS, it is to the best interests of the Company to continue handling said tin-plate line;

WHEREAS, Elizalde Steel Consolidated, Inc. has requested the assistance of the Company in obtaining credit facilities to enable it to maintain the present level of its tin-plate manufacturing output and the Company is willing to extend said requested assistance;

NOW, THEREFORE, for and in consideration of the foregoing premises ---

BE IT RESOLVED AS IT IS HEREBY RESOLVED, That the PRESIDENT & GENERAL MANAGER, ANTONIO ROXAS CHUA, be, as he is hereby empowered to allow and

authorize ELIZALDE STEEL CONSOLIDATED, INC. to avail and make use of the Credit Line of PACIFIC MULTI-COMMERCIAL CORPORATION with the COMMERCIAL BANK & TRUST COMPANY OF THE PHILIPPINES, Makati, Metro Manila;

RESOLVED, FURTHER, That the Pacific Multi-Commercial Corporation guarantee, as it does hereby guarantee, solidarily, the payment of the corresponding Letters of Credit upon maturity of the same;

RESOLVED, FINALLY, That copies of this resolution be furnished the Commercial Bank & Trust Company of the Philippines, Makati, Metro Manila, for their information.4

Subsequently, on September 26, 1978, Antonio Roxas Chua and Chester G. Babst executed a Continuing Suretyship,5 whereby they bound themselves jointly and severally liable to pay any existing indebtedness of MULTI to CBTC to the extent of P8,000,000.00 each. 1âwphi1.nêt

Sometime in October 1978, CBTC opened for ELISCON in favor of National Steel Corporation three (3) domestic letters of credit in the amounts of P1,946,805.73,6 P1,702,869.327 and P200,307.72,8 respectively, which ELISCON used to purchase tin black plates from National Steel Corporation. ELISCON defaulted in its obligation to pay the amounts of the letters of credit, leaving an outstanding account, as of October 31, 1982, in the total amount of P3,963,372.08.9

On December 22, 1980, the Bank of the Philippine Islands (BPI) and CBTC entered into a merger, wherein BPI, as the surviving corporation, acquired all the assets and assumed all the liabilities of CBTC.10

Meanwhile, ELISCON encountered financial difficulties and became heavily indebted to the Development Bank of the Philippines (DBP). In order to settle its obligations, ELISCON proposed to convey to DBP by way of dacion en pago all its fixed assets mortgaged with DBP, as payment for its total indebtedness in the amount of P201,181,833.16. On December 28, 1978, ELISCON and DBP executed a Deed of Cession of Property in Payment of Debt.11

In June 1981, ELISCON called its creditors to a meeting to announce the take-over by DBP of its assets.

In October 1981, DBP formally took over the assets of ELISCON, including its indebtedness to BPI. Thereafter, DBP proposed formulas for the settlement of all of ELISCON's obligations to its creditors, but BPI expressly rejected the formula submitted to it for not being acceptable.12

Consequently, on January 17, 1983, BPI, as successor-in-interest of CBTC, instituted with the Regional Trial Court of Makati, Branch 147, a complaint13 for sum of money against ELISCON, MULTI and Babst, which was docketed as Civil Case No. 49226.

ELISCON, in its Answer,14 argued that the complaint was premature since DBP had made serious efforts to settle its obligations with BPI.

Babst also filed his Answer alleging that he signed the Continuing Suretyship on the understanding that it covers only obligations which MULTI incurred solely for its benefit and not for any third party liability, and he had no knowledge or information of any transaction between MULTI and ELISCON.15

MULTI, for its part, denied knowledge of the merger between BPI and CBTC, and averred that the guaranty under its board resolution did not cover purchases made by ELISCON in the form of trust

receipts. It set up a cross-claim against ELISCON alleging that the latter should be held liable for any judgment which the court may render against it in favor of BPI.16

On February 20, 1987, the trial court rendered its Decision,17 the dispositive portion of which reads:

WHEREFORE, in view of all the foregoing, the Court hereby renders judgment in favor of the plaintiff and against all the defendants:

1) Ordering defendant ELISCON to pay the plaintiff the amount of P2,795,240.67 due on the promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982;

2) Ordering defendant ELISCON to pay the plaintiff interests and related charges on the principal of said promissory note of P2,102,232.02 at the rates provided in said note from and after 31 October 1982 until full payment thereof, and on the principal of the three (3) domestic letters of credit of P3,564,349.25 interests and related charges at the rates provided in said letters of credit, from and after 31 October 1982 until full payment;

3) Ordering defendant ELISCON to pay interests at the legal rate on all interests and related charges but unpaid as of the filing of this complaint, until full payment thereof;

4) Ordering defendant ELISCON to pay attorney's fees equivalent to 10% of the total amount due under the preceding paragraphs;

5) Ordering defendants Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and severally with defendant ELISCON, the total sum of P3,963,372.08 due on the three (3) domestic letters of credit as of 31 October 1982 with interests and related charges on the principal amount of P3,963,372.08 at the rates provided in said letters of credit from 30 October 1982 until fully paid, but to the extent of not more than P8,000,000.00 in the case of defendant Chester Babst;

6) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and severally plaintiff interests at the legal rate on all interests and related charges already accrued but unpaid on said three (3) domestic letters of credit as of the date of the filing of this Complaint until full payment thereof;

7) Ordering defendant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and severally, attorney's fees of not less than 10% of the total amount due under paragraphs 5 and 6 hereof. With costs.

SO ORDERED.

In due time, ELISCON, MULTI and Babst filed their respective notices of appeal.18

On April 29, 1991, the Court of Appeals rendered the appealed Decision as follows:

WHEREFORE, the judgment appealed from is MODIFIED, to now read (with the underlining to show the principal changes from the decision of the lower court) thus:

1) Ordering appellant ELISCON to pay the appellee BPI the amount of P2,731,005.60 due on the promissory note, Annex "A" of the Complaint as of 31 October 1982 and the amount of P3,963,372.08 due on the three (3) domestic letters of credit, also as of 31 October 1982;

2) Ordering appellant ELISCON to pay the appellee BPI interests and related charges on the principal of said promissory note of P2,102,232.02 at the rates provided in said note from and after 31 October 1982 until full payment thereof, and on the principal of the three (3) domestic letters of credit of P3,564,349.25 interests and related charges at the rates provided in said letters of credit, from and after 31 October 1982 until full payment;

3) Ordering appellant ELISCON to pay appellee BPI interest at the legal rate on all interests and related charges but unpaid as of the filing of this complaint, until full payment thereof;

4) Ordering appellant Pacific Multi-Commercial Corporation and appellant Chester G. Babst to pay appellee BPI, jointly and severally with appellant ELISCON, the total sum of P3,963,372.08 due on the three (3) domestic letters of credit as of 31 October 1982 with interest and .related charges on the principal amount of P3,963,372.08 at the rates provided in said letters of credit from 30 October 1982 until fully paid, but to the extent of not more than P8,000,000.00 in the case of defendant Chester Babst;

5) Ordering appellant Pacific Multi-Commercial Corporation and defendant Chester Babst to pay, jointly and severally, appellee BPI interests at the legal rate on all interests and related charges already accrued but unpaid on said three (3) domestic letters of credit as of the date of the filing of this Complaint until full payment thereof and the plaintiff's lawyer's fees in the nominal amount of P200.000.00;

6) Ordering appellant ELISCON to reimburse appellants Pacific Multi-Commercial Corporation and Chester Babst whatever amount they shall have paid in said Eliscon's behalf particularly referring to the three (3) letters of credit as of 31 October 1982 and other related charges.

No costs.

SO ORDERED.19

ELISCON filed a Motion for Reconsideration of the Decision of the Court of Appeals which was, however, denied in a Resolution dated March 9, 1992.20 Subsequently, ELISCON filed a petition for review on certiorari, docketed as G.R. No. 104625, on the following grounds:

A. THE BANK OF THE PHILIPPINE ISLANDS IS NOT ENTITLED TO RECOVER FROM PETITIONER ELISCON THE LATTER'S OBLIGATION WITH COMMERCIAL BANK AND TRUST COMPANY (CBTC)

B. THERE WAS A VALID NOVATION OF THE CONTRACT BETWEEN ELISCON AND BPI THERE BEING A PRIOR CONSENT TO AND APPROVAL BY BPI OF THE SUBSTITUTION BY DBP AS DEBTOR IN LIEU OF THE ORIGINAL DEBTOR, ELISCON, THEREBY RELEASING ELISCON FROM ITS OBLIGATION TO BPI.

C. PACIFIC MULTI COMMERCIAL CORPORATION AND CHESTER BABST CANNOT LAWFULLY RECOVER FROM ELISCON WHATEVER AMOUNT THEY MAY BE REQUIRED TO PAY TO BPI AS SURETIES OF ELISCON'S OBLIGATION TO BPI; THEIR

CAUSE OF ACTION MUST BE DIRECTED AGAINST DBP AS THE NEWLY SUBSTITUTED DEBTOR IN PLACE OF ELISCON.

D. THE DBP TAKEOVER OF THE ENTIRE ELISCON AMOUNTED TO AN ACT OF GOVERNMENT WHICH WAS A FORTUITOUS EVENT EXCULPATING ELISCON FROM FURTHER LIABILITIES TO RESPONDENT BPI.

E. PETITIONER ELISCON SHOULD NOT BE HELD LIABLE TO PAY RESPONDENT BPI THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF RESPONDENT COURT OF APPEALS' DECISION:21

BPI filed its Comment22 raising the following arguments, to wit:

1. Respondent BPI is legally entitled to recover from ELISCON, MULTI and Babst the past due obligations with CBTC prior to the merger of BPI with CBTC.

2. BPI did not give its consent to the DBP take-over of ELISCON. Hence, no valid novation has been effected.

3. Express consent of creditor to substitution should be recorded in the books.

4. Petitioner Chester G. Babst and respondent MULTI are jointly and solidarily liable to BPI for the unpaid letters of credit of ELISCON.

5. The question of the liability of ELISCON to BPI has been clearly established.

6. Since MULTI and Chester G. Babst are guarantors of the debts incurred by ELISCON, they may recover from the latter what they may have paid for on account of that guaranty.

Chester Babst filed a Comment with Manifestation,23 wherein he contends that the suretyship agreement he executed with Antonio Roxas Chua was in favor of MULTI; and that there is nothing therein which authorizes MULTI, in turn, to guarantee the obligations of ELISCON.

In its Comment,24 MULTI maintained that inasmuch as BPI had full knowledge of the purpose of the meeting in June 1981, wherein the takeover by DBP of ELISCON was announced, it was incumbent upon the said bank to formally communicate its objection to the assumption of ELISCON's liabilities by DBP in answer to the call for the meeting. Moreover, there was no showing that the availment by ELISCON of MULTI's credit facilities with CBTC, which was supposedly guaranteed by Antonio Roxas Chua, was indeed authorized by the latter pursuant to the resolution of the Board of Directors of MULTI.

In compliance with this Court's Resolution dated March 17, 1993,25 the parties submitted their respective memoranda.

Meanwhile, in a petition for review filed with this Court, which was docketed as G.R. No. 99398, Chester Babst alleged that the Court of Appeals acted without jurisdiction and/or with grave abuse of discretion when:

1. IT AFFIRMED THE LOWER COURT'S HOLDING THAT THERE WAS NO NOVATION INASMUCH AS RESPONDENT BANK OF THE PHILIPPINE ISLANDS (OR BPI) HAD PRIOR CONSENT TO AND APPROVAL OF THE SUBSTITUTION AS DEBTOR BY THE

DEVELOPMENT BANK OF THE PHILIPPINES (OR DBP) IN THE PLACE OF ELIZALDE STEEL CONSOLIDATED, INC. (OR ELISCON) IN THE LATTER 'S OBLIGATION TO BPI.

2. IT CONFIRMED THE LOWER COURT'S CONCLUSION THAT THERE WAS NO IMPLIED CONSENT OF THE CREDITOR BANK OF THE PHILIPPINE ISLANDS TO THE SUBSTITUTION BY DEVELOPMENT BANK OF THE PHILIPPINES OF THE ORIGINAL DEBTOR ELIZALDE STEEL CONSOLIDATED, INC.

3. IT AFFIRMED THE LOWER COURT'S FINDING OF LACK OF MERIT OF THE CONTENTION OF ELISCON THAT THE FAILURE OF THE OFFICER OF BPI, WHO WAS PRESENT DURING THE MEETING OF ELISCON'S CREDITORS IN JUNE 1981 TO VOICE HIS OBJECTION TO THE ANNOUNCED TAKEOVER BY THE DBP OF THE ASSETS OF ELISCON AND ASSUMPTION OF ITS LIABILITIES, CONSTITUTED AN IMPLIED CONSENT TO THE ASSUMPTION BY DBP OF THE OBLIGATIONS OF ELISCON TO BPI.

4. IN NOT TAKING JUDICIAL NOTICE THAT THE DBP TAKEOVER OF THE ENTIRE ELISCON WAS AN ACT OF GOVERNMENT CONSTITUTING A FORTUITOUS EVENT EXCULPATING ELISCON FROM ANY LIABILITY TO BPI.

5. IN NOT FINDING THAT THE DACION EN PAGO BETWEEN DBP AND BPI RELIEVED ELISCON, MULTI AND BABST OF ANY LIABILITY TO BPI.

6. IN FINDING THAT MULTI AND BABST BOUND THEMSELVES SOLIDARILY WITH ELISCON WITH RESPECT TO THE OBLIGATION INVOLVED HERE.

7. IN RENDERING JUDGMENT IN FAVOR OF BPI AND AGAINST ELISCON ORDERING THE LATTER TO PAY THE AMOUNTS STATED IN THE DISPOSITIVE PORTION OF THE DECISION; AND ORDERING PETITIONER AND MULTI TO PAY SAID AMOUNTS JOINTLY AND SEVERALLY WITH ELISCON.26

Petitioner Babst alleged that DBP sold all of ELISCON's assets to the National Development Company, for the latter to take over and continue the operation of its business. On September 11, 1981, the Board of Governors of the DBP adopted Resolution No. 2817 which states that DBP shall enter into a contractual arrangement with NDC for the latter to pay ELISCON's creditors, including BPI in the amount of P4,015,534.54. This was followed by a Memorandum of Agreement executed on May 4,1983 by and between DBP and NDC, wherein they stipulated, inter alia, that NDC shall pay to ELISCON's creditors, through DBP, the amount of P299,524,700.00. Among the creditors mentioned in the agreement was BPI, with a listed credit of P4,015,534.54.

Furthermore, petitioner Babst averred that the assets of ELISCON which were acquired by the DBP, and later transferred to the NDC, were placed under the Asset Privatization Trust pursuant to Proclamation No. 50, issued by then President Corazon C. Aquino on December 8, 1986.

In its Comment,27 BPI countered that by virtue of its merger with CBTC, it acquired all the latter's rights and interest including all receivables; that in order to effect a valid novation by substitution of debtors, the consent of the creditor must be express; that in addition, the consent of BPI must appear in its books, it being a private corporation; that BPI intentionally did not consent to the assumption by DBP of the obligations of ELISCON because it wanted to preserve intact its causes of action and legal recourse against Pacific Multi-Commercial Corporation and Babst as sureties of ELISCON and not of DBP; that MULTI expressly bound itself solidarily for ELISCON's obligations to CBTC in its Resolution wherein it allowed the latter to use its credit facilities; and that the suretyship

agreement executed by Babst does not exclude liabilities incurred by MULTI on behalf of third parties, such as ELISCON.

ELISCON likewise filed a Comment,28 wherein it manifested that of the seven errors raised by Babst in his petition, six are arguments which ELISCON itself raised in its previous pleadings. It is only the sixth assigned error --- that the Court of Appeals erred in finding that MULTI and Babst bound themselves solidarily with ELISCON --- that ELISCON takes exception to. More particularly, ELISCON pointed out the contradictory positions taken by Babst in admitting that he bound himself to pay the indebtedness of MULTI, while at the same time completely disavowing and denying any such obligation. It stressed that should MULTI or Babst be finally adjudged liable under the suretyship agreement, they cannot lawfully recover from ELISCON, but from the DBP which had been substituted as the new debtor.

MULTI filed its Comrnent,29 admitting the correctness of the petition and adopting the Comment of ELISCON insofar as it is not inconsistent with the positions of Babst and MULTI.

At the outset, the preliminary issue of BPI's right of action must first be addressed. ELISCON and MULTI assail BPI's legal capacity to recover their obligation to CBTC. However, there is no question that there was a valid merger between BPI and CBTC. It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation.30 Hence, BPI has a right to institute the case a quo.

We now come to the primordial issue in this case — whether or not BPI consented to the assumption by DBP of the obligations of ELISCON.

Article 1293 of the Civil Code provides:

Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by the new debtor gives him the rights mentioned in articles 1236 and 1237.

BPI contends that in order to have a valid novation, there must be an express consent of the creditor. In the case of Testate Estate of Mota, et al. v. Serra,31 this Court held:

It should be noted that in order to give novation its legal effect, the law requires that the creditor should consent to the substitution of a new debtor. This consent must be given expressly for the reason that, since novation extinguishes the personality of the first debtor who is to be substituted by a new one, it implies on the part of the creditor a waiver of the right that he had before the novation, which waiver must be express under the principle of renuntiatio non proesumitur, recognized by the law in declaring that a waiver of right may not be performed [should read: presumed] unless the will to waive is indisputably shown by him who holds the right.32

The import of the foregoing ruling, however, was explained and clarified by this Court in the later case of Asia Banking Corporation v. EIser33 in this wise:

The aforecited article 1205 [now 1293] of the Civil Code does not state that the creditor's consent to the substitution of the new debtor for the old be express, or given at the time of the substitution, and the Supreme Court of Spain, in its judgment of June 16,

1908, construing said article, laid down the doctrine that "article 1205 of the Civil Code does not mean or require that the creditor's consent to the change of debtors must be given simultaneously with the debtor's consent to the substitution, its evident purpose being to preserve the creditor's full right, it is sufficient that the latter's consent be given at any time and in any form whatever, while the agreement of the debtors subsists." The same rule is stated in theEnciclopedia Juridica Española, volume 23, page 503, which reads: "'The rule that this kind of novation, like all others, must be express, is not absolute; for the existence of the consent may well be inferred from the act of the creditor, since volition may as well be expressed by deeds as by words." The understanding between Henry W. Elser and the principal director of Yangco, Rosenstock & Co., Inc., with respect to Luis R. Yangco's stock in said corporation, and the acts of the board of directors after Henry W. Elser had acquired said shares, in substituting the latter for Luis R. Yangco, are a clear and unmistakable expression of its consent. When this court said in the case of Estate of Mota vs. Serra (47 Phil. 464), that the creditor's express consent is necessary in order that there may be a novation of a contract by the substitution of debtors, it did not wish to convey the impression that the word "express" was to be given an unqualified meaning. as indicated in the authorities or cases. both Spanish and American, cited in said decision.34

Subsequently, in the case of Vda. e Hijos de Pio Barretto y Cia., Inc. v. Albo & Sevilla, Inc., et al.,35 this Court reiterated the rule that there can be implied consent of the creditor to the substitution of debtors.

In the case at bar, Babst, MULTI and ELISCON all maintain that due to the failure of BPI to register its objection to the take-over by DBP of ELISCON's assets, at the creditors' meeting held in June 1981 and thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as debtor.

We find merit in the argument. Indeed, there exist clear indications that BPI was aware of the assumption by DBP of the obligations of ELISCON. In fact, BPI admits that ---

"the Development Bank of the Philippines (DBP), for a time, had .proposed a formula for the settlement of Eliscon's past obligations to its creditors, including the plaintiff [BPI], but the formula was expressly rejected by the plaintiff as not acceptable (long before the filing of the complaint at bar)."36

The Court of Appeals held that even if the account officer who attended the June 1981 creditors' meeting had expressed consent to the assumption by DBP of ELISCON' s debts, such consent would not bind BPI for lack of a specific authority therefor. In its petition, ELISCON counters that the mere presence of the account officer at the meeting necessarily meant that he was authorized to represent BPI in that creditors' meeting. Moreover, BPI did not object to the substitution of debtors, although it objected to the payment formula submitted by DBP.

Indeed, the authority granted by BPI to its account officer to attend the creditors' meeting was an authority to represent the bank, such that when he failed to object to the substitution of debtors, he did so on behalf of and for the bank. Even granting arguendo that the said account officer was not so empowered, BPI could have subsequently registered its objection to the substitution, especially after it had already learned that DBP had taken over the assets and assumed the liabilities of ELISCON. Its failure to do so can only mean an acquiescence in the assumption by DBP of ELISCON's obligations. As repeatedly pointed out by ELISCON and MULTI, BPI's objection was to the proposed payment formula, not to the substitution itself.

BPI gives no cogent reason in withholding its consent to the substitution, other than its desire to preserve its causes of action and legal recourse against the sureties of ELISCON. It must be remembered, however, that while a surety is solidarily liable with the principal debtor, his obligation to pay only arises upon the principal debtor's failure or refusal to pay. A contract of surety is an accessory promise by which a person binds himself for another already bound, and agrees with the creditor to satisfy the obligation if the debtor does not.37 A surety is an insurer of the debt; he promises to pay the principal's debt if the principal will not pay.38

In the case at bar, there was no indication that the principal debtor will default in payment. In fact, DBP, which had stepped into the shoes of ELISCON, was capable of payment. Its authorized capital stock was increased by the government.39 More importantly, the National Development Company took over the business of ELISCON and undertook to pay ELISCON's creditors, and earmarked for that purpose the amount of P4,015,534.54 for payment to BPI.40

Notwithstanding the fact that a reliable institution backed by government funds was offering to pay ELISCON's debts, not as mere surety but as substitute principal debtor, BPI, for reasons known only to itself, insisted in going after the sureties. The course of action chosen taxes the credulity of this Court. At the very least, suffice it to state that BPI's actuation in this regard runs counter to the good faith covenant in contractual relations, provided for by the Civil Code, to wit:

ART. 19. 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. 1âwphi1.nêt

ART. 1159. Obligations arising from contract have the force of law between the contracting parties and should be complied with in good faith.

BPI's conduct evinced a clear and unmistakable consent to the substitution of DBP for ELISCON as debtor. Hence, there was a valid novation which resulted in the release of ELISCON from its obligation to BPI, whose cause of action should be directed against DBP as the new debtor.

Novation, in its broad concept, may either be extinctive or modificatory .It is extinctive when an old obligation is terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive novation results either by changing the object or principal conditions (objective or real), or by substituting the person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Under this mode, novation would have dual functions — one to extinguish an existing obligation, the other to substitute a new one in its place — requiring a conflux of four essential requisites, (1) a previous valid obligation; (2) an agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the birth of a valid new obligation.41

The original obligation having been extinguished, the contracts of suretyship executed separately by Babst and MULTI, being accessory obligations, are likewise extinguished.42

Hence, BPI should enforce its cause of action against DBP. It should be stressed that notwithstanding the lapse of time within which these cases have remained pending, the prescriptive period for BPI to file its action was interrupted when it filed Civil Case No. 49226.43

WHEREFORE, the consolidated petitions are GRANTED. The appealed Decision of the Court of Appeals, which held ELISCON, MULTI and Babst solidarily liable for payment to BPI of the

promissory note and letters of credit, isREVERSED and SET ASIDE. BPI's complaint against ELISCON, MULTI and Babst is DISMISSED.

SO ORDERED.

Davide, Jr., Puno, Kapunan, and Pardo, JJ., concur.


Manila

THIRD DIVISION

G.R. No. 131889 March 12, 2001

VIRGINIA O. GOCHAN, FELIX Y. GOCHAN III, MAE GOCHAN EFANN, LOUISE Y. GOCHAN, ESTEBAN Y. GOCHAN JR., DOMINIC Y.GOCHAN, FELIX 0. GOCHAN III, MERCEDES R. GOCHAN, ALFREDO R. GOCHAN, ANGELINA R. GOCHAN-HERNAEZ, MARIA MERCED R. GOCHAN, CRISPO R. GOCHAN JR., MARION R. GOCHAN, MACTAN REALTY DEVELOPMENT CORPORATION and FELIX GOCHAN & SONS REALTY CORPORATION, petitioner, vs.RICHARD G. YOUNG, DAVID G. YOUNG, JANE G. YOUNG-LLABAN, JOHN D. YOUNG JR., MARY G. YOUNG-HSU and ALEXANDER THOMAS G. YOUNG as heirs of Alice Gochan; the INTESTATE ESTATE OF JOHN D. YOUNG SR.; and CECILIA GOCHAN-UY and MIGUEL C. UY, for themselves and on behalf and for the benefit of FELIX GOCHAN & SONS REALTY CORPORATION, respondents.

PANGANIBAN, J.:

A court or tribunal's jurisdiction over the subject matter is determined by the allegations in the complaint. The fact that certain persons are not registered as stockholders in the books of the corporation will not bar them from filing a derivative suit, if it is evident from the allegations in the complaint that they are bona fide stockholders. In view of RA 8799, intra-corporate controversies are now within the jurisdiction of courts of general jurisdiction, no longer of the Securities and Exchange Commission. 1âwphi1.nêt

The Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. The Petition assails the February 28, 1996 Decision1 of the Court of Appeals (CA), as well as its December 18, 1997 Resolution denying petitioner's Motion for Reconsideration. The dispositive part of the CA Decision reads as follows:

"WHEREFORE, the petition as far as the heirs of Alice Gochan, is DISMISSED, without prejudice to filing the same in the regular courts.

SO ORDERED."2

In dismissing the Complaint before the SEC regarding only Alice Gochan's heirs but not the other complainants, the CA effectively modified the December 9, 1994 Order of the hearing officer3 of the Securities and Exchange Commission (SEC). The Order, which was affirmed in full by the SEC en banc, dismissed the entire case.

The Facts

The undisputed facts are summarized by the Court of Appeals as follows:

"Felix Gochan and Sons Realty Corporation (Gochan Realty, for brevity) was registered with the SEC on June, 1951, with Felix Gochan, Sr., Maria Pan Nuy Go Tiong, Pedro Gochan, Tomasa Gochan, Esteban Gochan and Crispo Gochan as its incorporators.

"Felix Gochan Sr.'s daughter, Alice, mother of [herein respondents], inherited 50 shares of stock in Gochan Realty from the former.

"Alice died in 1955, leaving the 50 shares to her husband, John Young, Sr.

"In 1962, the Regional Trial Court of Cebu adjudicated 6/14 of these shares to her children, herein [respondents] Richard Young, David Young, Jane Young Llaban, John Young Jr., Mary Young Hsu and Alexander Thomas Young.

"Having earned dividends, these stocks numbered 179 by 20 September 1979.

"Five days later (25 September), at which time all the children had reached the age of majority, their father John Sr., requested Gochan Realty to partition the shares of his late wife by cancelling the stock certificates in his name and issuing in lieu thereof, new stock certificates in the names of [herein respondents].

"On 17 October 1979, respondent Gochan Realty refused, citing as reason, the right of first refusal granted to the remaining stockholders by the Articles of Incorporation.

"On 21, 1990, [sic] John, Sr. died, leaving the shares to the [respondents].

"On 8 February 1994, [respondents] Cecilia Gochan Uy and Miguel Uy filed a complaint with the SEC for issuance of shares of stock to the rightful owners, nullification of shares of stock, reconveyance of property impressed with trust, accounting, removal of officers and directors and damages against respondents. A Notice of Lis Pendens was annotated as [sic] real properties of the corporation.

"On 16 March 1994, [herein petitioners] moved to dismiss the complaint alleging that: (1) the SEC ha[d] no jurisdiction over the nature of the action; (2) the [respondents] [were] not the real parties-in-interest and ha[d] no capacity to sue; and (3) [respondents'] causes of action [were] barred by the Statute of Limitations.

"The motion was opposed by herein [respondents].

"On 29 March 1994, [petitioners'] filed a Motion for cancellation of Notice of Lis Pendens. [Respondents] opposed the said motion.

"On 9 December 1994, the SEC, through its Hearing Officer, granted the motion to dismiss and ordered the cancellation of the notice of lis pendens annotated upon the titles of the corporate lands. In its order, the SEC opined:

'In the instant case, the complaint admits that complainants Richard G. Young, David G. Young, Jane G. Young Llaban, John D. Young, Jr., Mary G. Young Hsu and Alexander Thomas G. Young, who are the children of the late Alice T. Gochan and the late John D. Young, Sr. are suing in their own right and as heirs of and/or as the beneficial owners of the shares in the capital stock of FGSRC held in trust for them during his lifetime by the late John D. Young. Moreover, it has been shown that said

complainants ha[d] never been x x x stockholder[s] of record of FGSRC to confer them with the legal capacity to bring and maintain their action. Conformably, the case cannot be considered as an intra-corporate controversy within the jurisdiction of this Commission.

'The complainant heirs base what they perceived to be their stockholders' rights upon the fact of their succession to all the rights, property and interest of their father, John D. Young, Sr. While their heirship is not disputed, their right to compel the corporation to register John D. Young's Sr. shares of stock in their names cannot go unchallenged because the devolution of property to the heirs by operation of law in succession is subject to just obligations of the deceased before such property passes to the heirs. Conformably, until therefore the estate is settled and the payment of the debts of the deceased is accomplished, the heirs cannot as a matter of right compel the delivery of the shares of stock to them and register such transfer in the books of the corporation to recognize them as stockholders. The complainant heirs succeed to the estate of [the] deceased John D. Young, Sr. but they do not thereby become stockholders of the corporation.

'Moreover, John D. [Young Sr.'s] shares of stocks form part of his estate which is the subject of Special Proceedings No. 3694-CEB in the Regional Trial Court of Cebu, Branch VIII, [par. 4 of the complaint]. As complainants clearly claim[,] the Intestate Estate of John D. Young, Sr. has an interest in the subject matter of the instant case. However, actions for the recovery or protection of the property [such as the shares of stock in question] may be brought or defended not by the heirs but by the executor or administrator thereof.

'Complainants further contend that the alleged wrongful acts of the corporation and its directors constitute fraudulent devices or schemes which may be detrimental to the stockholders. Again, the injury [is] perceived[,] as is alleged[,] to have been suffered by complainants as stockholders, which they are not. Admittedly, the SEC has no jurisdiction over a controversy wherein one of the parties involved is not or not yet a stockholder of the corporation. [SEC vs. CA, 201 SCRA 134].

'Further, by the express allegation of the complaint, herein complainants bring this action as [a] derivative suit on their own behalf and on behalf of respondent FGSRC.

'Section 5, Rule III of the Revised Rules of Procedure in the Securities and Exchange Commission provides:

'Section 5. Derivative Suit. No action shall be brought by stockholder in the right of a corporation unless the complainant was a stockholder at the time the questioned transaction occurred as well as at the time the action was filed and remains a stockholder during the pendency of the action. x x x.'

'The rule is in accord with well settled jurisprudence holding that a stockholder bringing a derivative action must have been [so] at the time the transaction or act complained of [took] place. (Pascual vs. Orozco, 19 Phil. 82; Republic vs. Cuaderno, 19 SCRA 671; San Miguel Corporation vs. Khan, 176 SCRA 462-463) The language of the rule is mandatory, strict compliance with the terms thereof thus being a condition precedent, a jurisdictional requirement to the filing of the instant action.

'Otherwise stated, proof of compliance with the requirement must be sufficiently established for the action to be given due course by this Commission. The failure to comply with this jurisdictional requirement on derivative action must necessarily result in the dismissal of the instant complaint.' (pp. 77-79, Rollo)

"[Respondents] moved for a reconsideration but the same was denied for being pro-forma.

"[Respondents] appealed to the SEC en banc, contending, among others, that the SEC ha[d] jurisdiction over the case.

"[Petitioners], on the other hand, contend that the appeal was 97 days late, beyond the 30-day period for appeals.

"On 3 March 1995, the SEC en banc ruled for the [petitioners,] holding that the [respondents'] motion for reconsideration did not interrupt the 30-day period for appeal because said motion was pro-forma."4

Aggrieved, herein respondents then filed a Petition for Review with the Court of Appeals.


The Court of Appeals ruled that the SEC had no jurisdiction over the case as far as the heirs of Alice Gochan were concerned, because they were not yet stockholders of the corporation. On the other hand, it upheld the capacity of Respondents Cecilia Gochan Uy and her spouse, Miguel Uy. It also held that the Intestate Estate of John Young Sr. was an indispensable party.

The appellate court further ruled that the cancellation of the notice of lis pendens on the titles of the corporate real estate was not justified. Moreover, it declared that respondents' Motion for Reconsideration before the SEC was not pro forma; thus, its filing tolled the appeal period.


The Issues

These are the issues presented before us:

"A. Whether or not the Spouses Uy have the personality to file an action before the SEC against Gochan Realty Corporation.

"B. Whether or not the Spouses Uy could properly bring a derivative suit in the name of Gochan Realty to redress wrongs allegedly committed against it for which the directors refused to sue.

"C. Whether or not the intestate estate of John D. Young Sr. is an indispensable party in the SEC case considering that the individual heirs' shares are still in the decedent stockholder's name.

"D. Whether or not the cancellation of [the] notice of lis pendens was justified considering that the suit did not involve real properties owned by Gochan Realty."6

In addition, the Court will determine the effect of Republic Act No.87997 on this case.

The Court's Ruling

The Petition has no merit. In view of the effectivity of RA 8799, however, the case should be remanded to the proper regional trial court, not to the Securities and Exchange Commission.

First Issue:

Personality of the Spouses U y to File a Suit Before the SEC

Petitioners argue that Spouses Cecilia and Miguel Uy had no capacity or legal standing to bring the suit before the SEC on February 8, 1994, because the latter were no longer stockholders at the time. Allegedly, the stocks had already been purchased by the corporation. Petitioners further assert that, being allegedly a simple contract of sale cognizable by the regular courts, the purchase by Gochan Realty of Cecilia Gochan Uy's 210 shares does not come within the purview of an intra-corporate controversy.

As a general rule, the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the complaint.8 For purposes of resolving a motion to dismiss, Cecilia Uy's averment in the Complaint -that the purchase of her stocks by the corporation was null and void ab initio - is deemed admitted. It is elementary that a void contract produces no effect either against or in favor of anyone; it cannot create, modify or extinguish the juridical relation to which it refers.9 Thus, Cecilia remains a stockholder of the corporation in view of the nullity of the Contract of Sale. Although she was no longer registered as a stockholder in the corporate records as of the filing of the case before the SEC, the admitted allegations in the Complaint made her still a bona fide stockholder of Felix Gochan & Sons Realty Corporation (FGSRC), as between said parties.

In any event, the present controversy, whether intra-corporate or not, is no longer cognizable by the SEC, in view of RA 8799, which transferred to regional trial courts the former's jurisdiction over cases involving intra-corporate disputes.

Action Has Not Prescribed

Petitioners contend that the statute of limitations already bars the Uy spouses' action, be it one for annulment of a voidable contract or one based upon a written contract. The Complaint, however, contains respondents' allegation that the sale of the shares of stock was not merely voidable, but was void ab initio. Below we quote its relevant portion:

"38. That on November 21, 1979, respondent Felix Gochan & Sons Realty Corporation did not have unrestricted retained earnings in its books to cover the purchase price of the 208 shares of stock it was then buying from complainant Cecilia Gochan Uy, thereby rendering said purchase null and void ab initio for being violative of the trust fund doctrine and contrary to law, morals good customs, public order and public policy;"

Necessarily, petitioners' contention that the action has prescribed cannot be sustained. Prescription cannot be invoked as a ground if the contract is alleged to be void ab initio.10 It is axiomatic that the action or defense for the declaration of nullity of a contract does not prescribe.11

Second Issue:

Derivative Suit and the Spouses Uy

Petitioners also contend that the action filed by the Spouses Uy was not a derivative suit, because the spouses and not the corporation were the injured parties. The Court is not convinced. The following quoted portions of the Complaint readily shows allegations of injury to the corporation itself:

"16. That on information and belief, in further pursuance of the said conspiracy and for the fraudulent purpose of depressing the value of the stock of the Corporation and to induce the minority stockholders to sell their shares of stock for an inadequate consideration as aforesaid, respondent Esteban T. Gochan . . ., in violation of their duties as directors and officers of the Corporation . . ., unlawfully and fraudulently appropriated [for] themselves the funds of the Corporation by drawing excessive amounts in the form of salaries and cash advances. . . and by otherwise charging their purely personal expenses to the Corporation."

x x x x x x x x x

"41. That the payment of P1,200,000.00 by the Corporation to complainant Cecilia Gochan Uy for her shares of stock constituted an unlawful, premature and partial liquidation and distribution of assets to a stockholder, resulting in the impairment of the capital of the Corporation and prevented it from otherwise utilizing said amount for its regular and lawful business, to the damage and prejudice of the Corporation, its creditors, and of complainants as minority stockholders;"12

As early as 1911, this Court has recognized the right of a single stockholder to file derivative suits. In its words:

"[W]here corporate directors have committed a breach of trust either by their frauds, ultra vires acts, or negligence, and the corporation is unable or unwilling to institute suit to remedy the wrong, a single stockholder may institute that suit, suing on behalf of himself and other stockholders and for the benefit of the corporation, to bring about a redress of the wrong done directly to the corporation and indirectly to the stockholders."13

In the present case, the Complaint alleges all the components of a derivative suit. The allegations of injury to the Spouses Uy can coexist with those pertaining to the corporation. The personal injury suffered by the spouses cannot disqualify them from filing a derivative suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against the erring directors. This cause of action is also included in the Complaint filed before the SEC.

The Spouses Uy have the capacity to file a derivative suit in behalf of and for the benefit of the corporation. The reason is that, as earlier discussed, the allegations of the Complaint make them out as stockholders at the time the questioned transaction occurred, as well as at the time the action was filed and during the pendency of the action.

Third Issue:

Capacity of the Intestate Estate of John D. Young Sr.

Petitioners contend that the Intestate Estate of John D. Young Sr. is not an indispensable party, as there is no showing that it stands to be benefited or injured by any court judgement.

It would be useful to point out at this juncture that one of the causes of action stated in the Complaint filed with the SEC refers to the registration, in the name of the other heirs of Alice Gochan Young, of 6/14th of the shares still registered under the name of John D. Young Sr. Since all the shares that

belonged to Alice are still in his name, no final determination can be had without his estate being impleaded in the suit. His estate is thus an indispensable party with respect to the cause of action dealing with the registration of the shares in the names of the heirs of Alice.

Petitioners further claim that the Estate of John Young Sr. was not properly represented. They claim that "when the estate is under administration, suits for the recovery or protection of the property or rights of the deceased may be brought only by the administrator or executor as approved by the court."14 The rules relative to this matter do not, however, make any such categorical and confining statement.

Section 3 of Rule 3 of the Rules of Court, which is cited by petitioners in support of their position, reads:

"Sec. 3. Representatives as parties. - Where the action is allowed to be prosecuted or defended by a representative or someone acting in a fiduciary capacity, the beneficiary shall be included in the title of the case and shall be deemed to be the real party in interest. A representative may be a trustee of an express trust, a guardian, an executor or administrator, or a party authorized by law or these Rules. An agent acting in his own name and for the benefit of an undisclosed principal may sue or be sued without joining the principal except when the contract involves things belonging to the principal."

Section 2 of Rule 87 of the same Rules, which also deals with administrators, states:

"Sec. 2. Executor or administrator may bring or defend actions which survive. -For the recovery or protection of the property or rights of the deceased, an executor or administrator may bring or defend, in the right of the deceased, actions for causes which survive."

The above-quoted rules, while permitting an executor or administrator to represent or to bring suits on behalf of the deceased, do not prohibit the heirs from representing the deceased. These rules are easily applicable to cases in which an administrator has already been appointed. But no rule categorically addresses the situation in which special proceedings for the settlement of an estate have already been instituted, yet no administrator has been appointed. In such instances, the heirs cannot be expected to wait for the appointment of an administrator; then wait further to see if the administrator appointed would care enough to file a suit to protect the rights and the interests of the deceased; and in the meantime do nothing while the rights and the properties of the decedent are violated or dissipated.1âwphi1.nêt

The Rules are to be interpreted liberally in order to promote their objective of securing a just, speedy and inexpensive disposition of every action and proceeding.15 They cannot be interpreted in such a way as to unnecessarily put undue hardships on litigants. For the protection of the interests of the decedent, this Court has in previous instances16 recognized the heirs as proper representatives of the decedent, even when there is already an administrator appointed by the court. When no administrator has been appointed, as in this case, there is all the more reason to recognize the heirs as the proper representatives of the deceased. Since the Rules do not specifically prohibit them from representing the deceased, and since no administrator had as yet been appointed at the time of the institution of the Complaint with the SEC, we see nothing wrong with the fact that it was the heirs of John D. Young Sr. who represented his estate in the case filed before the SEC.

Fourth Issue

Notice of Lis Pendens

On the issue of the annotation of the Notice of Lis Pendens on the titles of the properties of the corporation and the other respondents, we still find no reason to disturb the ruling of the Court of Appeals.

Under the third, fourth and fifth causes of action of the Complaint, there are allegations of breach of trust and confidence and usurpation of business opportunities in conflict with petitioners' fiduciary duties to the corporation, resulting in damage to the Corporation. Under these causes of action, respondents are asking for the delivery to the Corporation of possession of the parcels of land and their corresponding certificates of title. Hence, the suit necessarily affects the title to or right of possession of the real property sought to be reconveyed. The Rules of Court17 allows the annotation of a notice of lis pendens in actions affecting the title or right of possession of real property.18 Thus, the Court of Appeals was correct in reversing the SEC Order for the cancellation of the notice oflis pendens.

The fact that respondents are not stockholders of the Mactan Realty Development Corporation and the Lapu-Lapu Real Estate Corporation does not make them non-parties to this case. To repeat, the jurisdiction of a court or tribunal over the subject matter is determined by the allegations in the Complaint. In this case, it is alleged that the aforementioned corporations are mere alter egos of the directors-petitioners, and that the former acquired the properties sought to be re conveyed to FGSRC in violation of the directors-petitioners' fiduciary duty to FGSRC. The notion of corporate entity will be pierced or disregarded and the individuals composing it will be treated as identical19 if, as alleged in the present case, the corporate entity is being used as a cloak or cover for fraud or illegality; as a justification for a wrong; or as an alter ego, an adjunct, or a business conduit for the sole benefit of the stockholders.

Effect of RA 8799

While we sustain the appellate court, the case can no longer be remanded to the SEC. As earlier stated, RA 8799, which became effective on August 8, 2000, transferred SEC's jurisdiction over cases involving intra-corporate disputes to courts of general jurisdiction or to the regional trial courtS.20 Section 5.2 thereof reads as follows:

"5.2. The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed."

In the light of the Resolution issued by this Court in AM No. 00-8-10-SC,21 the Court Administrator and the Securities and Exchange Commission should be directed to cause the transfer of the records of SEC Case No. 02-94-4674 to the appropriate court of general jurisdiction.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED, subject to the modification that the case be remanded to the proper regional trial court. The December 9, 1994 Order of Securities and Exchange Commission hearing officer dismissing the Complaint and directing the cancellation of the notice of lis pendens, as well as the March 3, 1995 Order denying complainants' motion for reconsideration are REVERSEDand SET ASIDE. Pursuant to AM No. 00-8-10-SC, the Office of the Court Administrator and the SEC areDIRECTED to cause the actual transfer of the records of SEC Case No.02-94-467 4 to the appropriate regional trial court.


Manila

THIRD DIVISION

G.R. No. 138343 February 19, 2001

GILDA C. LIM, WILHELMINA V. JOVEN and DITAS A. LERIOS, petitioners, vs.PATRICIA LIM-YU, in her capacity as a minority stockholder of LIMPAN INVESTMENT CORPORATION,respondent.

PANGANIBAN, J.:

A suit to enforce preemptive rights in a corporation is not a derivative suit. Thus, a temporary restraining order enjoining a person from representing the corporation will not bar such action, because it is instituted on behalf and for the benefit of the shareholder, not the corporation.

Statement of the Case

Petitioners seek the reversal,1 under Rule 45 of the Rules of Court, of the July 31, 1998 Decision2 of the Court of Appeals3 (CA) in CA-GR SP No. 46292 and of its March 25, 1999 Resolution4 denying reconsideration. The decretal portion of the appealed Decision, which affirmed the Securities and Exchange Commission (SEC), reads as follows:

"WHEREFORE, judgment is hereby rendered DISMISSING the Petition for lack of merit. The preliminary injunction previously issued is hereby LIFTED."5

The Facts

The undisputed facts are summarized by the Court of Appeals as follows:

"At a special meeting on 07 October 1994, the Board of Directors of Limpan Investment Corporation (LIMPAN) approved a resolution of the following tenor:

'RESOLVED that the corporation make a partial payment [for] the legal services of Gilda C. Lim in the handling of various cases on behalf of, or involving the corporation in the amount of P1,551,500.00 to be paid in equivalent value in shares of stock of the corporation totaling 15,515 shares, the same being found to be reasonable, and there being no available funds to pay the same. 1âwphi1.nêt

'RESOLVED FURTHER, that the Corporate Secretary be authorized, as he is hereby authorized, to secure and comply with necessary requirements of the law for the issuance of said shares.'

"On 18 October 1994, the Corporate Secretary Jaime G. Manzano filed a request before the Corporate and legal Affairs Department of the SEC asking for the exemption of the 15,515 shares from the registration requirements of the Revised Securities Act; the request was granted in a Resolution dated 14 November 1994. Due to the issuance of the unsubscribed

shares to the petitioner GILDA C. LIM (LIM), all of LIMPAN's authorized capital stock became fully subscribed, with LIM ending up controlling 62.5% of the shares.

"In July 1996, the private respondent PATRICIA LIM YU (YU), a sister of the petitioner, LIM, filed a complaint against the members of the Board of Directors of LIMPAN who approved the aforesaid resolution (GILDA C. LIM, WILHEIMINA V. JOVEN, DITAS A. LERIOS, AUGUSTO R. BUNDANG, TERESITA C. VELEZ and JAIME MANZANO). The action was docketed as SEC Case No. 07-95-5114.

"BUNDANG, VELEZ, and MANZANO filed an Answer, asserting as affirmative defenses that the complaint failed to state a cause of action against them; that YU had no legal capacity to sue; and that the issuance of the shares in LIM's favor was bona fide and valid pursuant to law and LIMPAN's By-laws. In turn, the herein petitioners LIM, JOVEN and LERIOS filed a Motion to Dismiss on the following grounds: that YU had no legal capacity to sue; that the complaint failed to state a cause of action against JOVEN and LERIOS, and that no earnest efforts were exerted towards a compromise, YU and LIM being siblings.

"In support of their ground that YU ha[d] no legal capacity to sue, the petitioners pointed out that LIM had previously filed a petition for guardianship before the Regional Trial Court of Manila, docketed as Special proceeding No. 94-71010, praying for the issuance of letters of guardianship over YU. On 14 July 1994, the Presiding Judge of Branch 48, the Hon. Demetrio M. Batario, Jr., issued an Order, the relevant portion of which enjoined YU 'from entering into, or signing, contracts or documents on her behalf or on behalf of others' x x x.' On 16 August 1994, LIM was appointed [as] YU's general guardian, and the former took her oath as such on the same day. YU appealed LIM's appointment to the Supreme Court ("Patricia C. Lim-Yu, et al. v. Hon. Judge Demetrio M. Batario, Jr., et al.,' G.R. No.116926). On 27 February 1994, the High Court issued a Resolution giving due course to YU's petition. It likewise issued a temporary restraining order, the (pertinent portion of which is quoted hereunder:

'(b) to ISSUE the TEMPORARY RESTRAINING ORDER prayed for, limited however, to the 'Writ of Preliminary Injunction' dated 22 August 1994 and the order dated 14 July 1994 both issued in SP Proceeding No. 94-71010 which in the opinion of the Court are all too encompassing and should be limited in scope and subject to the conditions set forth in the resolution of September 28, 1994 that, '(D)uring the effectivity of the temporary restraining order, petitioner Patricia C. Lim, her attorneys, representatives, agents and any other persons assisting petitioner Patricia C. Lim will be able to act, enter into or sign contracts or documents solely for and on behalf of Patricia C. Lim; said actions, contracts or documents should not in any way bind or affect the interests of her parents, Isabelo P. Lim an Purificacion C. Lim, her brothers and sisters and any family owned or controlled corporation in particular, the Limpan Investment Corporation.'

'NOW THEREFORE, You (Respondent Hon. Judge Demetrio M. Batario, Jr.), your agents, representatives, and/or any person or persons, acting upon your orders or in your place or stead, are hereby RESTRAINED and ENJOINED from enforcing and carrying out the Writ of Preliminary Injunction dated 22 August 1994 and the Order dated 14 July 1994 both issued by respondent Judge In SP Proceeding No. 94-71010.' (underscoring supplied)

"The petitioners argued that, under the aforesaid order YU [was] incapacitated from filing a derivative suit. YU naturally espoused the opposite view.

"Acting on the petitioners' Motion to Dismiss, the Hearing Officer, Atty. Manuel Perea, issued an Order dated 05 January 1996, holding in abeyance the resolution of the motion to dismiss, which reads as follows:

'Before this Commission is the motion to dismiss filed by respondents Gilda C. Lim, et al., as well as the opposition thereto.

'In view of the conflicting interpretation of the order issued by the Supreme Court in Sp. Proc. No. 94-70010 regarding the legal capacity of the plaintiff [--] x x x who is allegedly under guardianship [-- to file the instant action] either or both parties are directed to file a motion for clarification of the orders invoked by respondent Gilda C. Lim, et al. The desired clarification is perceived to settle the issue of plaintiff's capacity to file the instant action.

'Meanwhile, resolution of the pending incident shall be held in abeyance until the parties shall have secured the desired interpretation/opinion of the Supreme Court on the matter.'

"Yu filed a Motion for Reconsideration dated 08 April 1996, which was denied in an Order dated 25 April 1996, on the ground that it was filed beyond the ten-day period allowed for seeking reconsideration. Yu filed a Motion for Leave to Admit Second Motion for Reconsideration dated 02 July 1996 which the Hearing Officer also denied.

"From the denial of her second motion for reconsideration, Yu filed a petition for certiorari before the SEC En Banc seeking to set aside the Order of 05 January 1994. On 04 February 1994, the SEC En Banc issued the first assailed order granting the petition for certiorari, and ordering the Securities Investigation & Clearing Department (SICD) to hear the other grounds of the Motion to Dismiss and to continue the case until its final determination. A motion for reconsideration filed by L[im] having been denied, the instant petition for review was instituted before this Court. x x x."6

Ruling of the Court of Appeal

Ruling that the Supreme Court's TRO was clear, the CA agreed with the SEC that, pending clarification thereof, there was no need for the hearing officer to defer ruling on the Motion to Dismiss. The appellate court stated that the TRO did not prohibit herein Respondent Patricia Lim-Yu from acting or entering into contracts on her own behalf or from protecting her rights. The root of the present controversy -- the Complaint she filed before the SEC -- relates to a denial of her preemptive right as a shareholder. Thus, her capacity to file the suit must be sustained. Finally, on the question of the timeliness of respondent's Petition for Certiorari. before the SEC, the CA ruled that adherence to strict technical rules should be relaxed to prevent palpable injustice.

Hence, this recourse.7

Issues

In their Memorandum,8 petitioners raise the following issues:

"I

The Honorable Court of Appeals erred in sustaining the respondent's legal capacity to sue the petitioners by relying solely on the first half of this Honorable Court's TRO and without considering the second half of said TRO.

"II

The Honorable Court of Appeals erred in disregarding the sole power/authority of the Supreme Court to enforce/clarify its own resolutions/orders under the Rules of Court.

"III

The Honorable Court of Appeals in effect allowed the Securities and Exchange Commission (SEC) to maintain two conflicting positions on similar matters before it (SEC) when it upheld the SEC's position that clarification of this Honorable Court's TRO was not needed in SEC Case No. 07-95-5114.

"IV.

The Honorable Court of Appeals failed to consider that herein respondent had been repeatedly and notoriously guilty of laches.

Simply put, the main issue is whether respondent had the legal capacity to file her Complaint before the SEC. The others are merely incidental to this main point.

The Court's Ruling

The Petition has no merit.

First Issue:

Legal Capacity to Sue

Petitioners point out that both the SEC and the Court of Appeals considered only the first part of the Supreme Court TRO and completely ignored the second part. Supposedly, the latter part barred respondent from entering into agreements that would affect her family and the corporation. Hence, they claim that the TRO, taken as a whole, proscribed respondent's "derivative suit," which sought to "enjoin herein [P]etitioner Gilda C. Lim from further voting or exercising any and all rights arising from the issuance to her of 15,515 shares of stock of the corporation."9

We do not agree. The pertinent portion of the TRO issued by this Court reads as follows:

"(b) to ISSUE the TEMPORARY RESTRAINING ORDER prayed for, limited however, to the 'Writ of Preliminary Injunction' dated 22 August 1994 and the Order dated 14 July 1994 both issued in SP Proceeding No. 94-71010 which in the opinion of the Court are all too encompassing and should be limited in scope and subject to the conditions set forth in the Resolution of September 28, 1994 that, '(D)uring the effectivity of the Temporary Restraining Order, petitioner Patricia C. Lim, her attorneys, representatives, agents and any other persons assisting petitioner Patricia C. Lim will be able to act, enter into or sign contracts or documents solely for and on behalf of Patricia C. Lim; said actions, contracts or documents should not in any way bind or affect the interests of her parents, Isabelo P. Lim and

Purificacion C. Lim, her brothers and sisters and any family owned or controlled corporation in particular, the Limpan Investment Corporation."

Simply put, the TRO allows Respondent Patricia Lim-Yu to act for herself and to enter into any contract on her own behalf. However, she cannot transact in representation of or for the benefit of her parents, brothers or sisters, or the Limpan Investment Corporation. Contrary to what petitioners suggest, all that is prohibited is any action that will bind them. In short, she can act only on and in her own behalf, not that of petitioners or the Corporation.

There appears to be a confusion on the nature of the suit initiated before the SEC. Petitioners describe it as a derivative suit, which has been defined as "an action brought by minority shareholders in the name of the corporation to redress wrongs committed against it, for which the directors refuse to sue. It is a remedy designed by equity and has been the principal defense of the minority shareholders against abuses by the majority."10 In a derivative action, the real party in interest is the corporation itself, I not the shareholder(s) who actually instituted it.

"If the suit filed by respondent was indeed derivative in character, then respondent may not have the capacity to sue. The reason is that she would be acting in representation of the corporation, an act which the TRO enjoins her from doing.

We hold, however, that the suit of respondent cannot be characterized as derivative, because she was complaining only of the violation of her preemptive right under Section 39 of the Corporation Code.11 She was merely praying that she be allowed to subscribe to the additional issuances of stocks in proportion to her shareholdings to enable her to preserve her percentage of ownership in the corporation. She was therefore not acting for the benefit of the corporation. Quite the contrary, she was suing on her own behalf, out of a desire to protect and preserve her preemptive rights. Unquestionably, the TRO did not prevent her from pursuing that action.

To repeat, the TRO issued by this Court had two components: (1) it allowed respondent to enter into agreements on her own behalf; and (2) it clarified that respondent's acts could not bind or affect the interests of her parents, brothers or sisters, or Limpan. In other words, respondent was, as a rule, allowed to act; but, as an exception, was prohibited from doing anything that would bind the corporation or any of the above-named persons.

In this light, the TRO did not prohibit respondent from filing, on and in her own behalf; a suit for the alleged violation of her preemptive rights to purchase additional stock subscriptions. In other words, it did not restrain respondent from acting and enforcing her own rights. It merely barred her from acting in representation of the corporation.

Petitioners fail to appreciate the distinction between the act itself and its net result. The act of filing the suit did not in any way bind the corporation. The result of such act affected it, however. Similarly, respondent can sell her shares to the corporation or make a will and designate her parents, for example, as beneficiaries. It would be quite far-fetched to say that these acts are prohibited by the TRO, even if they will definitely affect the corporation and her parents.

Section 2 of Rule 3 of the Rules of Court12 defines a real party in interest - as one who is entitled to the avails of any judgment rendered in a suit, or who stands to be benefited or injured by it. In the present case, it is clear that respondent was suing on her own behalf in order to enforce her preemptive rights. Nothing, not the TRO, barred her from filing that suit. 1âwphi1.nêt

Incidental Issues

Power to Clarify Own Resolutions

Petitioners also assail the ruling of the Court of Appeals that the SEC hearing officer "was bound to interpret the Supreme Court's order instead of burdening [it] with the responsibility of 'clarifying' what already appears to be a clear order." Citing Section 5 (5) of Article VIII13 of the Constitution and Section 5 of Rule 135,14 petitioners contend that the ruling disregarded the Supreme Court's power to control and to clarify its own orders, as granted by the Constitution.

The argument must be rejected outright. First, as stated earlier the TRO was very clear. In such instances, it was axiomatic that there was no need for interpretation, only for application.15 Hence, there was no reason for the SEC hearing officer to rely on the rules of statutory construction or for this Court to clarify its Order. Second, even assuming that there was a need to interpret the TRO, the hearing officer was duty-bound to do so. Indeed, the mandate to apply and interpret pertinent laws and rulings is necessarily included in the "adjudicative functions"16of the SEC or of any other quasi-judicial body for that matter.17

Verily, the power of this Court to clarify its own orders does not divest the SEC of its function to apply those orders to cases before it. If parties disagree with the SEC, they can file the proper suit in a regular court in accordance with law." In any event, the seeming obscurity or ambiguity of a TRO is not an excuse for a quasi-judicial body, or any regular court or judge, to shirk from the responsibility of applying and interpreting it.18

Alleged Conflicting Positions of the SEC

Petitioners further contend that the CA effectively allowed the SEC to maintain contradictory positions on similar matters. They cite Philippine Commercial International Bank v. Aquaventures Corporation, docketed as SEC En Banc Case No. 455, in "which the SEC referred a TRO to this Court for clarification.19

This argument is untenable. The alleged contradictory SEC ruling in the said case is irrelevant and unnecessary to the resolution of the present one. Petitioners do not claim that the factual milieu of the former is similar to that of the latter. Moreover, the actions of the SEC in the above-mentioned, case have not been put at issue by the proper parties in these proceedings. In any event, they are neither binding nor conclusive on appeal. They may be the subject of the Court's review in accordance with the applicable provisions of the Rules of Court.

Laches

Petitioners further contend that the CA failed to appreciate that respondent had been "repeatedly and notoriously guilty of laches." They point out that she filed a Motion for Reconsideration of the SEC hearing officer's Order almost four months late. They further allege that it took her another two and a half months to file a Motion for Leave to Admit Second Motion for Reconsideration.20

We reject this argument. It has been held that it is the better rule that courts, under the principle of equity, shall not be bound strictly by the doctrine of laches, when a manifest wrong or injustice would result.21 To rule that respondent can no longer question the hearing officer would deprive her of the opportunity to sue in order to enforce her preemptive rights, an act that is not proscribed by this Court's TRO.

WHEREFORE, the Petition is hereby DENIED and the assailed Decision AFFIRMED. Costs against petitioners.


Manila

FIRST DIVISION

G.R. No. 109491 February 28, 2001

ATRIUM MANAGEMENT CORPORATION, petitioner, vs.COURT OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE LEON, RAFAEL DE LEON, JR., AND HI-CEMENT CORPORATION, respondents.

----------------------------------------

G.R. No. 121794 February 28, 2001

LOURDES M. DE LEON, petitioner, vs.COURT OF APPEALS, ATRIUM MANAGEMENT CORPORATION, AND HI-CEMENT CORPORATION,respondents.

PARDO, J.:

What is before the Court are separate appeals from the decision of the Court of Appeals,1 ruling that Hi-Cement Corporation is not liable for four checks amounting to P2 million issued to E.T. Henry and Co. and discounted to Atrium Management Corporation.

On January 3, 1983, Atrium Management Corporation filed with the Regional Trial Court, Manila an action for collection of the proceeds of four postdated checks in the total amount of P2 million. Hi-Cement Corporation through its corporate signatories, petitioner Lourdes M. de Leon,2 treasurer, and the late Antonio de las Alas, Chairman, issued checks in favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four checks to petitioner Atrium Management Corporation for valuable consideration. Upon presentment for payment, the drawee bank dishonored all four checks for the common reason "payment stopped". Atrium, thus, instituted this action after its demand for payment of the value of the checks was denied.3

After due proceedings, on July 20, 1989, the trial court rendered a decision ordering Lourdes M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement Corporation to pay petitioner Atrium, jointly and severally, the amount of P2 million corresponding to the value of the four checks, plus interest and attorney's fees.4

On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals promulgated its decision modifying the decision of the trial court, absolving Hi-Cement Corporation from liability and dismissing the complaint as against it. The appellate court ruled that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor of E.T. Henry, Inc.; (2) The issuance of the subject checks by Lourdes M. de Leon and the late Antonio de las Alas constituted ultra vires acts; and (3) The subject checks were not issued for valuable consideration.5

At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in February 1981, Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering to discount four

RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor of E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-Cement the fact that the checks represented payment for petroleum products which E.T. Henry delivered to Hi-Cement. Carlos C. Syquia identified two letters, dated February 6, 1981 and February 9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as treasurer, confirming the issuance of the four checks in favor of E.T. Henry in payment for petroleum products.6

Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she was once a secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was familiar with the four RCBC checks as the postdated checks issued by Hi-Cement to E.T. Henry upon instructions of Ms. de Leon. She testified that E.T. Henry offered to give Hi-Cement a loan which the subject checks would secure as collateral.7

On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the dispositive portion of which reads:

"WHEREFORE, in view of the foregoing considerations, and plaintiff having proved its cause of action by preponderance of evidence, judgment is hereby rendered ordering all the defendants except defendant Antonio de las Alas to pay plaintiff jointly and severally the amount of TWO MILLION (P2,000,000.00) PESOS with the legal rate of interest from the filling of the complaint until fully paid, plus the sum of TWENTY THOUSAND (P20,000.00) PESOS as and for attorney's fees and the cost of suit."

All other claims are, for lack of merit dismissed.

SO ORDERED."8

In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of Appeals.9

Lourdes M. de Leon submitted that the trial court erred in ruling that she was solidarilly liable with Hi-Cement for the amount of the check. Also, that the trial court erred in ruling that Atrium was an ordinary holder, not a holder in due course of the rediscounted checks.10

Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-Cement did not authorize the issuance of the checks, it could still be held liable for the checks. And assuming that the checks were issued with its authorization, the same was without any consideration, which is a defense against a holder in due course and that the liability shall be borne alone by E.T. Henry.11

On March 17, 1993, the Court of Appeals promulgated its decision modifying the ruling of the trial court, the dispositive portion of which reads:

"Judgement is hereby rendered:

(1) dismissing the plaintiff's complaint as against defendants Hi-Cement Corporation and Antonio De las Alas;

(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and severally to pay the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00) with interest at the legal rate from the filling of the complaint until fully paid, plus P20,000.00 for attorney's fees.

(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly and severally to pay defendant Hi-Cement Corporation, the sum of P20,000.00 as and for attorney's fees.

With cost in this instance against the appellee Atrium Management Corporation and appellant Lourdes Victoria M. de Leon.

So ordered."12

Hence, the recourse to this Court.13

The issues raised are the following:

In G. R. No. 109491 (Atrium, petitioner):

1. Whether the issuance of the questioned checks was an ultra vires act;

2. Whether Atrium was not a holder in due course and for value; and

3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and ordering it to pay P20,000.00 as attorney's fees.14

In G. R. No. 121794 (de Leon, petitioner):

1. Whether the Court of Appeals erred in holding petitioner personally liable for the Hi-Cement checks issued to E.T. Henry;

2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;

3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as signatory of the checks was personally liable for the value of the checks, which were declared to be issued without consideration;

4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement attorney's fees and costs.15

We affirm the decision of the Court of Appeals.

We first resolve the issue of whether the issuance of the checks was an ultra vires act. The record reveals that Hi-Cement Corporation issued the four (4) checks to extend financial assistance to E.T. Henry, not as payment of the balance of the P30 million pesos cost of hydro oil delivered by E.T. Henry to Hi-Cement. Why else would petitioner de Leon ask for counterpart checks from E.T. Henry if the checks were in payment for hydro oil delivered by E.T. Henry to Hi-Cement?

Hi-Cement, however, maintains that the checks were not issued for consideration and that Lourdes and E.T. Henry engaged in a "kiting operation" to raise funds for E.T. Henry, who admittedly was in need of financial assistance. The Court finds that there was no sufficient evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the corporation and is authorized to sign checks for the corporation. At the time of the issuance of the checks, there were sufficient funds in the bank to cover payment of the amount of P2 million pesos.

It is, however, our view that there is basis to rule that the act of issuing the checks was well within the ambit of a valid corporate act, for it was for securing a loan to finance the activities of the corporation, hence, not an ultra vires act.

"An ultra vires act is one committed outside the object for which a corporation is created as defined by the law of its organization and therefore beyond the power conferred upon it by law"16 The term "ultra vires" is "distinguished from an illegal act for the former is merely voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated."17

The next question to determine is whether Lourdes M. de Leon and Antonio de las Alas were personally liable for the checks issued as corporate officers and authorized signatories of the check.

"Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when:

"1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;

"2. He consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto;

"3. He agrees to hold himself personally and solidarily liable with the corporation; or

"4. He is made, by a specific provision of law, to personally answer for his corporate action."18

In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon was negligent when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was aware that the checks were strictly endorsed for deposit only to the payee's account and not to be further negotiated. What is more, the confirmation letter contained a clause that was not true, that is, "that the checks issued to E.T. Henry were in payment of Hydro oil bought by Hi-Cement from E.T. Henry". Her negligence resulted in damage to the corporation. Hence, Ms. de Leon may be held personally liable therefor. 1âwphi1.nêt

The next issue is whether or not petitioner Atrium was a holder of the checks in due course. The Negotiable Instruments Law, Section 52 defines a holder in due course, thus:

"A holder in due course is a holder who has taken the instrument under the following conditions:

(a) That it is complete and regular upon its face;

(b) That he became the holder of it before it was overdue, and without notice that it had been previously dishonored, if such was the fact;

(c) That he took it in good faith and for value;

(d) That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it."

In the instant case, the checks were crossed checks and specifically indorsed for deposit to payee's account only. From the beginning, Atrium was aware of the fact that the checks were all for deposit only to payee's account, meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in due course.

However, it does not follow as a legal proposition that simply because petitioner Atrium was not a holder in due course for having taken the instruments in question with notice that the same was for deposit only to the account of payee E.T. Henry that it was altogether precluded from recovering on the instrument. The Negotiable Instruments Law does not provide that a holder not in due course can not recover on the instrument.19

The disadvantage of Atrium in not being a holder in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable.20 One such defense is absence or failure of consideration.21

We need not rule on the other issues raised, as they merely follow as a consequence of the foregoing resolutions.

WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the Court of Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMED in toto.

No costs.

SO ORDERED.

Davide, Jr., Puno, Kapunan, and Ynares-Santiago, JJ., concur.

FIRST DIVISION

[G.R. No. 128606. December 4, 2000]

REPUBLIC OF THE PHILIPPINES, Petitioner, vs. SANDIGANBAYAN (3RD DIVISION), JOSE L. AFRICA, UNIMOLCO, ROBERTO BENEDICTO, ANDRES AFRICA and SMART COMMUNICATIONS, Respondents.

D E C I S I O N

YNARES-SANTIAGO, J.: chanrobles virtual law library

This is a petition for review assailing the Resolutions[1 of the Sandiganbayan dated December 6, 1996[2 and March 17, 1997[3 in Civil Case No. 0009, entitled "Republic of the Philippines, Plaintiff versus Jose L. Africa, et al., Defendants, which upheld the sale by Universal Molasses Corporation (UNIMOLCO) of its shares of stock in Eastern Telecommunications Philippines, Inc. (ETPI), to Smart Communications. Petitioner contends that the sale violated its preemptive right as stockholder of ETPI, which is guaranteed in the Articles of Incorporation.chanrobles virtual law library

ETPI was one of the corporations sequestered by the Presidential Commission on Good Government (PCGG). Among its stockholders were Roberto S. Benedicto and UNIMOLCO. chanrobles virtual law library

Sometime in 1990, PCGG and Benedicto entered into a compromise agreement whereby Benedicto ceded to the government 204,000 shares of stock in ETPI, representing his fifty-one percent (51%) equity therein. The other forty-nine percent (49%), consisting of 196,000 shares of stock, were released from sequestration and adjudicated by final judgment to Benedicto and UNIMOLCO. Furthermore, the government agreed to withdraw the cases filed against Benedicto and free him from further criminal prosecution. chanrobles virtual law library

In a written notice received on April 24, 1996 by Melquiades Gutierrez, the President and Chairman of the Board of ETPI, UNIMOLCO offered to sell to ETPI its 196,000 shares of stock therein. chanrobles virtual law library

Meanwhile, on motion of petitioner, through the PCGG, the Sandiganbayan issued a Resolution, dated May 7, 1996, authorizing the entry in the Stock and Transfer Book of ETPI of the transfer of ownership of 204,000 shares of stock to petitioner, to be taken out of the shareholdings of UNIMOLCO. On June 5, 1996, Benedicto filed a Manifestation and Motion with the Sandiganbayan, praying that the Resolution dated May 7, 1996 be modified such that the entry of the 204,000 shares of stock of petitioner in ETPI be taken out of the shareholdings of UNIMOLCO and/or Roberto S. Benedicto. chanrobles virtual law library

On June 21, 1996, PCGG issued Resolution No. 96-142 enjoining all stockholders of ETPI from selling shares of stock therein without the written conformity of the PCGG.[4 chanrobles virtual law library

Subsequently, on July 24, 1996, UNIMOLCO and Smart Communications executed a Deed of Absolute Sale whereby UNIMOLCO sold its 196,000 shares of stock in ETPI to Smart.[5 Prior to the sale, Smart was not a stockholder of ETPI. chanrobles virtual law library

Thus, on August 8, 1996, petitioner filed with the Sandiganbayan a Motion to Cite Defendant Benedicto and the Parties to the Sale of UNIMOLCO Shares in ETPI in Contempt of Court and to Rescind and/or Annul Said Sale. Petitioner alleged that the sale of the 196,000 shares of stock of UNIMOLCO to Smart was in defiance of the May 7, 1996 Resolution of the Sandiganbayan, which provided that the 204,000 shares of the government shall come from the shareholdings of UNIMOLCO, and it interfered with the proceedings thereon. In support of its prayer for the rescission and annulment of the sale, petitioner argued that the same violated its right of first refusal to purchase shares of stock in ETPI. chanrobles virtual law library

The right of first refusal is contained in Article 10 of the Articles of Incorporation of ETPI, which states: chanrobles virtual law library

ARTICLE TENTH: In the event any stockholder (hereinafter referred to as the Offeror) desires to dispose, transfer, sell or assign any shares of stock of the Corporation (hereinafter referred to as the Offered Stock), except in the case of any disposal, transfer, sale or assignment between or among the incorporators or to corporation controlled by the incorporators, the Offeror shall give a right of first refusal to the Corporation and, thereafter in the event that the Corporation shall refuse or fail to accept all of the Offered Stock to all then stockholders of record of the Corporation

http://www.chanrobles.com/scdecisions/jurisprudence2000/dec2000/128606.php#_edn5





(except the Offeror) to purchase the Offered Stock pro rata, at a price and upon terms and conditions specified by the Offeror based upon a firm, bona fide, written cash offer from a bona fide purchaser. chanrobles virtual law library

The Corporation shall be entitled to exercise its right of first refusal with respect to all, but not less than all, of the Offered Stock for a period (hereinafter referred to as the First Period) of thirty (30) days, from the receipt by it of a written offer to sell from the Offeror. chanrobles virtual law library

If the Corporation shall fail or refuse within the First Period to accept the offer for all of the Offered Stock, then on or before the end of such First Period, the Secretary of the Corporation shall transmit by registered mail and by telegram or cable a copy of such offer to each stockholder of record (other than the Offeror) at his/its address appearing on the books of the Corporation and shall also notify each stockholder of the expiry date of such offer (such expiry date being thirty (30) days after the end of the First Period). All then stockholders of record of the Corporation, other than the Offeror, shall be entitled for a period (hereinafter referred to as the Second Period) ending thirty (30) days after the First Period to exercise their rights of first refusal with respect to all or any portion of the Offered Stock for which they have a right of first refusal and may in addition offer to purchase any shares thereof not subscribed for by the other stockholders pursuant to rights of first refusal. Such shares shall be allocated among stockholders offering to purchase such shares, pro rata, up to the limits, if any, specified by such purchasing stockholders. Each such purchasing stockholder shall transmit to the Corporation with his/its acceptance cash, or a certified check or checks drawn on a Philippine bank or banks, in an amount sufficient to meet the terms of the offer corresponding to such number of shares of Offered Stock specified in his/its acceptance. chanrobles virtual law library

In its Resolution dated December 6, 1996, the Sandiganbayan denied petitioners motion for contempt and to rescind or annul the sale of the 196,000 ETPI shares of stock to Smart.[6 Petitioner filed a motion for reconsideration but the same was denied in a Resolution dated March 17, 1997.[7 chanrobles virtual law library

Hence, this petition for review raising the following grounds: chanrobles virtual law library

I. THE SANDIGANBAYAN ERRED IN NOT RECOGNIZING PETITIONER PCGGS EXERCISE OF ITS RIGHT OF FIRST REFUSAL AS STOCKHOLDER, TO PURCHASE THE 196,000 ETPI SHARES REGISTERED IN THE NAME OF UNIMOLCO. chanrobles virtual law library

II. THE SANDIGANBAYAN ERRED IN APPROVING/RATIFYING THE SALE OF THE 196,000 SHARES BY PRIVATE RESPONDENTS UNIMOLCO, BENEDICTO AND AFRICA IN FAVOR OF SMART. chanrobles virtual law library

Petitioner argues that it received the notice of UNIMOLCOs offer to sell its shares of stock only on August 30, 1996. The written notice, issued by Atty. Bayani K. Tan, ETPI Corporate Secretary, gave the stockholders, including petitioner, until September 26, 1996 within which to exercise their preemptive right. On September 24, 1996, petitioner sent a letter to the Corporate Secretary stating that the government is exercising its right of first refusal and offering payment thereof in the form of compensation or set-off against the assets of respondent Benedicto still due to the Philippine government under the Compromise Agreement. chanrobles virtual law library

Respondents UNIMOLCO, Benedicto and Andres L. Africa filed their Comment,[8 arguing that petitioners offer of payment by way of set-off was invalid, inasmuch as the Articles of Incorporation of ETPI specifically provided that tender of payment should be in cash, certified check or checks drawn on a Philippine bank. chanrobles virtual law library

Respondent SMART filed its Comment,[9 likewise arguing that petitioners proposal to off-set the purchase price for the shares of stock with assets of Benedicto did not constitute a valid tender of payment. Moreover, petitioner cannot use assets recovered as ill-gotten wealth for the purchase of the shares of stock because under Section 63 of Republic Act No. 6657, any amounts derived therefrom shall be appropriated to fund the Comprehensive Agrarian Reform Program. chanrobles virtual law library

On October 2, 1997, Victor Africa filed a Motion for Leave to Intervene and a Comment-in-Intervention.[10 He alleges that petitioners exercise of the right of first refusal is preconditioned on its being a stockholder of ETPI. However, intervenor has a pending motion before the Sandiganbayan precisely questioning petitioners right to become a transferee of ETPI shares and to enjoin the registration of petitioner as a legitimate stockholder in the Stock and Transfer Book of ETPI. On December 10, 1997, the motion for leave to intervene was granted and the Comment-in-Intervention was admitted.[11 chanrobles virtual law library







The petition is without merit. chanrobles virtual law library

The records of the case clearly show that the written notice by UNIMOLCO, the Offeror, of its intention to sell its 196,000 shares of stock was duly received on April 24, 1996 by the President and Chairman of the Board of ETPI. The Sandiganbayan correctly held that this was valid service of the written offer to the corporation, applying by analogy the Rules of Court provisions on service of summons. Petitioner does not dispute that the written notice to the President and Chairman of the Board of ETPI was service to the corporation. It merely argues that after receipt of the offer, ETPI did not act in accordance with the procedure laid down in the Articles of Incorporation. Thus, in its petition for review, petitioner states: chanrobles virtual law library

The April 24, 1996 offer sent to ETPI Chairman and President Melquiades Gutierrez did not become valid and effective as it was not able to completely comply with the requirements of Article 10 of the ETPI Articles of Incorporation. Indeed, after receipt by ETPI of the April 24, 1996 offer, ETPI never acted on it. Assuming that ETPI, as a corporation did not exercise its right of first refusal within the first thirty day period pursuant to Article 10, it did not send notices to then stockholders of record of ETPI about the offered sale and their privilege to exercise their rights of first refusal. In other words, the ETPI stockholders were denied of its formal notice from ETPI about the said offer to sell the 196,000 share of stock.[12 chanrobles virtual law library

Hence, the First Period of thirty days contemplated in the Articles of Incorporation commenced to run on April 24, 1996, giving the corporation until May 24, 1996 within which to exercise its right of first refusal. ETPIs inaction simply means that it did not desire to purchase the shares of stock. The stockholders right of first refusal, thus, accrued upon the expiration of the First Period and within the succeeding thirty days, known as the Second Period. The Sandiganbayan held that the First Period and the Second Period are continuous in character because the Second Period ends, in the very words of Article 10 of the ETPI Articles, thirty (30) days after the First Period, and the expiry date being thirty (30) days after the end of the First Period. [13 The Second Period, therefore, covered the period from May 24, 1996 to June 23, 1996. chanrobles virtual law library

Petitioner maintains that under the Articles of Incorporation, the Corporate Secretary of ETPI should have given the stockholders written notice of the offer to sell on or before the expiration of the First Period. However, Resolution No. 96-142, adopted by PCGG on June 21, 1996, states among others: chanrobles virtual law library

WHEREAS, on 4 June 1996, the PCGG received copy of a letter of 29 May 1996 from Atty. Juan de Ocampo, alleging that he is the Corporate Secretary of ETPI, copy of which is hereto attached, stating that under Article Tenth of the ETPI articles of Incorporation, all stockholders of record have the right of first refusal to purchase pro rata to their holdings in ETPI to expire 20 days (supposed to be 30) from expiry date of ETPIs right of first refusal which was allegedly 24 May 1996, giving the Government up to 18 June 1996 to exercise the right of first refusal to purchase up to 22,148 shares of stock.[14 chanrobles virtual law library

From the above, it clearly appears that, by petitioners own admission and contrary to its belated protestation, the procedure outlined in the Articles of Incorporation relating to the right of first refusal was observed. But petitioner takes exception to Atty. De Ocampos authority to act as Corporate Secretary of ETPI. In this connection, the Sandiganbayan held: chanrobles virtual law library

xxx. The question of who are the legitimate directors and officers of ETPI has been elevated to the Supreme Court but has not yet been finally resolved. This should not, however, detract from the fact that PCGG has actually been informed of the intended sale.[15 chanrobles virtual law library

We agree with the Sandiganbayan. The purpose of the notice requirement in Article 10 of the ETPI Articles of Incorporation is to give the stockholders knowledge of the intended sale of shares of stock of the corporation, in order that they may exercise their preemptive right. Where it is shown that a stockholder had actual knowledge of the intended sale within the period prescribed to exercise the right, the notice requirement had been sufficiently met. In the case at bar, PCGG had actual knowledge of UNIMOLCOs offer to sell its shares of stock. In fact, it issued Resolution No. 96-142 enjoining the sale of the said shares of stock to Smart. Petitioner, thus, cannot feign lack of notice.[16 chanrobles virtual law library

Parenthetically, PCGG had no more authority to enjoin the sale of UNIMOLCOs 196,000 shares of stock, as it endeavored to do in Resolution No. 96-142. As correctly found by the Sandiganbayan, since the 196,000 shares of stock had already been adjudicated by final judgment to Benedicto and UNIMOLCO, PCGG could no longer exercise power and authority over the same.[17 chanrobles virtual law library







Therefore, we sustain the Sandiganbayans ruling that petitioners right of first refusal was not seasonably exercised.[18 chanrobles virtual law library

Even on the assumption that petitioner exercised its right of first refusal on time, it nonetheless failed to follow the requirement in the Articles of Incorporation that payment must be tendered in cash or certified checks or checks drawn on a Philippine bank or banks. The set-off or compensation it proposed does not fall under any of the recognized modes of payment in the Articles. In order that compensation may be proper, Article 1279 of the Civil Code requires: chanrobles virtual law library

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other; chanrobles virtual law library

(2) That both debts consist in a sum of money, or if the things are consumable, they be of the same kind, and also of the same quality if the later has been stated; chanrobles virtual law library

(3) That the two debts be due; chanrobles virtual law library

(4) That they be liquidated and demandable, and chanrobles virtual law library

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor. chanrobles virtual law library

Petitioner sought the offsetting of the price of the shares of stock with assets of respondent Benedicto, whom it claimed was indebted to it for certain lands and dividends due to it under their Compromise Agreement. Benedicto was only a stockholder of UNIMOLCO, the Offeror. While he may be the majority stockholder, UNIMOLCO cannot be said to be liable for Benedictos supposed obligations to petitioner. To be sure, Benedicto and UNIMOLCO are separate and distinct persons. On the basis of this alone, there can be no valid set-off. Petitioner and UNIMOLCO are not principal debtors and creditors of each other. chanrobles virtual law library

Petitioner counters that UNIMOLCOs corporate fiction should be pierced since it is also owned by Benedicto. However, mere majority ownership of the stocks of a corporation is not per se a cause for piercing the corporate veil. There was no evidence that UNIMOLCOs corporate entity was used by respondent Benedicto to commit fraud or to do wrong on petitioner; neither was it shown that the corporate entity was merely a farce and that it was used as an alter ego, business conduit or instrumentality of a person or another entity or that piercing the corporation fiction is necessary to achieve justice or equity.[19 Only in these instances may the fiction be pierced and disregarded.[20 Being the party that invoked it, petitioner has the burden of substantiating by clear and convincing evidence that UNIMOLCOs corporate veil must be pierced. chanrobles virtual law library

Besides, petitioners claims on the lands and dividends allegedly due it from respondent Benedictos other business holdings are not enforceable in court. Only liquidated debts are enforceable in court, there being no apparent defenses inherent in them.[21 For compensation to take place, a distinction must be made between a debt and a mere claim. A debt is a claim which has been formally passed upon by the highest authority to which it can in law be submitted and has been declared to be a debt. A claim, on the other hand, is a debt in embryo. It is mere evidence of a debt and must pass through the process prescribed by law before it develops into what is properly called a debt.[22 There being no two debts for which either party may be said as principally bound to each other, again, there can be no set-off. chanrobles virtual law library

In the final analysis, the resolution of this case hinges on questions of fact. It is axiomatic that factual findings of the Sandiganbayan are conclusive on the Supreme Court.[23 None of the exceptions to this rule[24 is present in this case. chanrobles virtual law library

WHEREFORE, the petition is DENIED. The Resolutions of the Sandiganbayan dated December 6, 1996 and March 17, 1997 in Civil Case No. 0009 are AFFIRMED. chanrobles virtual law library

EN BANC[G.R. Nos. 104637-38. September 14, 2000]

SAN MIGUEL CORPORATION, NEPTUNIA CORPORATION LIMITED, ANDRES SORIANO III AND ANSCOR-HAGEDORN SECURITIES, INC., petitioners, vs. SANDIGANBAYAN (FIRST DIVISION), PHILIPPINE COCONUT








PRODUCERS FEDERATION, INC. (COCOFED), MARIA CLARA L. LOBREGAT, BIENVENIDO MARQUEZ, JOSE R. ELEAZAR, JR., DOMINGO ESPINA, JOSE GOMEZ, CELESTINO SABATE, MANUEL DEL ROSARIO, JOSE

MARTINEZ, JR., JOSE REYNALDO MORENTE AND ELADIO CHATTO, respondents.[G.R. No. 109797. September 14, 2000]

SAN MIGUEL CORPORATION, NEPTUNIA CORPORATION LIMITED, ANDRES SORIANO III AND ANSCOR-HAGEDORN SECURITIES, INC., petitioners, vs. SANDIGANBAYAN (FIRST DIVISION), PHILIPPINE COCONUT PRODUCERS FEDERATION, INC. (COCOFED), MARIA CLARA L. LOBREGAT, BIENVENIDO MARQUEZ, JOSE R. ELEAZAR, JR., DOMINGO ESPINA, JOSE GOMEZ, CELESTINO SABATE, MANUEL DEL ROSARIO, JOSE

MARTINEZ, JR., JOSE REYNALDO MORENTE AND ELADIO CHATTO, respondents.

D E C I S I O N

PUNO, J.:

It appears that on March 26, 1986, the Coconut Industry Investment Fund Holding Companies [1] ("CIIF" for brevity) sold 33,133,266 shares of the outstanding capital stock of San Miguel Corporation to Andres Soriano III of the SMC Group payable in four (4) installments.[2]

On April 1, 1986, Andres Soriano III paid the initial P500 million to the UCPB as administrator of the CIIF. The sale was transacted through the stock exchange and the shares were registered in the name of Anscor-Hagedorn Securities, Inc. (AHSI).On April 7, 1986, the Presidential Commission on Good Government (PCGG) then led by the former President of the Senate, the Honorable Jovito R. Salonga, sequestered the shares of stock subject of the sale. [3] Due to the sequestration, the SMC Group (hereinafter referred to as the petitioners) suspended payment of the balance of the purchase price of the subject stocks. In retaliation, the UCPB Group rescinded the sale.On June 2, 1986, UCPB and CIIF Holding Companies went to court. They filed a complaint with the Regional Trial Court of Makati against the petitioners for confirmation of rescission of sale with damages. [4] On June 5, 1986, the petitioners assailed in this Court the jurisdiction of the Makati RTC on the ground that primary jurisdiction was vested with the PCGG since the SMC shares were sequestered shares. [5] On August 10, 1988, we upheld the petitioners. We ordered, among others, the dismissal of the rescission case filed in the Makati RTC without prejudice to the ventilation of the parties' claims before the Sandiganbayan.[6]

The record shows that the petitioners and the UCPB Group were able to thresh out their dispute extra-judicially. In March 1990, they signed a Compromise Agreement and Amicable Settlement.[7] Its pertinent provisions state:"3.1. The sale of the shares covered by and corresponding to the first installment of the 1986 Stock Purchase Agreement consisting of Five Million SMC Shares is hereby recognized by the parties as valid and effective as of 1 April 1986. Accordingly, said shares and all stock and cash dividends declared thereon after 1 April 1986 shall pertain, and are hereby assigned, to SMC. x x x3.2. The First Installment Shares shall revert to the SMC treasury for dispersal pursuant to the SMC Stock Dispersal Plan attached as Annex "A-1" hereof. The parties are aware that these First Installment Shares shall be sold to raise funds at the soonest possible time for the expansion program of SMC. x x x3.3. The sale of the shares covered by and corresponding to the second, third and fourth installments of the 1986 Stock Purchase Agreement is hereby rescinded effective 1 April 1986 and deemed null and void, and of no force and effect. Accordingly, all stock and cash dividends declared after 1 April 1986 corresponding to the second, third and fourth installments shall pertain to CIIF Holding Corporations. xxx"[8](emphasis supplied)They likewise agreed to pay an "arbitration fee" of 5,500,000 SMC shares composed of 3,858,831 “A” shares and 1,641,169 “B” shares to the PCGG to be held in trust for the Comprehensive Agrarian Reform Program.[9]

On March 23, 1990, the petitioners and the UCPB Group filed with the Sandiganbayan a Joint Petition for Approval of the Compromise Agreement and Amicable Settlement. The petition was docketed as Civil Case No. 0102.[10]

On March 29, 1990, the Sandiganbayan motu proprio directed that copies of the Joint Petition be furnished to E. Cojuangco, Jr., M. Lobregat and others who are defendants in Civil Case No. 0033. The same SMC shares are the subject of Civil Case No. 0033 and alleged as part of the alleged ill-gotten wealth of former President Marcos and his "cronies."[11]

On April 25, 1990, the Republic of the Philippines, through the Office of the Solicitor General (OSG), opposed[12] the Compromise Agreement and Amicable Settlement. It contended that the involved coco-levy funds, whether in the form of earnings or dividends therefrom, or in the form of the value of liquidated corporate assets represented by all sequestered shares (like the value of assets sold/mortgaged to finance the P500M first installment), or in the form of cash, or, as in the case of subject "Settlement," in the form of "proceeds" of sale or of "payments" of certain alleged obligations are public funds. As public funds, the coco-levy funds, in any form or transformation, are beyond or "outside the commerce," and perforce not within the private disposition of private individuals.[13]

The reliefs prayed for by the Solicitor General state:"1. That the "Settlement" be stricken off the record or at most referred back to the PCGG for serious study and consideration. While the PCGG under its legal mandate (as sustained in G.R. No. 84895, "Republic v. Campos") in principle encourages settlement agreements on ill-gotten wealth to expedite recovery thereof for the benefit of the

http://sc.judiciary.gov.ph/jurisprudence/2000/sept2000/104637_38.htm#_edn13













Government, the herein privately proposed "Settlement" subject of the petition contains private proposals of "utilization and management of" public funds that are prejudicial to the Government , without "full disclosures" as normally required by PCGG and over which in respect of declarant immunity may even be granted.2. That this Petition be consolidated with, or treated as a premature motion or incident in Civil Case No. 0033, and brought by improper parties. To repeat, the plaintiff Republic through PCGG is not a party to what in effect will be a judicial compromise in Civil Case No. 0033. Nowhere does the "Settlement" mention that its terms are subject to the judicial outcome of this Civil Case No. 0033. It is to be emphasized that even in the "Pepsi-Cola Settlement" cited by the petitioners, the alleged loan payments therein to liquidate alleged obligations are subject in no uncertain terms to the final outcome of the main Civil Case No. 0033 pending before this Honorable Court,'The concern of the Court in matters such as this has always been to see to it that the properties in sequestration would be well (and profitably, if possible) preserved either for the government, if the plaintiff proves the 'crony' and 'ill-gotten' character of the property, or for the defendants if not,'considering that one of the reliefs prayed for or one of causes of action in the Republic's Complaint in Civil Case No. 0033 is precisely for Accounting and/or Damages. In the instant "Settlement," the "crony" and "ill-gotten character of the property" involved is a matter of public record if not public notoriety. Plaintiff Republic need not prove the public character of the coco-levy funds. This is a matter of settled law and jurisprudence, a "given" fact, to quote the Honorable Supreme Court."[14] (emphasis supplied)On April 18, 1990, Mr. Eduardo M. Cojuangco, Jr. moved to intervene alleging legal interest in the approval or disapproval of the Compromise Agreement and Amicable Settlement.[15]

On May 24, 1990, the Philippine Coconut Producers' Federation, Inc. (COCOFED), et al.[16] filed an "Omnibus Class Action Motion for Leave to Intervene and to Admit: (1) Opposition-in-Intervention, and (2) Compulsory Counter-Petition and Counterclaim for Damages."[17] They alleged that they are the ultimate beneficial owners of the SMC shares subject of the Compromise Agreement.On June 18, 1990, the PCGG filed its Manifestation [18] attaching a copy of the Resolution[19] of the Commission en banc dated June 15, 1990. PCGG joined the Solicitor General in praying that the Joint Petition for Approval of Compromise Agreement should be treated as an incident of Case No. 0033. [20] PCGG, however, interposed no objection to the implementation of the Compromise Agreement subject to the incorporation of the following provisions:"1. As stated in the COMPROMISE, the 5 million SMC shares (now 26,450,000) paid for by the P500 million first installment shall be delivered to SMC, kept in treasury, and sold as soon as feasible in accordance with a plan to be agreed upon by the Commission and SMC; provided, that SMC shall not unreasonably withhold its consent to a sales plan approved by PCGG.The P500 million paid by SMC as first installment shall be accounted for by UCPB and the CIIF companies to the extent respectively received by them, and any portion thereof in excess of the usual business needs of the possessor shall be delivered by it to the Commission, to be held in escrow for the ultimate owner.2. On Delivery Date, the stock certificates for the balance of the SHARES in the name of the 14 holding companies shall be delivered to PCGG and deposited with the Central Bank for safekeeping to await their sale in accordance with the plan of dispersal that PCGG and UCPB shall agree to establish for them. As soon as practicable, but with proper account of market conditions, all those shares shall be sold, and the proceeds thereof disposed as provided below. UCPB shall not unreasonably withhold its consent to a sales plan approved by PCGG in accordance with this paragraph.3. So much of the proceeds of the sale as may be necessary shall be used a) to finance the obligations of the CIIF Companies under the COMPROMISE, and b) to liquidate the obligations of the CIIF Companies to UCPB for the purchase price of the SHARES. The balance shall be kept by the PCGG in escrow to await final judicial determination of the ownership of the various coconut-related companies and of all the other assets involved here. The cash dividends that have been declared on the SHARES may be applied for the above purposes before proceeds from the sale of shares are realized. The balance of such cash dividends shall be held in escrow in the same manner as the sales proceeds.4. All SHARES shall continue to be sequestered even beyond Delivery Date. Sequestration on them shall be lifted as they are sold consequent to approval of the sale by the Sandiganbayan, and in accordance with the dispersal plan approved by the Commission. All of the SHARES that are unsold will continue to be voted by PCGG while still unsold.5. The consent of PCGG to the transfer of the sequestered shares of stock in accordance with the COMPROMISE, and to the lifting of the sequestration thereon to permit such transfer, shall be effective only when approved by the Sandiganbayan. The Commission makes no determination of the legal rights of the parties as against each other. The consent it gives here conforms to its duty to care for the sequestered assets, and to its purpose to prevent the repetition of the national plunder. It is not to be construed as indicating any recognition of the legality or sufficiency of any act of any of the parties."[21]

The petitioners and the UCPB Group filed their Joint Manifestation [22] accepting the conditions imposed by PCGG. They also opposed the intervention of COCOFED, et al.On October 12, 1990, the petitioners moved for early resolution of the Joint Petition for Approval of the Compromise Agreement and Amicable Settlement together with its pending incidents.[23]











On October 16, 1990, the Sandiganbayan issued an Order[24] integrating Case No. 0102 as an incident of Civil Case No. 0033, thus:"Considering the interest expressed by the different parties in Civil Case No. 0033, and considering further that the subject matter of the amicable settlement which is presented before this Court for approval, the Court has deemed it best that Civil Case No. 0102 be integrated with, and be made an incident to, Civil Case No. 0033. xxx" [25]

The petitioners did not challenge the Order.In its Manifestation[26] dated November 19, 1990, the Solicitor General maintained his Opposition to the Compromise Agreement and Amicable Settlement.On November 23, 1990, Sandiganbayan deferred consideration of the Compromise Agreement "until the parties thereto take the initiative to restore the same in the Court's calendar." [27] On February 5, 1991, it also deferred resolution of Cojuangco's Motion to Intervene.On February 21, 1991, the UCPB Group filed a Motion to set the Joint Petition for hearing. [28] In its Order dated February 27, 1991, the Sandiganbayan required the parties to comment on the propriety of the said court's continuing to entertain the Compromise Agreement.[29] In compliance with the said Order, the petitioners filed its Manifestation dated March 15, 1991 expressly recognizing the jurisdiction of the Sandiganbayan to rule on the petition for the approval of the compromise agreement.31

On June 3, 1991, the Sandiganbayan issued the following Resolution:31

"It appearing that the sequestered character of the shares of stock subject of the instant petition for the approval of the compromise agreement, which are shares of stock in the San Miguel Corporation in the name of the CIIF Corporations, is independent of the transaction involving the contracting parties in the Compromise Agreement between what may be labeled as the "SMC Group" and the "UCPB Group," and it appearing further that the said sequestered SMC shares of stock have not been physically seized nor taken over by the PCGG, so much so that the reversions contemplated in said Compromise Agreement are without prejudice to the perpetuation of the sequestration thereon, until such time as a judgment might be rendered on said sequestration (which issue is not before this Court as (sic) this time), and it appearing finally that the PCGG has not interposed any objection to the contractual resolution of the problems confronting the "SMC Group" and the "UCPB Group" to the extent that the sequestered character of the shares in question is not affected, this Court will await the pleasure of the Presidential Commission on Good Government before consideration of the Compromise Agreement is reinstated in the Court's calendar.While this is, in effect, a denial of the "UCPB Group's" Motion to set consideration of the Compromise Agreement herein, this denial is without prejudice to a reiteration of the motion or any other action by the parties should developments hereafter justify the same."On July 4, 1991, the petitioners and the UCPB Group filed a Joint Manifestation that they have implemented the Compromise Agreement and Amicable Settlement with the conditions set by the PCGG and accordingly, withdrew their Joint Petition.32 They informed that they have executed the following corporate acts:"a. On instructions of the SMC Group, the certificates of stock registered in the name of Anscor-Hagedorn Securities, Inc. (AHSI) representing 175,274,960 SMC shares were surrendered to the SMC corporate secretary.b. The said SMC shares were reissued and registered in the record books of SMC in the following manner:i) Certificates for 25,450,000 SMC shares were registered in the name of SMC, as treasury;ii) Certificates for 144,324,960 SMC shares were registered in the name of the CIIF Holding Companies;iii) Certificates for 5,500,000 SMC shares were registered in the name of the PCGG.c. The UCPB Group has delivered to the SMC Group the amount of P500,000,000.00 in full payment of the UCPB preferred shares.d. The SMC Group delivered to the UCPB Group the amount of P481,628,055.99 representing accumulated dividends (from April 1, 1986) on the shares reverted to the CIIF Holding Companies."33

The PCGG manifested that it has no objection to the action taken by the petitioners and the UCPB Group.34 COCOFED, et al. and Cojuangco, Jr. filed their respective motions,35 both dated July 4, 1991 to nullify the implementation of the compromise agreement.Acting on the Joint Manifestation of Implementation of Compromise Agreement and of Withdrawal of Petition, the Sandiganbayan on July 5, 1991 noted the same "with the observation that the PCGG, the UCPB Group and the SMC Group shall always act with due regard to the sequestered character of the shares of stock involved herein as well as the fruits thereof, more particularly to prevent the loss or dissipation of their value" and "without prejudice to whatever might be the resolution of this Court on the Motion to Nullify the Compromise Agreement filed by Eduardo Cojuangco, Jr."36

On July 8, 1991, the Sandiganbayan issued two (2) Orders. The first was to hear the defendants in Civil Case No. 0033 on the matter of the Compromise Agreement whether under Civil Case No. 0102 or as an incident to Civil Case No. 0033.37 The second required the petitioners and the UCPB Group as well as PCGG to formally state in writing the different holders of the SMC shares subject of the compromise agreement. The Sandiganbayan further ordered PCGG to indicate on the face of the subject shares their sequestered character.38

On July 16, 1991, petitioners filed their Manifestation where they declared that Stock Certificate Nos. A 0004129 and A 0015556 representing 25,450,000 shares were issued in the name of SMC as treasury stocks.39

















On July 23, 1991, the Sandiganbayan noted the Manifestations of the PCGG, the petitioners and the UCPB group that the certificates of stock for the subject SMC shares which are intended to form part of the corporation's treasury shares have been marked "sequestered" by SMC and are in the custody of the PCGG.40

On August 5, 1991, the Sandiganbayan issued an order requiring SMC to deliver the certificates of stock representing the subject matter of the Compromise Agreement to the PCGG in view of the oral manifestations of Commissioner Maceren seeking clarification of portions of Sandiganbayan's July 23, 1991 Resolution.41

On August 9, 1991, the UCPB Group filed a Motion to Allow it to Utilize Dividends on SMC shares for the payment of the loans of CIIF Companies to UCPB.42 The motion was granted on September 2, 1991.43

On August 15, 1991, COCOFED, et al. filed their Urgent Motion to Compel Surrender of the Cash Dividends pertaining to (a) the 4.5 million SMC shares allegedly delivered to PCGG in trust for the Comprehensive Agrarian Reform Program and (b) the SMC shares allegedly delivered to SMC as treasury shares.44

On August 22, 1991, petitioners filed a Manifestation and Motion stating that the SMC shares have reverted to the SMC treasury as treasury shares and are not entitled to dividends.45

On October 1, 1991, the Sandiganbayan issued a Resolution allowing COCOFED, et al. to intervene.46 On March 30, 1992, it denied the separate motions for reconsideration filed by the petitioners and the UCPB Group.47

On October 25, 1991, the Sandiganbayan issued another Resolution requiring SMC to deliver the 25.45 million SMC treasury shares to the PCGG.48 On March 18, 1992, it denied petitioners' Motion for Reconsideration and further ordered SMC to pay dividends on the said treasury shares and to deliver them to the PCGG.49

On April 13, 1992, petitioners filed a Motion to Dismiss Intervention and/or Motion for Clarification with Ad Cautelam Motion to Suspend Time.50 The motion was denied in the Sandiganbayan's Resolution dated March 17, 1993.51

Before this Court now are two (2) consolidated petitions for certiorari under Rule 65 of the Rules of Court filed by petitioners San Miguel Corporation, Neptunia Corporation Limited, Andres Soriano III and Anscor-Hagedorn Securities, Inc. They seek to annul the following resolutions of the Sandiganbayan:In G.R. No. 104637-38:1. The Resolution dated October 25, 1991 reiterating52 that all Certificates of Stock representing sequestered shares in the SMC be physically deposited with the PCGG and requiring SMC to pay the cash dividendsdue or actually earned by the said shares and deliver them to PCGG;53

2. The Resolution dated March 18, 199254 requiring SMC to deliver to the PCGG the 25.45 million shares as well as the cash and/or stock dividends which have accrued thereto from March 26, 1986 to date and which might have further accrued thereto had not said shares of stock been declared treasury shares.55

In G.R. No. 109797:1. The Resolution dated September 30, 1991 allowing COCOFED and other private respondents to intervene in Case No. 0102 and admitting their Counter-Petition;56

2. The Resolution dated March 27, 1992 denying the motions of petitioners and the UCPB Group for reconsideration of the Resolution dated September 30, 1991; and57

3. The Resolution dated March 17, 1993 denying petitioners' motion to dismiss the Counter-Petition filed by COCOFED, et al.58

Petitioners contend:In G.R. No. 104637-38:"GROUNDS FOR CERTIORARIThe questioned orders of the Sandiganbayan were issued without or in excess of its jurisdiction, and with grave abuse of discretion amounting to lack of jurisdiction. They should be set aside as null and void.AThe questioned orders would deprive SMC of property already paid for. They unduly protect the claimants of sequestered companies, at the expense of SMC.BThe Sandiganbayan over-reached its jurisdiction in issuing the questioned orders.1. The fact of sequestration, by itself, does not mean that the possessor of the sequestered assets must be dispossessed thereof at all costs. In the present case, there are weighty reasons why the treasury shares and any "dividends" thereon should remain with SMC.2. The purported issue of ownership does not justify the dispossession of SMC of these shares.CThe PCGG is the entity primarily charged with the duty and responsibility of preserving sequestered assets. Absent any showing that the PCGG betrayed this duty when it allowed SMC to keep the shares already paid for in treasury, the Sandiganbayan has no jurisdiction to over-rule the PCGG's judgment.DThe questioned orders will foment litigation, in violation of the clear policy of the law that compromise is encouraged.EThe sequestered (sic) assets threaten and put the sequestered assets at risk.FThe Sandiganbayan gravely abused its discretion when it treated the contracting parties to the compromise agreement differently."59





















In G. R. No. 109797:"GROUNDS TO GRANT PETITIONThe Sandiganbayan acted without or in excess of jurisdiction or with grave abuse of discretion in issuing the questioned Resolutions in that:ICivil Case No. 0102 has been withdrawn. COCOFED, et al. cannot intervene in a withdrawn case.IIThe Sandiganbayan's motu proprio consolidation of Case 102 with Case 33 did not make the SMC Group parties to Case 33. It did not result in a merger of the two cases which preserved their separate identity.IIIBy their own allegations, COCOFED, et al. have no cause of action.1. COCOFED, et al. are not real parties in interest. They deny the Sandiganbayan's basis for finding that they are real parties in interest, i.e., that the SMC shares were acquired with coco-levy funds.2. COCOFED, et al. are estopped from claiming to act for the UCPB Group.IVCOCOFED, et al. are bound by the business judgment of the UCPB Group that the compromise is to the best interest of the UCPB Group.VIn violation of the public policy that frowns on litigation and encourages fair compromise, the questioned resolutions foment litigation on issues settled by the compromise.VICOCOFED, et al. paid no docket fees for the counter-petition. The Sandiganbayan acquired no jurisdiction over the counter-petition."60

Vis-à-vis these arguments, private respondents COCOFED, et al. contend:In G.R. No. 104637-38:I. That the Sandiganbayan has not yet resolved the matter of the compromise agreement. By insisting that it has implemented the compromise agreement and thus need not turn over the SMC shares corresponding to the P500 million first installment and the dividends thereon to the PCGG, the SMC Group is preempting the Sandiganbayan.II. The Order of the Sandiganbayan to turn over the SMC shares corresponding to the P500 million first installment and the dividends thereon is proper because the SMC Group is not entitled thereto, having forfeited the first installment as liquidated damages for its refusal and failure to make subsequent installment payments.III. At any rate, the transformation of the SMC shares into treasury shares is but part and parcel of the compromise agreement which has not yet been approved. Thus, it is premature for the SMC Group to treat these shares as such and to refuse to turn over the same as well as the accrued dividends thereon to the PCGG, as ordered by the Sandiganbayan. Moreover, the transformation is extremely disadvantageous to the CIIF Companies.IV. The PCGG appointed directors of UCPB, the CIIF Companies, and SMC cannot enter into a compromise agreement which is tantamount to a disposition or dissipation of sequestered assets. Moreover, the PCGG is not entitled to any arbitration fee.V. While the law encourages amicable settlements, the law likewise provides that any compromise should not only be legal but must also be fair. In this case, the proposed compromise is contrary to law and grossly disadvantageous to the CIIF Companies, UCPB and the coconut farmers/producers.VI. The perceived danger of risk on the sequestered assets is purely speculative and is not supported by adequate proof. Moreover, the SMC shares are sufficient to cover the losses which may be sustained in pursuing the recovery of the SMC shares.VII. The CIIF Companies, being the disputed owners of the SMC shares, are entitled to have the dividends on the SMC shares applied to its indebtedness to UCPB. On the other hand, until the question of which entity is entitled thereto is settled, the SMC shares corresponding to the P500 million first installment and the dividends thereon should be turned over to the PCGG.61

and in G.R. No. 109797:I. Civil Case No. 0102 may not be withdrawn sans the approval of the Sandiganbayan. Further, the filing by COCFED, et al. of the Intervention was in accordance with the ruling in Soriano III case which vests on COCOFED, et al. the right to ventilate its claims over the SMC shares.II. The COCOFED case settled with finality that COCOFED, et al. are real parties in interest to the coconut levy funds as well as the corporations organized and investments acquired or funded from out of the coconut levy funds.III. Where the business judgment is unsound and violative of law or public policy, affected persons may question such decision.IV. The admission of the intervention is consistent with the ruling laid down in the Soriano III case.V. The intervention is in the nature of an Answer with Compulsory Counterclaim. As such, the Sandiganbayan acquired jurisdiction despite non-payment of docket fees.62

We stress at the outset that the instant petitions were brought to us through a special civil action of certiorari under Rule 65 of the Rules of Court to annul and set aside the above mentioned Sandiganbayan resolutions for having been allegedly issued without or in excess of jurisdiction and with grave abuse of discretion. To justify the issuance of




the writ of certiorari, the abuse of discretion must be grave, as when the power is exercised in an arbitrary or despotic manner by reason of passion or personal hostility, and it must be so patent as to amount to an evasion of positive duty or to a virtual refusal to perform the duty enjoined, or to act at all, in contemplation of law, as to be equivalent to having acted without jurisdiction.63 We shall now use this unyielding yardstick.RE: ISSUE OF DELIVERY OF CERTIFICATES OF STOCK OF SMC SHARES AND THE DIVIDENDS THEREON TO THE PCGG IN G.R. NO. 104637-38

We find no grave abuse of discretion on the part of Sandiganbayan when it ordered the petitioners to deliver the treasury shares to PCGG and pay their corresponding dividends for the following reasons:First. The cases at bar do not merely involve a compromise agreement dealing with private interest. The Compromise Agreement here involves sequestered shares of stock now worth more than nine (9) billions of pesos, per estimate given by COCOFED.64 Their ownership is still under litigation. It is not yet known whether the shares are part of the alleged ill-gotten wealth of former President Marcos and his "cronies." Any Compromise Agreement concerning these sequestered shares falls within the unquestionable jurisdiction of and has to be approved by the Sandiganbayan. The parties themselves recognized this jurisdiction. In the Compromise Agreement itself, the petitioners and the UCPB Group expressly acknowledged the need to obtain the approval by the Sandiganbayan of its terms and conditions, thus:“5. Unless extended by mutual agreement of the parties, the 'Delivery Date' shall be on the 10th Day from and after receipt by any party of the notice of approval of this Compromise Agreement and Amicable Settlement by the Sandiganbayan. Upon receipt of such notice, all other parties shall be immediately informed.”65 (emphasis supplied)The PCGG Resolution of June 15, 1990 also imposed the approval of the Sandiganbayan as a condition sine qua non for the transfer of these sequestered shares of stock, viz:"4. All SHARES shall continue to be sequestered even beyond Delivery Date. Sequestration on them shall be lifted as they are sold consequent to approval of the sale by the Sandiganbayan, and in accordance with the dispersal plan approved by the Commission. All of the SHARES that are unsold will continue to be voted by PCGG while still unsold.5. The consent of PCGG to the transfer of the sequestered shares of stock in accordance with the COMPROMISE, and to the lifting of the sequestration thereon to permit such transfer, shall be effective only when approved by the Sandiganbayan. The Commission makes no determination of the legal rights of the parties as against each other. The consent it gives here conforms to its duty to care for the sequestered assets, and to its purpose to prevent the repetition of the national plunder. It is not to be construed as indicating any recognition of the legality or sufficiency of any act of any of the parties."66 (emphasis supplied)Thus, the petitioners voluntarily submitted to the jurisdiction of the Sandiganbayan by asking for the approval of the said Compromise Agreement. They stated in their Manifestation dated March 15, 199167 that:"1. The Compromise Agreement subject matter of this petition categorically states that `(a)ll the terms of th(e) Agreement are subject to approval by the Presidential Commission on Good Government (PCGG) as may be required by Executive Orders numbered 1, 2, 14 and 14-A. (T)he Agreement and the PCGG approval thereof shall be submitted to the Sandiganbayan.’ x x xPCGG has consented to the Compromise Agreement. But its consent is 'effective only when approved by the Sandiganbayan' (PCGG Resolution dated 15 June 1990, In Re: Compromise Agreement between San Miguel Corporation, et al. and United Coconut Planters Bank, et al.). Petitioners accepted this condition, and incorporated by reference such condition as an integral part of the Compromise Agreement ."68 (emphasis supplied)In fine, the jurisdiction of the Sandiganbayan to pass upon the parties’ Compromise Agreement is beyond dispute.Second. Given its undisputed jurisdiction, the Sandiganbayan ordered that the treasury shares should be delivered to PCGG and that their dividends should be paid pending determinationof their real ownership which is the key to the question whether they are part of the alleged ill-gotten wealth of former President Marcos and his "cronies."We cannot condemn and annul this order as capricious. In the exercise of its discretion, the Sandiganbayan can require a party-litigant to deliver a sequestered property to the PCGG. We held in Baseco vs. PCGG69 that "the power of the PCGG to sequester property claimed to be 'ill-gotten' means to place or cause to be placed under its possession or control said property, or any building or office wherein any such property and any records pertaining thereto may be found, including 'business enterprises and entities,' - - - for the purpose of preventing the destruction, concealment or dissipation of, and otherwise conserving and preserving the same - - - until it can be determined, through appropriate judicial proceedings, whether the property was in truth 'ill-gotten,' i.e. acquired through or as a result of improper or illegal use or the conversion of funds belonging to the government or any of its branches, instrumentalities, enterprises, banks or financial institutions, or by taking undue advantage of official position, authority, relationship, connection or influence, resulting in unjust enrichment of the ostensible owner and grave damage and prejudice to the State."70

The order of the Sandiganbayan regarding the subject treasury shares is merely preservative in nature. When the petitioners and UCPB Group filed their Joint Manifestation of Implementation of the Compromise Agreement and of Withdrawal of Petition, the Sandiganbayan cautioned that "the PCGG, the UCPB and the SMC Group shall always act with due regard to the sequestered character of the shares of stock involved as well as the fruits thereof, more particularly to prevent the loss or dissipation of their value."71 The caution was wisely given in view of the many










contested provisions of the Compromise Agreement. For one, the Sandiganbayan observed that the conversion of the SMC shares to treasury shares will result in a change in the status of the sequestered shares in that:1. When the SMC converts these common shares to treasury stock, it is converting those outstanding shares into the corporation's property for which reason treasury shares do not earn dividends.2. The retained dividends which would have accrued to those shares if converted to treasury would go into the corporation and enhance the corporation as a whole. The enhancement to the specific sequestered shares, however, would be only to the extent aliquot in relation to all the other outstanding SMC shares.3. By converting the 26.45 million shares of stock into treasury shares, the SMC has altered not only the voting power of those shares of stock since treasury shares do not vote, but the SMC will have actually enhanced the voting strength of the other outstanding shares of stock to the extent that these 26.45 million shares no longer vote.72

These significant changes in the character of the SMC shares cannot be denied. In Commissioner of Internal Revenue vs. Manning,73 we explained the limited nature of treasury shares, thus:"Although authorities may differ on the exact legal and accounting status of the so-called 'treasury shares,' they are more or less in agreement that treasury shares are stocks issued and fully paid for and re-acquired by the corporation either by purchase, donation, forfeiture or other means. Treasury shares are therefore issued shares, but being in the treasury they do not have the status of outstanding shares. Consequently, although a treasury share, not having been retired by the corporation re-acquiring it, may be re-issued or sold again, such share, as long as it is held by the corporation as a treasury share, participates neither in dividends, because dividends cannot be declared by the corporation to itself, nor in the meetings of the corporation as voting stock , for otherwise equal distribution of voting powers among stockholders will be effectively lost and the directors will be able to perpetuate their control of the corporation, though it still represents a paid-for interest in the property of the corporation. The foregoing essential features of a treasury stock are lacking in the questioned shares..."74 (emphasis supplied)For another, the payment to the PCGG of an arbitration fee in the form of 5,500,000 of SMC shares75 is denounced as illegal, shocking and unconscionable.76 COCOFED, et al. have assailed the legal right of PCGG to act as arbiter as well as the fairness of its acts as arbiter. COCOFED, et al. estimate that the value of the SMC shares given to PCGG as arbitration fee which allegedly is not deserved, can run to P1,966,635,000.00.77 This is a serious allegation and the Sandiganbayan cannot be charged with grave abuse of discretion when it ordered that SMC should betemporarily dispossessed of the subject treasury shares and that SMC should pay their dividends while the Compromise Agreement involving them is still under question.Petitioners cannot rely on the case of First Phil. Holdings Corp. vs. Sandiganbayan78 to justify their insistence that the P500 million payment made by Soriano III should be validated. They contend that the rules encouraging amicable settlement in civil cases should apply to cases involving sequestered properties.79 In First Phil. Holdings, this Court gave due course to the petition and ordered the Sandiganbayan to approve the PCGG Resolution lifting the sequestration of MERALCO shares. We noted that the Republic of the Philippines has agreed to settle the controversy and the agreement will not in any way prejudice the rights of third persons.In the cases at bar, the record is clear that the Republic of the Philippines, through the Office of the Solicitor General, vigorously opposed the Compromise Agreement on legal and moral grounds. COCOFED, et al. also opposed and contend that the conversion of the SMC shares into treasury shares is highly prejudicial to the interests of the coconut farmers. It cannot be gainsaid that if it is later proved that SMC is not the lawful owner of the shares in question, what the adjudged lawful owner will receive are treasury shares with diminished value. The impugned order of theSandiganbayan was issued to avoid this mischief.Petitioners also argue that the Sandiganbayan gravely abused its discretion when it treated the contracting parties to the Compromise Agreement differently.80 They argue that it should not have allowed the dividend income of the sequestered shares in the name of the CIIF Holding Companies to be applied to their indebtedness to the UCPB. Again, we do not agree for the order of the Sandiganbayan is consistent with the need to preserve and enhance the value of the sequestered assets. We quote its explanation:"The application of the dividend income of the CIIF-owned SMC shares (which remain sequestered) to the debts of these CIIF companies in favor of the UCPB was meritorious on its own account.The CIIF companies remain sequestered companies; the shares of stock in these companies and in the UCPB remain sequestered. If the UCPB shares and the CIIF companies (and, therefore, their assets and properties) are adjudged to have been 'ill-gotten' and 'crony-owned,' then all the sequestered properties, including the SMC shares and the resulting dividends will go to the government; otherwise, the CIIF companies will go to their registered stockholders, i.e., allegedly the coconut farmers, and the debts of the CIIF companies to the UCPB will have been duly paid or diminished. The period of sequestration will not have been unduly prejudicial to these corporations or to the coconut farmers.Furthermore, if the debts of the CIIF companies to the UCPB had remained unpaid or unserviced at all, the bank itself (which is also heavily sequestered) would also suffer since it would, according to the UCPB, be violating the instructions of the Monetary Board (MB) thereon (p. 546, Record III). Compliance with the MB's instructions would save the UCPB from punitive action from the Central Bank.The release of the dividends in this case would, therefore, protect the contingent rights of the coconut farmers as well as of the Republic in the UCPB itself. After all, nobody else is in contention for the benefits resulting from the payment of the debts of the CIIF companies except for the Government by reason of the sequestrations imposed and the










registered stockholders thereof. Nobody else would suffer the consequences if the SMC shares owned by the CIIF companies were seized by the UCPB and/or the UCPB became impaired should the heavy debts of the CIIF companies not be serviced or partially paid.2. On the other hand, the SMC Group has not justified its desire to retain the custody of the 25.45 million sequestered shares of stock, which it had converted to Treasury Shares despite sequestration, and to retain the dividends due thereon, on its own merits.The SMC Group's primary justification for non-compliance with the Resolution of this Court requiring it to turn over the certificates of stock for the 25.45 million sequestered shares as well as the cash dividends already accrued thereon is the fact that the shares of stock have allegedly now become Treasury Shares.The SMC Group, however, forgets two things:'(a) Under the Corporation Code 'Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by, the issuing corporation by purchase, redemption, donation or through some lawful means . . .' (Sec. 9, B.P. Blg. 68, Corporation Code). These 26.45 million shares of stock or any portion thereof can, therefore, become Treasury Shares, i.e., property of the San Miguel Corporation, only if the sale between the UCPB Group and the SMC Group is allowed; otherwise these shares cannot even begin to be deemed to have been 're-acquired by the issuing corporation,' i.e., the San Miguel Corporation;(b) Even then, under the AGREEMENT between the UCPB Group and the SMC Group on March 26, 1986 for the sale of 33.1 million shares of SMC, the buyers were not only the San Miguel Corporation but also Andres Soriano, III, the Neptunia Corporation Limited of Hongkong and the Anscor-Hagedorn Securities, Inc. Under the letter of the PCGG Commissioner Ramon Diaz dated May 19, 1986 (item No. 6, supra), the Corporate Secretary of the San Miguel Corporation was forbidden from recording the transfer, conveyance, and encumbrance of these shares without the PCGG's approval. This was by virtue of the PCGG's powers under Sec. 2 of E.O. No. 2.'Unless, therefore, the right of Neptunia, Andres Soriano, III and the Anscor-Hagedorn Securities, Inc. to these 26.45 million shares shall have been transferred to the SMC, the SMC cannot be deemed to have 'reacquired' these shares. They would remain co-owned by all four (4) entities.The SMC Group's claim, therefore, that these 26.45 million shares are now Treasury Shares is unfounded.But even if, indeed, these shares are treasury shares, they remain sequestered so that any movement of these shares cannot be of any permanent character that will alter their being sequestered shares and, therefore, in 'custodia legis,' that is to say, under the control and disposition of this Court.It must finally be said that the conversion of the 26.45 (or 25.45) million shares by the SMC Group into Treasury Shares is of the SMC Group's own making and the SMC Group cannot perform acts that will, by its own say-so, take property away from 'custodia legis.'The position taken by the SMC Group here is self-serving and unacceptable. It is also contrary to jurisprudence."81

The claim of petitioners to fairness hardly impresses. It is planted on the assumption that their purchase of the subject shares is above board. The assumption begs the question for the Sandiganbayan has yet to decide the real ownership of the subject shares, i.e., whether or not they are part of the alleged illegal wealth of former President Marcos and his "cronies." Nor have petitioners shown that they will suffer a legal prejudice if they deliver the shares and the dividends thereon to the PCGG. It need not be stressed that in the event the petitioners are found to be the lawful owners of these shares, they will be awarded the cash and stock dividends which have accrued thereon. We agree with the conclusion of the Sandiganbayan in its assailed Resolution of March 18, 1992 that "the SMC Group has not justified its desire to retain the custody of the 25.45 million sequestered shares of stock, which it had converted to treasury shares despite sequestration, and to retain the dividends due thereon, on its own merits."82

More unimpressive is petitioners' submission that the "delivery of the shares to the PCGG may create legal problems and may give an impression that these shares are outstanding and may be sold and transferred, when under the law, all that can be done is for SMC to reissue the shares pursuant to procedures mandated by the applicable laws."83 Such fear is clearly unfounded and needs no elaborate refutation.RE: ISSUE Of INTERVENTION OF COCOFED, ET AL. IN CASE NO. 0102

We also affirm the resolution of the Sandiganbayan allowing the intervention of COCOFED, et al. in Civil Case No. 0102. It is the posture of the petitioners that intervention is improper since Case No. 0102 has already been withdrawn as of July 4, 1991. They hinge the right to withdraw the Joint Petition to approve their Compromise Agreement on section 1, Rule 17 of the Rules of Court.84 We do not agree.First. The right of COCOFED, et al. to intervene in cases involving these SMC shares has long been recognized by this Court. In Soriano III v. Yuzon,85 we ruled:"x x xThe Philippine Coconut Producers Federation (COCOFED) also came into the picture. A Manifestation dated March 15, 1988 was filed in its behalf by its President, Ma. Clara Lobregat. The Manifestation contained a discussion of the laws passed (and the official action taken pursuant thereto) establishing the coconut levy and providing for the management and utilization of the funds thereby generated. It advocated the thesis that the question of whether or not the investments of the coconut levy fund constitute public property, essentially involves issues of fact and law which should be resolved in the first instance by a trial court of competent jurisdiction at a hearing on the merits, and the COCOFED should be conceded the right to demonstrate at such a hearing that the coconut farmers, through the so-called CIIF companies, and not Mr. Cojuangco, Jr. or any of his companies, are the beneficial owners of the






disputed block of SMC shares. Alternatively, the COCOFED prayed that it be given the opportunity to substantiate the points it thus raises in G.R. No. 74910, or in Civil Case No. 13865 of the Regional Trial Court at Makati, or in Civil Case No. 0033 of the Sandiganbayan entitled 'Republic v. Eduardo Cojuangco, Jr.. et al.,' or in any other case which may hereafter be filed in litigation of the issues."86

In said case, we dismissed all the actions87 brought to us, directed the dismissal of cases pending before the Regional Trial Courts and Securities and Exchange Commission, and ruled that:"This dismissal is without prejudice to the assertion and ventilation before the Sandiganbayan by the parties of their respective claims by such appropriate modes as are prescribed by law. x x x"88

Second. We again emphasize that petitioners and the UCPB Group voluntarily submitted to and invoked the jurisdiction of the Sandiganbayan when they filed their Joint Petition for Approval of the Compromise Agreement and Amicable Settlement. The Sandiganbayan then immediately exercised its jurisdiction as can be gleaned from the numerous hearings conducted and orders it issued resolving various incidents of the case. Among others, it ordered persons and entities with known legal interest on the subject shares to file their comments on the Joint Petition.This order was not seasonably challenged by the petitioners. Pursuant thereto, COCOFED, et al., claiming beneficial interests on the shares, intervened. Mr. Eduardo Cojuangco, Jr. also manifested his intent to intervene. The right of these persons and entities to have their claims heard and resolved cannot be defeated by the petitioners by the simple act of withdrawing their Joint Petition for Approval of Compromise Agreement and immediately implementing its provisions. To allow the unilateral withdrawal is to allow the petitioners to make a plaything of the jurisdiction of the Sandiganbayan, submit to it when it is in their favor and repudiate it when it threatens to turn against their interest. Jurisdiction is vested by law and the all too familiar rule is that once a court has assumed jurisdiction over a case, its jurisdiction shall continue until the case is terminated.89

Third. Petitioners cannot invoke section 1, Rule 17 of the Rules of Court which provides "that a complaint may be dismissed by the plaintiff by filing a notice of dismissal at any time before service of the answer or of a motion for summary judgment." The provision contemplates a complaint where there is a plaintiff and a defendant with real conflicting interests. The cases at bar, however, are different. They started as a Joint Petition for Approval of Compromise Agreement and Amicable Settlement. Known persons and entities claiming adverse interests on the subject shares were not impleaded. In other words, no party that can assail the validity of the Compromise Agreement that involves billions of pesos and substantial state interests was impleaded in any capacity. Yet, petitioners are aware that the subject shares of stock are sequestered and their ownership is still under litigation in Case No. 0033. The attempt to bypass these persons and entities with interests in the subject shares is hardly tenable and the withdrawal of the petition and its immediate implementation when they opposed it makes petitioners' posture doubly untenable.There is another reason why petitioners cannot rely on section 1, Rule 17 of the Rules of Court. This provision allows the plaintiff to withdraw his complaint before defendant has answered it or filed a motion for summary judgment. In fine, before the defendant has pleaded to the complaint. At that point, defendant has hardly been exposed to any kind of damage or prejudice, hence, the plaintiff is unilaterally allowed to withdraw his complaint. In the cases at bar, before the petitioners and the UCPB Group can file their Manifestation of Withdrawal of Joint Petition for Approval of Compromise Agreement and Amicable Settlement, COCOFED, et al. have already filed their Opposition in Intervention and Compulsory Counter-Petition and Counterclaim for Damages. In the same vein, the Republic, thru the OSG, has already filed its Opposition. These pleadings of COCOFED, et al. and the Republic assail the legality of the Compromise Agreement. They can be deemed as answers to the Joint Petition, hence, petitioners can no longer unilaterally withdraw their Joint Petition.Fourth. Petitioners further contend that COCOFED, et al. cannot intervene because Case No. 0102 is not an action or a suit and they did not implead any adverse party and set forth no claims. Petitioners' contention cannot merit the assent of the Court. Regardless of its nature as an action or suit, the fault of the Joint Petition precisely lies in the attempt to bypass parties with legitimate interests on the subject shares. The existence of these parties is known to the petitioners yet they were not impleaded. Their failure to be impleaded is bad enough but worse still is petitioners' submission that since they were not impleaded, ergo, they cannot intervene. It is now a musty principle of justice that a right cannot arise from a wrong. Moreover, the Sandiganbayan did not treat the Joint Petition as an "action or suit" but as a mere incident of Case No. 0033. In any event, section 1, Rule 19 of the Rules of Court provides the rule on who can intervene, viz: "A person who has a legal interest in the matter in litigation, or in the success of either of the parties, or an interest against both, or is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or of an officer thereof, may, with leave of court, be allowed to intervene in the action." The legal interest of COCOFED, et al. which justifies their intervention is extensively discussed in the impugned resolution of the Sandiganbayan, viz:"In all fairness, the motion to intervene filed by COCOFED, et al. must be granted for the following reasons:1. The coconut planters and producers represented by COCOFED do have a legal interest in the matter of litigation and are so situated as to be adversely affected by the disposition of the sequestered shares of stock subject matter of the compromise agreement.The rule on intervention (section 2, Rule 12 of the Rules of Court) states:'Sec. 2. Intervention - A person may, before or during a trial be permitted by the court, in its discretion, to intervene in an action, if he has legal interest in the matter of litigation, or in the success of either of the parties, or an interest





against both, or when he is so situated as to be adversely affected by a distribution or other disposition of property in the custody of the court or an officer thereof.'x x x x x x x x xIt should be borne in mind that the real subject matter of this case is the coconut levy fund of which the SMC shares in question are claimed to be but a part. xxxTo start with, the coconut levy fund came from levies imposed upon the sale of copra or equivalent coconut product that was deducted from the price of copra which, as claimed by movants-farmers, would have gone to them. Thus, starting 1971, under the Coconut Investment Fund (CIF), a levy of P0.55 was imposed on the first domestic sale of every 100 kilograms of copra or equivalent product. In 1973, under the Coconut Consumers Stabilization Fund (CCSF), a levy of P15.00 on the first sale of every 100 kilograms of copra resecada or equivalent product was imposed. From the CCSF was established yet another fund, the Coconut Industry Development Fund (CIDF) whose initial capital of P100 million and regular allotment equivalent to P.20 per kilogram of copra resecada or its equivalent were contributed by the CCSF. (It is from this Coconut Industry Investment Fund (CIIF) that the so-called CIIF Companies were later established). From 1981, under the Coconut Industry Stabilization Fund which replaced the CCSF and CIDF, a levy of P50.00 for every 100 kilos of copra resecada or equivalent product delivered to exporters and copra users was collected and apportioned among the CIDF, COCOFED, PCA and the UCPB.Through the years, part of the coconut levy fund was used and applied to various projects and invested or converted into different assets, properties and businesses. xxxxxx [T]he coconut farmers and producers do have a legal interest in the SMC shares. That legal interest consists of their alleged beneficial ownership of the San Miguel shares, they being the 'registered owners and/or beneficial owners of all, or at least not less than fifty-one percent (51%), of the capital stock of the CIIF Companies' some of which wholly own the so-called CIIF Copra Trading Companies and the CIIF Holding Companies which are the registered stockholders of the SMC shares. (p. 3, COCOFED'S Omnibus Class Action xxx). Their claim is based on the specific provisions of Section 5, Article III, PD 1468, the pertinent portion of which states: 'Said fund (Coconut Consumers Stabilization Fund and the Coconut Industry Development Fund) and the disbursements thereof as herein authorized for the benefit of the coconut farmers shall be owned by them in their private capacities xxx.' This Presidential Decree has been assailed by the PCGG as a 'transgression of the basic limitation of the licit exercise of the state's taxing and police powers', but this is a legal question yet to be resolved.It has been argued that COCOFED, et al. should not be allowed to intervene because they have no actual, material, direct or immediate interest in the subject matter. To be bound entirely by the form and nature of these assets as shares of stock subject to the special laws, rules and by-laws of corporations, is to adopt an overly strict, narrow and myopic approach. It has already been alleged that these shares constitute ill-gotten wealth derived from the coconut levy fund. The form into which part of the coco-levy fund has been converted is not crucial or decisive; otherwise, it would be so easy to defeat the recovery of ill-gotten wealth by simply converting those funds, assets and properties from one form to another and using legal technicalities to thwart all attempts to reach them. The clear intention of the law is to recover all assets and properties illegally acquired by former President Marcos, et al., in whatever form they may be, such as, to quote the exact wording of Executive Order No. 2, 'in the form of bank accounts, deposits, trust accounts, shares of stocks, buildings, shopping centers, condominium, mansions, residences, estates, and other kinds of real and personal properties in the Philippines and in various countries of the world.' (2nd Whereas Clause, Executive Order No. 2)Moreover, at this stage of the proceedings, it has not yet been established who the real owners of the SMC shares are, but if we bar movants from the start, and if it should turn out in the end that they are the beneficial owners and that the Compromise Agreement did in fact prejudice their rights, then we shall have done them an irreparable injustice. Fairness and prudence dictate that -- at the risk of the inconvenience of having one more group to be heard on the matter -- We exercise our discretion in favor of allowing them to intervene."90

Under the rules on intervention, the allowance or disallowance of a motion to intervene is addressed to the sound discretion of the court.91 Discretion is a faculty of a court or an official by which he may decide a question either way, and still be right.92 The permissive tenor of the rules shows an intention to give to the court the full measure of discretion in permitting or disallowing the intervention. The discretion of the court, once exercised, cannot be reviewed by certiorari nor controlled by mandamus save in instances where such discretion has been so exercised in an arbitrary or capricious manner.93

Nor are we impressed by petitioners' submission that COCOFED, et al. should pay a docket fee for their counter-petition and counterclaim for damages. We note that it was the Sandiganbayan itself that ordered COCOFED and the other defendants in Civil Case No. 0033 to give their comment to the Joint Petition for Approval of Compromise Agreement, etc. In response to this order, COCOFED, et al. filed their Opposition-in-Intervention and Compulsory Counter-Petition and Counterclaim for Damages. COCOFED, et al. alleged that the Compromise Agreement is illegal and its approval would bring damages to themselves. In effect, COCOFED, et al. alleged a compulsory counterclaim for which they need not pay any docket fee.Fifth. Petitioners cannot insist on their right to have their Compromise Agreement approved on the ground that it bears the imprimatur of the PCGG. To be sure, the consent of the PCGG is a factor that should be considered in the approval or disapproval of the subject Compromise Agreement but it is not the only factor.





In Republic vs. Sandiganbayan,94 this Court had the occasion to categorically draw the distinctions between (i) the Sandiganbayan's exclusive jurisdiction to determine the judicial question of ownership over sequestered properties and (ii) the incidents of the exercise by the PCGG of its purely administrative and executive functions as conservator of sequestered properties, as follows:"In other words, neither in Peña nor in any other case did this Court ever say that orders of sequestration, seizure or take-over of the PCGG or other acts done in the exercise of its so-called 'primary administrative jurisdiction' are beyond judicial review, or beyond the power of the courts to reverse or nullify. It is true, of course, that those acts are entitled to much respect, the findings and conclusions motivating and justifying them should be accorded great weight, 'like the factual findings of the trial and appellate courts,' and such findings and conclusions of the PCGG may not be superseded and substituted by the judgment of the courts. But obviously the principle does not and cannot sanction arbitrary, whimsical, capricious or oppressive exercise of power and discretion on the part of the PCGG, or its performance of acts without or in excess of its authority and competence under the law. And in accordance with applicable law, review of those acts, and correction or invalidation thereof, when called for, can only be undertaken by the Sandiganbayan, which has exclusive original jurisdiction over all cases regarding 'the funds, moneys, assets and properties illegally acquired or misappropriated by former President Ferdinand E. Marcos, Mrs. Imelda Romualdez Marcos, their close relatives, subordinates, business associates, dummies, agents or nominees.'"95 (emphasis supplied)This ruling has stronger application in the cases at bar considering that COCOFED, et al. have challenged the legality of the consent given by PCGG to the Compromise Agreement on various grounds but especially in light of the "arbitration fee" it received in the form of SMC shares of substantial value. COCOFED, et al.'s position that the Compromise Agreement is a sell out of its interest is also a repudiation of the so called "business judgment" of UCPB which petitioners insist should bind COCOFED, et al.A final word. The cases at bar involve shares of stock estimated to be worth more than P9 billion now. These shares were sequestered in 1986 and the government filed Civil Case No. 0033 in 1987 to determine whether they are part of the alleged ill-gotten wealth of former President Marcos and his "cronies." We did not set aside the impugned resolutions of the Sandiganbayan in the cases at bar for they constitute cautious moves to preserve the character of the sequestered shares pending determination of their true owners. Be that as it may, we note that Civil Case No. 0033 has remained unresolved by the Sandiganbayan. The delay is no longer tolerable for it locks in billions of pesos which could well rev-up our sputtering economy. Worse, it constitutes another embarassing evidence of snail-paced justice, so long lamented but mostly by our lips alone. The Sandiganbayan must not be the burial ground of cases of far-reaching importance to our people. It is time for it to write finis to Civil Case No. 0033.

IN VIEW WHEREOF, the petitions in G.R. Nos. 104637-38 and in G.R. No. 109797 are DISMISSED. No costs.

SO ORDERED.

SECOND DIVISION[G.R. No. 138542. August 25, 2000]

ALFREDO P. PASCUAL and LORETA S. PASCUAL, petitioners, vs. COURT OF APPEALS (former Seventh Division), ERNESTO P. PASCUAL and HON. ADORACION ANGELES, in her capacity as Presiding Judge,

RTC, Kaloocan City, Branch 121,Respondents.



D E C I S I O N

MENDOZA, J.:

The question for decision in this case is whether an action for reconveyance of a piece of land and for accounting and damages which private respondent Ernesto P. Pascual brought against his brother, petitioner Alfredo P. Pascual, and the latters wife involves an intra-corporate dispute beyond the jurisdiction of the Regional Trial Court, Branch 121, Kalookan City in which it was filed. The trial court held that the action did not constitute an intra-corporate dispute and, therefore, denied petitioners motion to dismiss. The Court of Appeals sustained the order of the trial court. Hence, this petition for review of the decision1 of the appellate court. We affirm. chanrobles virtual law libraryThe facts are as follows: chanrobles virtual law libraryOn February 7, 1996, private respondent Ernesto P. Pascual filed a complaint in the Regional Trial Court for accounting, reconveyance of real property based on implied trust resulting from fraud, declaration of nullity of TCT, recovery of sums of money, and damages against his brother, petitioner Alfredo, and the latters wife Loreta Pascual. The pertinent parts of his complaint read:chanrobles virtual law library3. Plaintiff Ernesto and defendant Alfredo Pascual are full blood brothers. They, along with Araceli P. Castro, Ester P. Abad, Edgardo P. Pascual, Sr. (now deceased), Corazon P. Montenegro, Leonor P. Rivera, Luciano Pascual, Jr., and Teresita P. Manuel, are legitimate children of Luciano Pascual, Sr. and Consolacion Pascual. Defendant Loreta Pascual is the wife of defendant Alfredo. chanrobles virtual law library4. Between 1963 to 1975, Luciano R. Pascual, Sr. acquired substantial shares in Phillens Manufacturing Corp. Luciano, Sr. parceled out and assigned a good number of these shares in the names of his children. chanrobles virtual law library5. With Lucianos substantial shareholdings, his eldest son, defendant Alfredo became President, General Manager, and Vice-Chairman of the Board of Phillens. Plaintiff was only 20 years old then. chanrobles virtual law library6. Defendant Alfredo was also president of L.R. Pascual & Sons, Inc. which held substantial shares in Phillens. (Plaintiff is a stockholder of L. R. Pascual & Sons, Inc.) chanrobles virtual law library7. Although during and after the lifetime of the parties parents, defendant Alfredo held family property in trust for Luciano Sr. and Consolacion, and for his brothers and sisters, defendant Alfredo gave the latter no accounting at any point in time contrary to what their father intended. chanrobles virtual law library8. Because from 1969 to 1990, defendant Alfredo turned over zero profit to plaintiff Ernesto as far as his share was concerned, plaintiff tried to arrange a meeting between them about the matter of accounting -- without any success during a 5-year period (1990-1995). Defendant Alfredo would each time be sensitive, evasive, and drunk, so nothing became of those efforts. chanrobles virtual law library. . . . chanrobles virtual law library10. Since defendant Alfredo was President of L.R. Pascual & Sons, Inc. which held family properties in Quezon City, Manila, and Baguio, plaintiff wanted this matter taken up in a meeting he requested with defendant Alfredo. In addition, plaintiff asked defendant Alfredo for an accounting in L.R. Pascual & Co., a registered partnership distinct from L.R. Pascual & Sons, Inc. which would be discussed in that requested meeting. chanrobles virtual law library. . . . chanrobles virtual law library12. Because of defendant Alfredos icy silence and unmistakable attempts to claim the lid on plaintiff Ernesto Pascual, plaintiff conducted an inquiry. As a result, he discovered that when defendant Alfredo caused the dissolution of Phillens Manufacturing Corporation by asking for a shortening of its term, defendant Alfredo represented in an affidavit of undertaking that chanrobles virtual law library(a) he is the owner of the majority of the outstanding capital stock of the corporation; chanrobles virtual law library(b) that the corporation has no obligation, whether existing or contingent, direct or indirect, due or payable to any person whomsoever, natural or juridical; chanrobles virtual law library(c) he is assuming and will pay any and all valid claims or demands by creditors, stockholders, or any third person or persons, presented after the dissolution of the corporation. chanrobles virtual law library13. By taking a position adverse to the trust and to his familys, defendant Alfredo, greatly profiting from Phillens, now held he owned majority and will undertake to pay any claimant or creditor. Yet, defendant Alfredo had not paid plaintiff what was properly owing to him. chanrobles virtual law library14. Plaintiff also discovered, to his dismay, that defendant Alfredo had written an October 8, 1990 letter to the Securities & Exchange Commission falsely representing as follows: chanrobles virtual law libraryOctober 8, 1990 chanrobles virtual law libraryExaminer & Appraiser Dept. [sic] chanrobles virtual law librarySecurities & Exchange Commission chanrobles virtual law libraryE. de los Santos Avenue chanrobles virtual law libraryMandaluyong, Metro Manila chanrobles virtual law libraryGentlemen: chanrobles virtual law libraryThis will certify that the P3.3-million notes payable as shown in the balance sheet of Phillens Manufacturing Corporation as of June 30, 1990, is [sic] my personal advances.chanrobles virtual law library

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Since I am assuming the assets and liabilities of the company, to which all the stockholders have consented, I am likewise giving my consent to the dissolution of the corporation. chanrobles virtual law libraryVery truly yours, chanrobles virtual law libraryALFREDO P. PASCUAL chanrobles virtual law library16. Further, on inquiry, plaintiff discovered that last April 3, 1989, defendant Alfredo caused an appraisal of the fair market value of the land and buildings of Phillens in Kalookan, excluding equipment, remaining stock and inventory. Aware that Cuervo had appraised such properties at P10,977,000 as of March 10, 1989, defendant Alfredo hatched a ploy to buy for himself such properties at only P4.5 million. (A copy of the April 3, 1989 Cuervo report addressed to defendant Alfredo is here attached as Annex A.) chanrobles virtual law library18. To consummate his fraudulent design, defendant Alfredo caused in bad faith the cancellation of TCT C-28572 and the issuance of TCT 215804 in his and defendant Loretas name (copy of which is here attached as Annex D). That TCT is of course void, proceeding as it does from a void transfer, which constitutes fraud and a breach of trust. chanrobles virtual law libraryOn March 21, 1996, petitioners filed a motion to dismiss on the ground that the complaint raises an intra-corporate controversy between the parties over which original and exclusive jurisdiction is vested in the Securities and Exchange Commission (SEC). At first, the trial court granted petitioners motion and dismissed the complaint on the ground that the complaint stemmed from alleged fraudulent acts and misrepresentations of petitioner Alfredo P. Pascual as a corporate officer of Phillens Manufacturing Corp. (Phillens) and thus the SEC had jurisdiction over the case. However, on respondents motion, the trial court reconsidered its order and reinstated respondents action. In an order, dated September 29, 1997, the trial court held that, since the corporation had been dissolved in 1990 and its corporate affairs terminated in 1993, there were no more corporate affairs to speak of at the time of the filing of the complaint. The court also allowed the amendment of the complaint. It appears that, pending resolution of the motion for reconsideration, respondent amended his complaint by alleging the following matters which are underlined: chanrobles virtual law library4. Luciano R. Pascual, Sr. together with L.R. Pascual & Sons. Inc. acquired approximately 38% of shares in Phillens Manufacturing Corp., a close corporation. Luciano Sr. died in 1984 while Consolacion died in 1986. Thus, plaintiff became owner by operation of law of 1/9 of his parents stockholdings since they died intestate without obligations.chanrobles virtual law library5. With Lucianos substantial shareholdings, defendant Alfredo became President, General Manager, and Vice-Chairman of Phillensin 1968 or 1969, positions which he held until 1990 when Phillens was dissolved.chanrobles virtual law library6. Defendant Alfredo held in trust for the benefit of Luciano Sr. and Consolacion, and for his brothers and sisters, plaintiff included, said stockholdings and the properties of Phillens. chanrobles virtual law library7. As trustee defendant Alfredo did not turn over the properties and sums due to plaintiff and the former even failed to account for the trust estate and its earnings, to the grave prejudice of the latter. chanrobles virtual law library8. One of the properties composing the trust estate, TCT No. C-28572 with an area of 7,528 square meters located in Caloocan City, was registered in the name of defendants under devious and fraudulent circumstances engineered by Alfredo. chanrobles virtual law library8.1. Said property was appraised conservatively to have a market value of no less than P10.9 Million in 1989.chanrobles virtual law library8.2 Although Alfredo was fully aware of its market value, Alfredo schemed, manipulated and succeeded in transferring title to and possession in his favor of TCT No. C-28572 in 1989 for an alleged consideration of P4.5 Million, in violation of his duties as trustee.chanrobles virtual law library8.3 In order to cover-up such serious breach of trust, Alfredo maliciously caused the dissolution of Phillens in 1990, shortly after ownership was transferred to him, and further caused the destruction of Phillens records thereby rendering its stocks valueless after its corporate affairs were wound up in 1993.chanrobles virtual law library8.4 Defendants presently appear as legal and beneficial owners by virtue of TCT No. C-215804.chanrobles virtual law libraryPetitioners reiterate their contention that the complaint against them involves an intra-corporate dispute cognizable by the SEC and, therefore, the Regional Trial Court should have dismissed the complaint. They complain that the trial court should not have allowed the amendment of the complaint because it was done in order to confer jurisdiction on the trial court. chanrobles virtual law libraryFirst. Petitioners contend that the existence of a corporation at the time of filing of a complaint involving an intra-corporate dispute is not required in order that such dispute be cognizable by the SEC because such requirement is not found in P.D. No. 902-A. chanrobles virtual law libraryThis contention has no merit. P.D. 902-A, 5 provides: chanrobles virtual law libraryIn addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of association registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: chanrobles virtual law library. . . . chanrobles virtual law library

b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders, members, or associates; between any or all of them and the corporation, partnership or association of which they are stockholders, members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity; chanrobles virtual law library. . . . chanrobles virtual law librarySec. 5(b) does not define what an intra-corporate controversy is, but case law has fashioned out two tests for determining what suit is cognizable by the SEC or the regular courts, and sometimes by the National Labor Relations Commission. The first test uses the enumeration in 5(b) of the relationships to determine jurisdiction, 2 to wit: chanrobles virtual law library(1) Those between and among stockholders and members; chanrobles virtual law library(2) Those between and among stockholders and members, on one hand, and the corporation, on the other hand; and chanrobles virtual law library(3) Those between the corporation and the State but only insofar as its franchise or right to exist as an entity is concerned. chanrobles virtual law libraryThe second test, on the other hand, focuses on the nature of the controversy itself. 3 Recent decisions of this Court consider not only the subject of their controversy but also the status of the parties.4 chanrobles virtual law libraryWe hold that the Court of Appeals correctly ruled that the regular courts, not the SEC, have jurisdiction over this case. Petitioners and private respondent never had any corporate relations in Phillens. It appears that private respondent was never a stockholder in Phillens, of which the parties predecessor-in-interest, Luciano Pascual, Sr., was a stockholder and whose properties are being litigated. Private respondents allegation is that, upon the death of their father, he became co-owner in the estate left by him, and part of this estate includes the corporate interests in Phillens. He also alleges that petitioners repudiated the trust relationship created between them and appropriated to themselves even the property that should have belonged to respondent. It is thus clear that there is no corporate relationship involved here. That petitioner Alfredo Pascual was a corporate officer holding in trust for his brother their fathers corporate interests did not create an intra-corporate relationship between them. chanrobles virtual law libraryNor is the controversy corporate in nature. As we have stated before, the grant of jurisdiction must be viewed in the light of the nature and function of the SEC under the law.5 P.D. No. 902-A, 3 gives the SEC jurisdiction, supervision, and control over all corporations, partnerships or associations, who are the grantees of primary franchise and/or a license or permit issued by the government to operate in the Philippines. From this, it can be deduced that the regulatory and adjudicatory functions of the SEC, insofar as intra-corporate controversies are concerned, comes into play only if a corporation still exists. chanrobles virtual law libraryIn the case at bar, the corporation whose properties are being contested no longer exists, it having been completely dissolved in 1993; consequently, the supervisory authority of the SEC over the corporation has likewise come to an end. chanrobles virtual law libraryIt is true that a complaint for accounting, reconveyance, etc. of corporate properties has previously been held to be within the jurisdiction of the SEC.6 Nonetheless, a distinction can be drawn between those cases and the case at bar, for, in those cases, the corporations involved were still existing, whereas in the present case, there is no more corporation involved. There is no question that assessing the financial status of an existing corporation, for purposes of an action for accounting, requires the expertise of the SEC. But in the case of a dissolved corporation, no such expertise is required, for all its business has been properly accounted for already, and what is left to be determined is properly within the competence of regular courts. chanrobles virtual law libraryIt may be noted in this connection that pursuant to R.A. No. 8799, 5.2,7 which took effect on August 8, 2000, the jurisdiction of the SEC to decide cases involving intra-corporate dispute was transferred to courts of general jurisdiction and, in accordance therewith, all cases of this nature, with the exception only of those submitted for decision, were transferred to the regular courts. Hence, the question whether this case should be filed in the SEC is now only of academic interest. For even if it involves an intra-corporate dispute, it would be remanded to the Regional Trial Court just the same. chanrobles virtual law librarySecond. Petitioners contend that the lower courts erred in allowing the amendment of the complaint, which were actually made to confer jurisdiction on the trial court after the original complaint was dismissed. chanrobles virtual law libraryThis contention has no basis. The original complaint alleged that Phillens has already been completely dissolved. In addition, it alleged a breach by petitioner Alfredo P. Pascual of the implied trust created between him and his brother, respondent Ernesto P. Pascual, after the death of their father. Thus, even without the amendments, the allegations in the original complaint were sufficient to confer jurisdiction on the trial court. The amendments made by respondent were merely for the purpose of making more specific his original allegations. chanrobles virtual law libraryWHEREFORE, the decision of the Court of Appeals is AFFIRMED. chanrobles virtual law librarySO ORDERED. chanrobles virtual law library

FIRST DIVISION[G.R. No. 131367. August 31, 2000]

HUTCHISON PORTS PHILIPPINES LIMITED, Petitioner, v. SUBIC BAY METROPOLITAN AUTHORITY, INTERNATIONAL CONTAINER TERMINAL SERVICES INC., ROYAL PORT SERVICES INC. and the EXECUTIVE

SECRETARY, Respondents.







D E C I S I O N


On February 12, 1996, the Subic Bay Metropolitan Authority (or SBMA) advertised in leading national daily newspapers and in one international publication,[1 an invitation offering to the private sector the opportunity to develop and operate a modern marine container terminal within the Subic Bay Freeport Zone. Out of seven bidders who responded to the published invitation, three were declared by the SBMA as qualified bidders after passing the pre-qualification evaluation conducted by the SBMAs Technical Evaluation Committee (or SBMA-TEC). These are: (1) International Container Terminal Services, Inc. (or ICTSI); (2) a consortium consisting of Royal Port Services, Inc. and HPC Hamburg Port Consulting GMBH (or RPSI); and (3) Hutchison Ports Philippines Limited (or HPPL), representing a consortium composed of HPPL, Guoco Holdings (Phils.), Inc. and Unicol Management Services, Inc. All three qualified bidders were required to submit their respective formal bid package on or before July 1, 1996 by the SBMAs Pre-qualification, Bids and Awards Committee (or SBMA-PBAC).Thereafter, the services of three (3) international consultants[2 recommended by the World Bank for their expertise were hired by SBMA to evaluate the business plans submitted by each of the bidders, and to ensure that there would be a transparent and comprehensive review of the submitted bids. The SBMA also hired the firm of Davis, Langdon and Seah Philippines, Inc. to assist in the evaluation of the bids and in the negotiation process after the winning bidder is chosen. All the consultants, after such review and evaluation unanimously concluded that HPPLs Business Plan was far superior to that of the two other bidders.[3However, even before the sealed envelopes containing the bidders proposed royalty fees could be opened at the appointed time and place, RPSI formally protested that ICTSI is legally barred from operating a second port in the Philippines based on Executive Order No. 212 and Department of Transportation and Communication (DOTC) Order 95-863. RPSI thus requested that the financial bid of ICTSI should be set aside.[4Nevertheless, the opening of the sealed financial bids proceeded under advisement relative to the protest signified by RPSI. The financial bids, more particularly the proposed royalty fee of each bidder, was as follows:ICTSI ------------US$57.80 TEUHPPL ------------US$20.50 TEURPSI -------------US$15.08 TEUThe SBMA-PBAC decided to suspend the announcement of the winning bid, however, and instead gave ICTSI seven (7) days within which to respond to the letter-protest lodged by RPSI. The HPPL joined in RPSIs protest, stating that ICTSI should be disqualified because it was already operating the Manila International Container Port (or MICP), which would give rise to inevitable conflict of interest between the MICP and the Subic Bay Container Terminal facility.[5On August 15, 1996, the SBMA-PBAC issued a resolution rejecting the bid of ICTSI because said bid does not comply with the requirements of the tender documents and the laws of the Philippines. The said resolution also declared that:RESOLVED FURTHER, that the winning bid be awarded to HUTCHISON PORTS PHILIPPINES LIMITED (HPPL) and that negotiations commence immediately with HPPL (HUTCHISON) with a view to concluding an acceptable agreement within 45 days of this date failing which negotiations with RPSI (ROYAL) will commence with a view to concluding an acceptable agreement within 45 days thereafter failing which there will be declared a failure of bids.[6 (Underscoring supplied)The following day, ICTSI filed a letter-appeal with SBMAs Board of Directors requesting the nullification and reversal of the above-quoted resolution rejecting ICTSIs bid while awarding the same to HPPL. But even before the SBMA Board could act on the appeal, ICTSI filed a similar appeal before the Office of the President. [7 On August 30, 1996, then Chief Presidential Legal Counsel (CPLC) Renato L. Cayetano submitted a memorandum to then President Fidel V. Ramos, containing the following recommendations:We therefore suggest that the President direct SBMA Chairman Gordon to consider option number 4 that is to re-evaluate the financial bids submitted by the parties, taking into consideration all the following factors:1. Reinstate ICTSIs bid;2. Disregard all arguments relating to monopoly;3. The re-evaluation must be limited to the parties financial bids.3.1 Considering that the parties business have been accepted (passed), strictly follow the criteria for bid evaluation provided for in pars. (c) and (d), Part B (1) of the Tender Document.4. In the re-evaluation, the COA should actively participate to determine which of the financial bids is more advantageous.5. In addition, all the parties should be given ample opportunity to elucidate or clarify the components/justification for their respective financial bids in order to ensure fair play and transparency in the proceedings.6. The Presidents authority to review the final award shall remain.[8 (Underscoring supplied)The recommendation of CPLC Cayetano was approved by President Ramos, and a copy of President Ramos handwritten approval was sent to the SBMA Board of Directors. Accordingly, the SBMA Board, with the concurrence

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of representatives of the Commission on Audit, agreed to focus the reevaluation of the bids in accordance with the evaluation criteria and the detailed components contained in the Tender Document, including all relevant information gleaned from the bidding documents, as well as the reports of the three international experts and the consultancy firm hired by the SBMA.On September 19, 1996, the SBMA Board issued a Resolution, declaring:NOW, THEREFORE, IT IS HEREBY RESOLVED that the bid that conforms to the Invitation to Tender, that has a realistic Business Plan offering the greatest financial return to SBMA, the best possible offer and the most advantageous to the government is that of HPPL andHPPL is accordingly selected as the winning bidder and is hereby awarded the concession for the operation and development of the Subic Bay Container Terminal.[9 (Underscoring supplied)In a letter dated September 24, 1996, the SBMA Board of Directors submitted to the Office of the President the results of the re-evaluation of the bid proposals, to wit:SBMA, through the unanimous vote of all the Board Members, excluding the Chairman of the Board who voluntarily inhibited himself from participating in the re-evaluation, selected the HPPL bid as the winning bid, being: the conforming bid with a realistic Business Plan offering the greatest financial return to the SBMA; the best possible offer in the market, and the most advantageous to the government in accordance with the Tender Document.[10Notwithstanding the SBMA Boards recommendations and action awarding the project to HPPL, then Executive Secretary Ruben Torres submitted a memorandum to the Office of the President recommending that another rebidding be conducted.[11 Consequently, the Office of the President issued a Memorandum directing the SBMA Board of Directors to refrain from signing the Concession Contract with HPPL and to conduct a rebidding of the project.[12In the meantime, the Resident Ombudsman for the DOTC filed a complaint against members of the SBMA-PBAC before the Office of the Ombudsman for alleged violation of Section 3(e) of Republic Act No. 3019 for awarding the contract to HPPL. On April 16, 1997, the Evaluation and Preliminary Investigation Bureau of the Office of the Ombudsman issued a Resolution absolving the members of the SBMA-PBAC of any liability and dismissing the complaint against them, ruling thus:After an assiduous study of the respective contentions of both parties, we are inclined to hold, as it is hereby held, that there is no proof on record pinpointing respondents to have acted in excess of their discretion when they awarded the bid to HPPL. Records revealed that respondents, in the exercise of their discretion in determining the financial packages offered by the applicants, were guided by the expert report of Davis, Langdon and Seah (DLS) that fairly evaluated which of the bidders tender the greatest financial return to the government. There is no showing that respondents had abused their prerogatives. As succinctly set forth in the DLS report it stated, among others, that, in assessing the full financial return to SBMA offered by the bidders, it is necessary to consider the following critical matters:1. Royalty fees2. Volume of TEUs as affected by:a. Tariff rates;b. Marketing strategy;c. Port facilities; andd. Efficient reliable services.With the preceding parameters for the evaluation of bidders business plan, the respondents were fairly guided by, as they aligned their judgment in congruence with, the opinion of the panel of experts and the SBMAs Technical Evaluation Committee to the effect that HPPLs business is superior while that of ICTSIs appeared to be unrealistically high which may eventually hinder the competitiveness of the SBMA port with the rest of the world. Respondents averred that the panel of World Bank experts noted that ICTSIs high tariff rates at U.S. $119.00 per TEU is already higher by 37% through HPPL, which could further increase by 20% in the first two (2) years and by 5% hike thereafter. In short, high tariffs would discourage potential customers which may be translated into low cargo volume that will eventually reduce financial return to SBMA. Respondents asserted that HPPLs business plan offers the greatest financial return which could be equated that over the five years, HPPL offers 1.25 billion pesos while ICTSI offers P0.859 billion, and RPSI offers P.420 billion. Over the first ten years HPPL gives P2.430 billion, ICTSI tenders P2.197 billion and RPSI has P1.632 billion.Viewed from this perspective alongside with the evidence on record, the undersigned panel does not find respondents to have exceeded their discretion in awarding the bid to HPPL. Consequently, it could not be said that respondents act had placed the government at a grossly disadvantageous plight that could have jeopardized the interest of the Republic of the Philippines.[13On July 7, 1997, the HPPL, feeling aggrieved by the SBMAs failure and refusal to commence negotiations and to execute the Concession Agreement despite its earlier pronouncements that HPPL was the winning bidder, filed a complaint[14 against SBMA before the Regional Trial Court (RTC) of Olongapo City, Branch 75, for specific performance, mandatory injunction and damages. In due time, ICTSI, RPSI and the Office of the President filed separate Answers-in-Intervention[15 to the complaint opposing the reliefs sought by complainant HPPL.Complainant HPPL alleged and argued therein that a binding and legally enforceable contract had been established between HPPL and defendant SBMA under Article 1305 of the Civil Code, considering that SBMA had repeatedly








declared and confirmed that HPPL was the winning bidder. Having accepted HPPLs offer to operate and develop the proposed container terminal, defendant SBMA is duty-bound to comply with its obligation by commencing negotiations and drawing up a Concession Agreement with plaintiff HPPL. HPPL also pointed out that the bidding procedure followed by the SBMA faithfully complied with existing laws and rules established by SBMA itself; thus, when HPPL was declared the winning bidder it acquired the exclusive right to negotiate with the SBMA. Consequently, plaintiff HPPL posited that SBMA should be: (1) barred from conducting a re-bidding of the proposed project and/or performing any such acts relating thereto; and (2) prohibited from negotiating with any party other than plaintiff HPPL until negotiations between HPPL and SBMA have been concluded or in the event that no acceptable agreement could be arrived at. Plaintiff HPPL also alleged that SBMAs continued refusal to negotiate the Concession Contract is a substantial infringement of its proprietary rights, and caused damage and prejudice to plaintiff HPPL.Hence, HPPL prayed that:(1) Upon the filing of this complaint, hearings be scheduled to determine the propriety of plaintiffs mandatory injunction application which seeks to order defendant or any of its appropriate officers or committees to forthwith specify the date as well as to perform any and all such acts (e.g. laying the ground rules for discussion) for the commencement of negotiations with plaintiff with the view to signing at the earliest possible time a Concession Agreement for the development and operation of the Subic Bay Container Terminal.(2) Thereafter, judgment be rendered in favor of plaintiff and against defendant:2.1. Making permanent the preliminary mandatory injunction it had issued;2.2. Ordering defendant to implement the Concession Agreement it had executed with plaintiff in respect of the development and operation of the proposed Subic Bay Container Terminal;2.3. Ordering defendant to pay for the cost of plaintiffs attorneys fees in the amount of P500,000.00, or as otherwise proven during the trial.Plaintiff prays for other equitable reliefs.[16During the pre-trial hearing, one of the issues raised and submitted for resolution was whether or not the Office of the President can set aside the award made by SBMA in favor of plaintiff HPPL and if so, can the Office of the President direct the SBMA to conduct a re-bidding of the proposed project.While the case before the trial court was pending litigation, on August 4, 1997, the SBMA sent notices to plaintiff HPPL, ICTSI and RPSI requesting them to declare their interest in participating in a rebidding of the proposed project.[17 On October 20, 1997, plaintiff HPPL received a copy of the minutes of the pre-bid conference which stated that the winning bidder would be announced on December 5, 1997.[18 Then on November 4, 1997, plaintiff HPPL learned that the SBMA had accepted the bids of ICTSI and RPSI who were the only bidders who qualified.In order to enjoin the rebidding while the case was still pending, plaintiff HPPL filed a motion for maintenance of the status quo[19 on October 28, 1997. The said motion was denied by the court a quo in an Order dated November 3, 1997, to wit:Plaintiff maintains that by voluntarily participating in this proceedings, the defendant and the intervenors have unqualifiedly agreed to submit the issue of the propriety, legality and validity of the Office of the Presidents directive that the SBMA effect a rebidding of its concession contract or the operation of the Subic Bay Container Terminal. As such, the status quo must be maintained in order not to thwart the courts ability to resolve the issues presented. Further, the ethics of the profession require that counsel should discontinue any act which tends to render the issues academic.The Opposition is anchored on lack of jurisdiction since the issuance of a cease-and-desist order would be tantamount to the issuance of a Temporary Restraining Order or a Writ of Injunction which this Court cannot do in light of the provision of Section 21 of R.A. 7227 which states:Section 21. Injunction and Restraining Order. The implementation of the projects for the conversion into alternative productive uses of the military reservations are urgent and necessary and shall not be restrained or enjoined except by an order issued by the Supreme Court of the Philippines.During the hearing on October 30, 1997, SBMAs counsel revealed that there is no law or administrative rule or regulation which requires that a bidding be accomplished within a definite time frame.Truly, the matter of the deferment of the re-bidding on November 4, 1997 rests on the sound discretion of the SBMA. For this Court to issue a cease-and-desist order would be tantamount to an issuance of a Temporary Restraining Order or a Writ of Preliminary Injunction.(Prado v. Veridiano II, G.R. No. 98118, December 6, 1991).The Court notes that the Office of the President has not been heard fully on the issues. Moreover, one of the intervenors is of the view that the issue of jurisdiction must be resolved first, ahead of all the other issues.WHEREFORE, and viewed from the foregoing considerations, plaintiffs motion is DENIED.SO ORDERED.[20 (Underscoring supplied)Hence, this petition filed by petitioner (plaintiff below) HPPL against respondents SBMA, ICTSI, RPSI and the Executive Secretary seeking to obtain a prohibitory injunction. The grounds relied upon by petitioner HPPL to justify the filing of the instant petition are summed up as follows:29. It is respectfully submitted that to allow or for this Honorable Court to otherwise refrain from restraining SBMA, during the pendency of this suit, from committing the aforementioned act(s) which will certainly occur on 5 December 1997 such action (or inaction) will work an injustice upon petitioner which has validly been announced as the winning bidder for the operation of the Subic Bay Container Terminal.






30. To allow or for this Honorable Court to otherwise refrain from restraining SBMA, during the pendency of this suit, from committing the aforementioned threatened acts would be in violation of petitioners rights in respect of the action it had filed before the RTC of Olongapo City in Civil Case No. 243-O-97, and could render any judgment which may be reached by said Court moot and ineffectual. As stated, the legal issues raised by the parties in that proceedings are of far reaching importance to the national pride and prestige, and they impact on the integrity of government agencies engaged in international bidding of privatization projects. Its resolution on the merits by the trial court below and, thereafter, any further action to be taken by the parties before the appellate courts will certainly benefit respondents and the entire Filipino people.[21WHEREFORE, petitioner HPPL sought relief praying that:a) Upon the filing of this petition, the same be given due course and a temporary restraining order and/or writ of preliminary injunction be issued ex parte, restraining SBMA or any of its committees, or other persons acting under its control or direction or upon its instruction, from declaring any winner on 5 December 1997 or at any other date thereafter, in connection with the rebidding for the privatization of the Subic Bay Container Terminal and/or for any, some or all of the respondents to perform any such act(s) in pursuance thereof, until further orders from this Honorable Court;b) After appropriate proceedings, judgment be rendered in favor of petitioner and against respondents --(1) Ordering SBMA to desist from conducting any rebidding or in declaring the winner of any such rebidding in respect of the development and operation of the Subic Bay Container Terminal until the judgment which the RTC of Olongapo City may render in Civil Case No. 243-O-97 is resolved with finality;(2) Declaring null and void any award which SBMA may announce or issue on 5 December 1997; and(3) Ordering respondents to pay for the cost of suit.Petitioner prays for other equitable reliefs.[22The instant petition seeks the issuance of an injunctive writ for the sole purpose of holding in abeyance the conduct by respondent SBMA of a rebidding of the proposed SBICT project until the case for specific performance is resolved by the trial court. In other words, petitioner HPPL prays that the status quo be preserved until the issues raised in the main case are litigated and finally determined. Petitioner was constrained to invoke this Courts exclusive jurisdiction and authority by virtue of the above-quoted Republic Act 7227, Section 21.On December 3, 1997, this Court granted petitioner HPPLs application for a temporary restraining order enjoining the respondent SBMA or any of its committees, or other persons acting under its control or direction or upon its instruction, from declaring any winner on December 5, 1997 or at any other date thereafter, in connection with the rebidding for the privatization of the Subic Bay Container Terminal and/or for any, some or all of the respondents to perform any such act or acts in pursuance thereof.[23There is no doubt that since this controversy arose, precious time has been lost and a vital infrastructure project has in essense been mothballed to the detriment of all parties involved, not the least of which is the Philippine Government, through its officials and agencies, who serve the interest of the nation. It is, therefore, imperative that the issues raised herein and in the court a quo be resolved without further delay so as not to exacerbate an already untenable situation.At the outset, the application for the injunctive writ is only a provisional remedy, a mere adjunct to the main suit.[24 Thus, it is not uncommon that the issues in the main action are closely intertwined, if not identical, to the allegations and counter allegations propounded by the opposing parties in support of their contrary positions concerning the propriety or impropriety of the injunctive writ. While it is not our intention to preempt the trial courts determination of the issues in the main action for specific performance, this Court has a bounden duty to perform; that is, to resolve the matters before this Court in a manner that gives essence to justice, equity and good conscience.While our pronouncements are for the purpose only of determining whether or not the circumstances warrant the issuance of the writ of injunction, it is inevitable that it may have some impact on the main action pending before the trial court. Nevertheless, without delving into the merits of the main case, our findings herein shall be confined to the necessary issues attendant to the application for an injunctive writ.For an injunctive writ to be issued, the following requisites must be proven:First . That the petitioner/applicant must have a clear and unmistakable right.Second . That there is a material and substantial invasion of such right.Third . That there is an urgent and permanent necessity for the writ to prevent serious damage.[25To our mind, petitioner HPPL has not sufficiently shown that it has a clear and unmistakable right to be declared the winning bidder with finality, such that the SBMA can be compelled to negotiate a Concession Contract. Though the SBMA Board of Directors, by resolution, may have declared HPPL as the winning bidder, said award cannot be said to be final and unassailable. The SBMA Board of Directors and other officers are subject to the control and supervision of the Office of the President. All projects undertaken by SBMA require the approval of the President of the Philippines under Letter of Instruction No. 620, which places the SBMA under its ambit as an instrumentality, defined in Section 10 thereof as an agency of the national government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. This term includes regulatory agencies, chartered institutions and government owned and controlled corporations.[26 (Underscoring supplied)







As a chartered institution, the SBMA is always under the direct control of the Office of the President, particularly when contracts and/or projects undertaken by the SBMA entail substantial amounts of money. Specifically, Letter of Instruction No. 620 dated October 27, 1997 mandates that the approval of the President is required in all contracts of the national government offices, agencies and instrumentalities, including government-owned or controlled corporations involving two million pesos (P2,000,000.00) and above, awarded through public bidding or negotiation. The President may, within his authority, overturn or reverse any award made by the SBMA Board of Directors for justifiable reasons. It is well-established that the discretion to accept or reject any bid, or even recall the award thereof, is of such wide latitude that the courts will not generally interfere with the exercise thereof by the executive department, unless it is apparent that such exercise of discretion is used to shield unfairness or injustice. When the President issued the memorandum setting aside the award previously declared by the SBMA in favor of HPPL and directing that a rebidding be conducted, the same was, within the authority of the President and was a valid exercise of his prerogative. Consequently, petitioner HPPL acquired no clear and unmistakable right as the award announced by the SBMA prior to the Presidents revocation thereof was not final and binding.There being no clear and unmistakable right on the part of petitioner HPPL, the rebidding of the proposed project can no longer be enjoined as there is no material and substantial invasion to speak of. Thus, there is no longer any urgent or permanent necessity for the writ to prevent any perceived serious damage. In fine, since the requisites for the issuance of the writ of injunction are not present in the instant case, petitioners application must be denied for lack of merit.[27Finally, we focus on the matter of whether or not petitioner HPPL has the legal capacity to even seek redress from this Court. Admittedly, petitioner HPPL is a foreign corporation, organized and existing under the laws of the British Virgin Islands. While the actual bidder was a consortium composed of petitioner, and two other corporations, namely, Guoco Holdings (Phils.) Inc. and Unicol Management Servises, Inc., it is only petitioner HPPL that has brought the controversy before the Court, arguing that it is suing only on an isolated transaction to evade the legal requirement that foreign corporations must be licensed to do business in the Philippines to be able to file and prosecute an action before Philippines courts.The maelstrom of this issue is whether participating in the bidding is a mere isolated transaction, or did it constitute engaging in or transacting business in the Philippines such that petitioner HPPL needed a license to do business in the Philippines before it could come to court.There is no general rule or governing principle laid down as to what constitutes doing or engaging in or transacting business in the Philippines. Each case must be judged in the light of its peculiar circumstances. [28 Thus, it has often been held that a single act or transaction may be considered as doing business when a corporation performs acts for which it was created or exercises some of the functions for which it was organized. The amount or volume of the business is of no moment, for even a singular act cannot be merely incidental or casual if it indicates the foreign corporations intention to do business.[29Participating in the bidding process constitutes doing business because it shows the foreign corporations intention to engage in business here. The bidding for the concession contract is but an exercise of the corporations reason for creation or existence. Thus, it has been held that a foreign company invited to bid for IBRD and ADB international projects in the Philippines will be considered as doing business in the Philippines for which a license is required. In this regard, it is the performance by a foreign corporation of the acts for which it was created, regardless of volume of business, that determines whether a foreign corporation needs a license or not.[30The primary purpose of the license requirement is to compel a foreign corporation desiring to do business within the Philippines to submit itself to the jurisdiction of the courts of the state and to enable the government to exercise jurisdiction over them for the regulation of their activities in this country. [31 If a foreign corporation operates a business in the Philippines without a license, and thus does not submit itself to Philippine laws, it is only just that said foreign corporation be not allowed to invoke them in our courts when the need arises. While foreign investors are always welcome in this land to collaborate with us for our mutual benefit, they must be prepared as an indispensable condition to respect and be bound by Philippine law in proper cases, as in the one at bar. [32 The requirement of a license is not intended to put foreign corporations at a disadvantage, for the doctrine of lack of capacity to sue is based on considerations of sound public policy.[33 Accordingly, petitioner HPPL must be held to be incapacitated to bring this petition for injunction before this Court for it is a foreign corporation doing business in the Philippines without the requisite license.

WHEREFORE, in view of all the foregoing, the instant petition is hereby DISMISSED for lack of merit. Further, the temporary restraining order issued on December 3, 1997 is LIFTED and SET ASIDE. No costs.SO ORDERED.

FIRST DIVISION[G.R. Nos. 116124-25. November 22, 2000]

BIBIANO O. REYNOSO, IV, petitioner, vs. HON. COURT OF APPEALS and GENERAL CREDIT CORPORATION, respondents.

D E C I S I O N









Assailed in this petition for review is the consolidated decision of the Court of Appeals dated July 7, 1994, which reversed the separate decisions of the Regional Trial Court of Pasig City and the Regional Trial Court of Quezon City in two cases between petitioner Reynoso and respondent General Credit Corporation (GCC).Sometime in the early 1960s, the Commercial Credit Corporation (hereinafter, “CCC”), a financing and investment firm, decided to organize franchise companies in different parts of the country, wherein it shall hold thirty percent (30%) equity. Employees of the CCC were designated as resident managers of the franchise companies. Petitioner Bibiano O. Reynoso, IV was designated as the resident manager of the franchise company in Quezon City, known as the Commercial Credit Corporation of Quezon City (hereinafter, “CCC-QC”).CCC-QC entered into an exclusive management contract with CCC whereby the latter was granted the management and full control of the business activities of the former. Under the contract, CCC-QC shall sell, discount and/or assign its receivables to CCC. Subsequently, however, this discounting arrangement was discontinued pursuant to the so-called “DOSRI Rule”, prohibiting the lending of funds by corporations to its directors, officers, stockholders and other persons with related interests therein.On account of the new restrictions imposed by the Central Bank policy by virtue of the DOSRI Rule, CCC decided to form CCC Equity Corporation, (hereinafter, “CCC-Equity”), a wholly-owned subsidiary, to which CCC transferred its thirty (30%) percent equity in CCC-QC, together with two seats in the latter’s Board of Directors.Under the new set-up, several officials of Commercial Credit Corporation, including petitioner Reynoso, became employees of CCC-Equity. While petitioner continued to be the Resident Manager of CCC-QC, he drew his salaries and allowances from CCC-Equity. Furthermore, although an employee of CCC-Equity, petitioner, as well as all employees of CCC-QC, became qualified members of the Commercial Credit Corporation Employees Pension Plan.As Resident Manager of CCC-QC, petitioner oversaw the operations of CCC-QC and supervised its employees. The business activities of CCC-QC pertain to the acceptance of funds from depositors who are issued interest-bearing promissory notes. The amounts deposited are then loaned out to various borrowers. Petitioner, in order to boost the business activities of CCC-QC, deposited his personal funds in the company. In return, CCC-QC issued to him its interest-bearing promissory notes.On August 15, 1980, a complaint for sum of money with preliminary attachment, [1] docketed as Civil Case No. Q-30583, was instituted in the then Court of First Instance of Rizal by CCC-QC against petitioner, who had in the meantime been dismissed from his employment by CCC-Equity. The complaint was subsequently amended in order to include Hidelita Nuval, petitioner’s wife, as a party defendant. [2] The complaint alleged that petitioner embezzled the funds of CCC-QC amounting to P1,300,593.11. Out of this amount, at least P630,000.00 was used for the purchase of a house and lot located at No. 12 Macopa Street, Valle Verde I, Pasig City. The property was mortgaged to CCC, and was later foreclosed.In his amended Answer, petitioner denied having unlawfully used funds of CCC-QC and asserted that the sum of P1,300,593.11 represented his money placements in CCC-QC, as shown by twenty-three (23) checks which he issued to the said company.[3]

The case was subsequently transferred to the Regional Trial Court of Quezon City, Branch 86, pursuant to the Judiciary Reorganization Act of 1980.On January 14, 1985, the trial court rendered its decision, the decretal portion of which states:Premises considered, the Court finds the complaint without merit. Accordingly, said complaint is hereby DISMISSED.By reason of said complaint, defendant Bibiano Reynoso IV suffered degradation, humiliation and mental anguish.On the counterclaim, which the Court finds to be meritorious, plaintiff corporation is hereby ordered:a) to pay defendant the sum of P185,000.00 plus 14% interest per annum from October 2, 1980 until fully paid;b) to pay defendant P3,639,470.82 plus interest thereon at the rate of 14% per annum from June 24, 1981, the date of filing of Amended Answer, until fully paid; from this amount may be deducted the remaining obligation of defendant under the promissory note of October 24, 1977, in the sum of P9,738.00 plus penalty at the rate of 1% per month from December 24, 1977 until fully paid;c) to pay defendants P200,000.00 as moral damages;d) to pay defendants P100,000.00 as exemplary damages;e) to pay defendants P25,000.00 as and for attorney's fees; plus costs of the suit.SO ORDERED.Both parties appealed to the then Intermediate Appellate Court. The appeal of Commercial Credit Corporation of Quezon City was dismissed for failure to pay docket fees. Petitioner, on the other hand, withdrew his appeal.Hence, the decision became final and, accordingly, a Writ of Execution was issued on July 24, 1989. [4] However, the judgment remained unsatisfied,[5] prompting petitioner to file a Motion for Alias Writ of Execution, Examination of Judgment Debtor, and to Bring Financial Records for Examination to Court. CCC-QC filed an Opposition to petitioner’s motion,[6] alleging that the possession of its premises and records had been taken over by CCC.Meanwhile, in 1983, CCC became known as the General Credit Corporation.On November 22, 1991, the Regional Trial Court of Quezon City issued an Order directing General Credit Corporation to file its comment on petitioner’s motion for alias writ of execution. [7]General Credit Corporation filed a Special Appearance and Opposition on December 2, 1991,[8] alleging that it was not a party to the case, and therefore

http://sc.judiciary.gov.ph/jurisprudence/2000/nov2000/116124_25.htm#_edn8








petitioner should direct his claim against CCC-QC and not General Credit Corporation. Petitioner filed his reply,[9] stating that the CCC-QC is an adjunct instrumentality, conduit and agency of CCC. Furthermore, petitioner invoked the decision of the Securities and Exchange Commission in SEC Case No. 2581, entitled, “Avelina G. Ramoso, et al., Petitioner versus General Credit Corp., et al., Respondents,” where it was declared that General Credit Corporation, CCC-Equity and other franchised companies including CCC-QC were declared as one corporation.On December 9, 1991, the Regional Trial Court of Quezon City ordered the issuance of an alias writ of execution.[10] On December 20, 1991, General Credit Corporation filed an Omnibus Motion, [11] alleging that SEC Case No. 2581 was still pending appeal, and maintaining that the levy on properties of the General Credit Corporation by the deputy sheriff of the court was erroneous.In his Opposition to the Omnibus Motion, petitioner insisted that General Credit Corporation is just the new name of Commercial Credit Corporation; hence, General Credit Corporation and Commercial Credit Corporation should be treated as one and the same entity.On February 13, 1992, the Regional Trial Court of Quezon City denied the Omnibus Motion. [12] On March 5, 1992, it issued an Order directing the issuance of an alias writ of execution.[13]

Previously, on February 21, 1992, General Credit Corporation instituted a complaint before the Regional Trial Court of Pasig against Bibiano Reynoso IV and Edgardo C. Tanangco, in his capacity as Deputy Sheriff of Quezon City,[14] docketed as Civil Case No. 61777, praying that the levy on its parcel of land located in Pasig, Metro Manila and covered by Transfer Certificate of Title No. 29940 be declared null and void, and that defendant sheriff be enjoined from consolidating ownership over the land and from further levying on other properties of General Credit Corporation to answer for any liability under the decision in Civil Case No. Q-30583.The Regional Trial Court of Pasig, Branch 167, did not issue a temporary restraining order. Thus, General Credit Corporation instituted two (2) petitions for certiorari with the Court of Appeals, docketed as CA-G.R. SP No. 27518[15] and CA-G.R. SP No. 27683. These cases were later consolidated.On July 7, 1994, the Court of Appeals rendered a decision in the two consolidated cases, the dispositive portion of which reads:WHEREFORE, in SP No. 27518 we declare the issue of the respondent court's refusal to issue a restraining order as having been rendered moot by our Resolution of 7 April 1992 which, by way of injunctive relief, provided that "the respondents and their representatives are hereby enjoined from conducting an auction sale (on execution) of petitioner's properties as well as initiating similar acts of levying (upon) and selling on execution other properties of said petitioner". The injunction thus granted, as modified by the words in parenthesis, shall remain in force until Civil Case No. 61777 shall have been finally terminated.In SP No. 27683, we grant the petition for certiorari and accordingly NULLIFY and SET ASIDE, for having been issued in excess of jurisdiction, the Order of 13 February 1992 in Civil Case No. Q-30583 as well as any other order or process through which the petitioner is made liable under the judgment in said Civil Case No. Q-30583.No damages and no costs.SO ORDERED.[16]

Hence, this petition for review anchored on the following arguments:1. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27683 WHEN IT NULLIFIED AND SET ASIDE THE 13 FEBRUARY 1992 ORDER AND OTHER ORDERS OR PROCESS OF BRANCH 86 OF THE REGIONAL TRIAL COURT OF QUEZON CITY THROUGH WHICH GENERAL CREDIT CORPORATION IS MADE LIABLE UNDER THE JUDGMENT THAT WAS RENDERED IN CIVIL CASE NO. Q-30583.2. THE HONORABLE COURT OF APPEALS ERRED IN CA-G.R. SP NO. 27518 WHEN IT ENJOINED THE AUCTION SALE ON EXECUTION OF THE PROPERTIES OF GENERAL CREDIT CORPORATION AS WELL AS INITIATING SIMILAR ACTS OF LEVYING UPON AND SELLING ON EXECUTION OF OTHER PROPERTIES OF GENERAL CREDIT CORPORATION.3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT GENERAL CREDIT CORPORATION IS A STRANGER TO CIVIL CASE NO. Q-30583, INSTEAD OF, DECLARING THAT COMMERCIAL CREDIT CORPORATION OF QUEZON CITY IS THE ALTER EGO, INSTRUMENTALITY, CONDUIT OR ADJUNCT OF COMMERCIAL CREDIT CORPORATION AND ITS SUCCESSOR GENERAL CREDIT CORPORATION.At the outset, it must be stressed that there is no longer any controversy over petitioner’s claims against his former employer, CCC-QC, inasmuch as the decision in Civil Case No. Q-30583 of the Regional Trial Court of Quezon City has long become final and executory. The only issue, therefore, to be resolved in the instant petition is whether or not the judgment in favor of petitioner may be executed against respondent General Credit Corporation. The latter contends that it is a corporation separate and distinct from CCC-QC and, therefore, its properties may not be levied upon to satisfy the monetary judgment in favor of petitioner. In short, respondent raises corporate fiction as its defense. Hence, we are necessarily called upon to apply the doctrine of piercing the veil of corporate entity in order to determine if General Credit Corporation, formerly CCC, may be held liable for the obligations of CCC-QC.The petition is impressed with merit.A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence. [17] It is an artificial being invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related.[18] It was evolved to make possible the aggregation and assembling of huge











amounts of capital upon which big business depends. It also has the advantage of non-dependence on the lives of those who compose it even as it enjoys certain rights and conducts activities of natural persons.Precisely because the corporation is such a prevalent and dominating factor in the business life of the country, the law has to look carefully into the exercise of powers by these artificial persons it has created.Any piercing of the corporate veil has to be done with caution. However, the Court will not hesitate to use its supervisory and adjudicative powers where the corporate fiction is used as an unfair device to achieve an inequitable result, defraud creditors, evade contracts and obligations, or to shield it from the effects of a court decision. The corporate fiction has to be disregarded when necessary in the interest of justice.In First Philippine International Bank v. Court of Appeals, et al.,[19] we held:When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals.Also in the above-cited case, we stated that this Court has pierced the veil of corporate fiction in numerous cases where it was used, among others, to avoid a judgment credit; [20] to avoid inclusion of corporate assets as part of the estate of a decedent;[21] to avoid liability arising from debt;[22] when made use of as a shield to perpetrate fraud and/or confuse legitimate issues;[23] or to promote unfair objectives or otherwise to shield them.[24]

In the appealed judgment, the Court of Appeals sustained respondent’s arguments of separateness and its character as a different corporation which is a non-party or stranger to this case.The defense of separateness will be disregarded where the business affairs of a subsidiary corporation are so controlled by the mother corporation to the extent that it becomes an instrument or agent of its parent. But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction applies only when such fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime.[25]

We stated in Tomas Lao Construction v. National Labor Relations Commission, [26] that the legal fiction of a corporation being a judicial entity with a distinct and separate personality was envisaged for convenience and to serve justice. Therefore, it should not be used as a subterfuge to commit injustice and circumvent the law.Precisely for the above reasons, we grant the instant petition.It is obvious that the use by CCC-QC of the same name of Commercial Credit Corporation was intended to publicly identify it as a component of the CCC group of companies engaged in one and the same business, i.e., investment and financing. Aside from CCC-Quezon City, other franchise companies were organized such as CCC-North Manila and CCC-Cagayan Valley. The organization of subsidiary corporations as what was done here is usually resorted to for the aggrupation of capital, the ability to cover more territory and population, the decentralization of activities best decentralized, and the securing of other legitimate advantages. But when the mother corporation and its subsidiary cease to act in good faith and honest business judgment, when the corporate device is used by the parent to avoid its liability for legitimate obligations of the subsidiary, and when the corporate fiction is used to perpetrate fraud or promote injustice, the law steps in to remedy the problem. When that happens, the corporate character is not necessarily abrogated. It continues for legitimate objectives. However, it is pierced in order to remedy injustice, such as that inflicted in this case.Factually and legally, the CCC had dominant control of the business operations of CCC-QC. The exclusive management contract insured that CCC-QC would be managed and controlled by CCC and would not deviate from the commands of the mother corporation. In addition to the exclusive management contract, CCC appointed its own employee, petitioner, as the resident manager of CCC-QC.Petitioner’s designation as “resident manager” implies that he was placed in CCC-QC by a superior authority. In fact, even after his assignment to the subsidiary corporation, petitioner continued to receive his salaries, allowances, and benefits from CCC, which later became respondent General Credit Corporation. Not only that. Petitioner and the other permanent employees of CCC-QC were qualified members and participants of the Employees Pension Plan of CCC.There are other indications in the record which attest to the applicability of the identity rule in this case, namely: the unity of interests, management, and control; the transfer of funds to suit their individual corporate conveniences; and the dominance of policy and practice by the mother corporation insure that CCC-QC was an instrumentality or agency of CCC.As petitioner stresses, both CCC and CCC-QC were engaged in the same principal line of business involving a single transaction process. Under their discounting arrangements, CCC financed the operations of CCC-QC. The subsidiary sold, discounted, or assigned its accounts receivables to CCC.The testimony of Joselito D. Liwanag, accountant and auditor of CCC since 1971, shows the pervasive and intensive auditing function of CCC over CCC-QC.[27] The two corporations also shared the same office space. CCC-QC had no office of its own.The complaint in Civil Case No. Q-30583, instituted by CCC-QC, was even verified by the director-representative of CCC. The lawyers who filed the complaint and amended complaint were all in-house lawyers of CCC.The challenged decision of the Court of Appeals states that CCC, now General Credit Corporation, is not a formal party in the case. The reason for this is that the complaint was filed by CCC-QC against petitioner. The choice of










parties was with CCC-QC. The judgment award in this case arose from the counterclaim which petitioner set up against CCC-QC.The circumstances which led to the filing of the aforesaid complaint are quite revealing. As narrated above, the discounting agreements through which CCC controlled the finances of its subordinates became unlawful when Central Bank adopted the DOSRI prohibitions. Under this rule the directors, officers, and stockholders are prohibited from borrowing from their company. Instead of adhering to the letter and spirit of the regulations by avoiding DOSRI loans altogether, CCC used the corporate device to continue the prohibited practice. CCC organized still another corporation, the CCC-Equity Corporation. However, as a wholly owned subsidiary, CCC-Equity was in fact only another name for CCC. Key officials of CCC, including the resident managers of subsidiary corporations, were appointed to positions in CCC-Equity.In order to circumvent the Central Bank’s disapproval of CCC-QC’s mode of reducing its DOSRI lender accounts and its directive to follow Central Bank requirements, resident managers, including petitioner, were told to observe a pseudo-compliance with the phasing out orders. For his unwillingness to satisfactorily conform to these directives and his reluctance to resort to illegal practices, petitioner earned the ire of his employers. Eventually, his services were terminated, and criminal and civil cases were filed against him.Petitioner issued twenty-three checks as money placements with CCC-QC because of difficulties faced by the firm in implementing the required phase-out program. Funds from his current account in the Far East Bank and Trust Company were transferred to CCC-QC. These monies were alleged in the criminal complaints against him as having been stolen. Complaints for qualified theft and estafa were brought by CCC-QC against petitioner. These criminal cases were later dismissed. Similarly, the civil complaint which was filed with the Court of First Instance of Pasig and later transferred to the Regional Trial Court of Quezon City was dismissed, but his counterclaims were granted.Faced with the financial obligations which CCC-QC had to satisfy, the mother firm closed CCC-QC, in obvious fraud of its creditors. CCC-QC, instead of opposing its closure, cooperated in its own demise. Conveniently, CCC-QC stated in its opposition to the motion for alias writ of execution that all its properties and assets had been transferred and taken over by CCC.Under the foregoing circumstances, the contention of respondent General Credit Corporation, the new name of CCC, that the corporate fiction should be appreciated in its favor is without merit.Paraphrasing the ruling in Claparols v. Court of Industrial Relations,[28] reiterated in Concept Builders Inc. v. National Labor Relations,[29] it is very obvious that respondent “seeks the protective shield of a corporate fiction whose veil the present case could, and should, be pierced as it was deliberately and maliciously designed to evade its financial obligation of its employees.”If the corporate fiction is sustained, it becomes a handy deception to avoid a judgment debt and work an injustice. The decision raised to us for review is an invitation to multiplicity of litigation. As we stated in Islamic Directorate vs. Court of Appeals,[30] the ends of justice are not served if further litigation is encouraged when the issue is determinable based on the records.A court judgment becomes useless and ineffective if the employer, in this case CCC as a mother corporation, is placed beyond the legal reach of the judgment creditor who, after protracted litigation, has been found entitled to positive relief. Courts have been organized to put an end to controversy. This purpose should not be negated by an inapplicable and wrong use of the fiction of the corporate veil.

WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and ASIDE. The injunction against the holding of an auction sale for the execution of the decision in Civil Case No. Q-30583 of properties of General Credit Corporation, and the levying upon and selling on execution of other properties of General Credit Corporation, is LIFTED.SO ORDERED.Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.


FIRST DIVISION

G.R. No. 120077 October 13, 2000THE MANILA HOTEL CORP. AND MANILA HOTEL INTL. LTD., petitioners,

vs.NATIONAL LABOR RELATIONS COMMISSION, ARBITER CEFERINA J. DIOSANA AND MARCELO G.

SANTOS, respondents.




PARDO, J.:

The case before the Court is a petition for certiorari1 to annul the following orders of the National Labor Relations Commission (hereinafter referred to as "NLRC") for having been issued without or with excess jurisdiction and with grave abuse of discretion:2

(1) Order of May 31, 1993.3 Reversing and setting aside its earlier resolution of August 28, 1992.4 The questioned order declared that the NLRC, not the Philippine Overseas Employment Administration (hereinafter referred to as "POEA"), had jurisdiction over private respondent's complaint;(2) Decision of December 15, 1994.5 Directing petitioners to jointly and severally pay private respondent twelve thousand and six hundred dollars (US$ 12,600.00) representing salaries for the unexpired portion of his contract; three thousand six hundred dollars (US$3,600.00) as extra four months salary for the two (2) year period of his contract, three thousand six hundred dollars (US$3,600.00) as "14th month pay" or a total of nineteen thousand and eight hundred dollars (US$19,800.00) or its peso equivalent and attorney's fees amounting to ten percent (10%) of the total award; and(3) Order of March 30, 1995.6 Denying the motion for reconsideration of the petitioners.In May, 1988, private respondent Marcelo Santos (hereinafter referred to as "Santos") was an overseas worker employed as a printer at the Mazoon Printing Press, Sultanate of Oman. Subsequently, in June 1988, he was directly hired by the Palace Hotel, Beijing, People's Republic of China and later terminated due to retrenchment.Petitioners are the Manila Hotel Corporation (hereinafter referred to as "MHC") and the Manila Hotel International Company, Limited (hereinafter referred to as "MHICL").When the case was filed in 1990, MHC was still a government-owned and controlled corporation duly organized and existing under the laws of the Philippines.MHICL is a corporation duly organized and existing under the laws of Hong Kong.7 MHC is an "incorporator" of MHICL, owning 50% of its capital stock.8

By virtue of a "management agreement"9 with the Palace Hotel (Wang Fu Company Limited), MHICL10 trained the personnel and staff of the Palace Hotel at Beijing, China.Now the facts.During his employment with the Mazoon Printing Press in the Sultanate of Oman, respondent Santos received a letter dated May 2, 1988 from Mr. Gerhard R. Shmidt, General Manager, Palace Hotel, Beijing, China. Mr. Schmidt informed respondent Santos that he was recommended by one Nestor Buenio, a friend of his.Mr. Shmidt offered respondent Santos the same position as printer, but with a higher monthly salary and increased benefits. The position was slated to open on October 1, 1988.11

On May 8, 1988, respondent Santos wrote to Mr. Shmidt and signified his acceptance of the offer.On May 19, 1988, the Palace Hotel Manager, Mr. Hans J. Henk mailed a ready to sign employment contract to respondent Santos. Mr. Henk advised respondent Santos that if the contract was acceptable, to return the same to Mr. Henk in Manila, together with his passport and two additional pictures for his visa to China.On May 30, 1988, respondent Santos resigned from the Mazoon Printing Press, effective June 30, 1988, under the pretext that he was needed at home to help with the family's piggery and poultry business.On June 4, 1988, respondent Santos wrote the Palace Hotel and acknowledged Mr. Henk's letter. Respondent Santos enclosed four (4) signed copies of the employment contract (dated June 4, 1988) and notified them that he was going to arrive in Manila during the first week of July 1988.The employment contract of June 4, 1988 stated that his employment would commence September 1, 1988 for a period of two years.12 It provided for a monthly salary of nine hundred dollars (US$900.00) net of taxes, payable fourteen (14) times a year.13

On June 30, 1988, respondent Santos was deemed resigned from the Mazoon Printing Press.On July 1, 1988, respondent Santos arrived in Manila.On November 5, 1988, respondent Santos left for Beijing, China. He started to work at the Palace Hotel.14

Subsequently, respondent Santos signed an amended "employment agreement" with the Palace Hotel, effective November 5, 1988. In the contract, Mr. Shmidt represented the Palace Hotel. The Vice President (Operations and Development) of petitioner MHICL Miguel D. Cergueda signed the employment agreement under the word "noted".From June 8 to 29, 1989, respondent Santos was in the Philippines on vacation leave. He returned to China and reassumed his post on July 17, 1989.On July 22, 1989, Mr. Shmidt's Executive Secretary, a certain Joanna suggested in a handwritten note that respondent Santos be given one (1) month notice of his release from employment.On August 10, 1989, the Palace Hotel informed respondent Santos by letter signed by Mr. Shmidt that his employment at the Palace Hotel print shop would be terminated due to business reverses brought about by the political upheaval in China.15 We quote the letter:16

"After the unfortunate happenings in China and especially Beijing (referring to Tiannamen Square incidents), our business has been severely affected. To reduce expenses, we will not open/operate printshop for the time being."We sincerely regret that a decision like this has to be made, but rest assured this does in no way reflect your past performance which we found up to our expectations.""Should a turnaround in the business happen, we will contact you directly and give you priority on future assignment."

On September 5, 1989, the Palace Hotel terminated the employment of respondent Santos and paid all benefits due him, including his plane fare back to the Philippines.On October 3, 1989, respondent Santos was repatriated to the Philippines.On October 24, 1989, respondent Santos, through his lawyer, Atty. Ednave wrote Mr. Shmidt, demanding full compensation pursuant to the employment agreement.On November 11, 1989, Mr. Shmidt replied, to wit:17

His service with the Palace Hotel, Beijing was not abruptly terminated but we followed the one-month notice clause and Mr. Santos received all benefits due him."For your information the Print Shop at the Palace Hotel is still not operational and with a low business outlook, retrenchment in various departments of the hotel is going on which is a normal management practice to control costs."When going through the latest performance ratings, please also be advised that his performance was below average and a Chinese National who is doing his job now shows a better approach."In closing, when Mr. Santos received the letter of notice, he hardly showed up for work but still enjoyed free accommodation/laundry/meals up to the day of his departure."On February 20, 1990, respondent Santos filed a complaint for illegal dismissal with the Arbitration Branch, National Capital Region, National Labor Relations Commission (NLRC). He prayed for an award of nineteen thousand nine hundred and twenty three dollars (US$19,923.00) as actual damages, forty thousand pesos (P40,000.00) as exemplary damages and attorney's fees equivalent to 20% of the damages prayed for. The complaint named MHC, MHICL, the Palace Hotel and Mr. Shmidt as respondents.The Palace Hotel and Mr. Shmidt were not served with summons and neither participated in the proceedings before the Labor Arbiter.18

On June 27, 1991, Labor Arbiter Ceferina J. Diosana, decided the case against petitioners, thus:19

"WHEREFORE, judgment is hereby rendered:"1. directing all the respondents to pay complainant jointly and severally;"a) $20,820 US dollars or its equivalent in Philippine currency as unearned salaries;"b) P50,000.00 as moral damages;"c) P40,000.00 as exemplary damages; and"d) Ten (10) percent of the total award as attorney's fees."SO ORDERED."On July 23, 1991, petitioners appealed to the NLRC, arguing that the POEA, not the NLRC had jurisdiction over the case.On August 28, 1992, the NLRC promulgated a resolution, stating:20

"WHEREFORE, let the appealed Decision be, as it is hereby, declared null and void for want of jurisdiction. Complainant is hereby enjoined to file his complaint with the POEA."SO ORDERED."On September 18, 1992, respondent Santos moved for reconsideration of the afore-quoted resolution. He argued that the case was not cognizable by the POEA as he was not an "overseas contract worker."21

On May 31, 1993, the NLRC granted the motion and reversed itself. The NLRC directed Labor Arbiter Emerson Tumanon to hear the case on the question of whether private respondent was retrenched or dismissed.22

On January 13, 1994, Labor Arbiter Tumanon completed the proceedings based on the testimonial and documentary evidence presented to and heard by him.23

Subsequently, Labor Arbiter Tumanon was re-assigned as trial Arbiter of the National Capital Region, Arbitration Branch, and the case was transferred to Labor Arbiter Jose G. de Vera.24

On November 25, 1994, Labor Arbiter de Vera submitted his report.25 He found that respondent Santos was illegally dismissed from employment and recommended that he be paid actual damages equivalent to his salaries for the unexpired portion of his contract.26

On December 15, 1994, the NLRC ruled in favor of private respondent, to wit:27

"WHEREFORE, finding that the report and recommendations of Arbiter de Vera are supported by substantial evidence, judgment is hereby rendered, directing the respondents to jointly and severally pay complainant the following computed contractual benefits: (1) US$12,600.00 as salaries for the unexpired portion of the parties' contract; (2) US$3,600.00 as extra four (4) months salary for the two (2) years period (sic) of the parties' contract; (3) US$3,600.00 as "14th month pay" for the aforesaid two (2) years contract stipulated by the parties or a total of US$19,800.00 or its peso equivalent, plus (4) attorney's fees of 10% of complainant's total award."SO ORDERED."On February 2, 1995, petitioners filed a motion for reconsideration arguing that Labor Arbiter de Vera's recommendation had no basis in law and in fact.28

On March 30, 1995, the NLRC denied the motion for reconsideration.29

Hence, this petition.30

On October 9, 1995, petitioners filed with this Court an urgent motion for the issuance of a temporary restraining order and/or writ of preliminary injunction and a motion for the annulment of the entry of judgment of the NLRC dated July 31, 1995.31

On November 20, 1995, the Court denied petitioner's urgent motion. The Court required respondents to file their respective comments, without giving due course to the petition.32

On March 8, 1996, the Solicitor General filed a manifestation stating that after going over the petition and its annexes, they can not defend and sustain the position taken by the NLRC in its assailed decision and orders. The Solicitor General prayed that he be excused from filing a comment on behalf of the NLRC33

On April 30,1996, private respondent Santos filed his comment.34

On June 26, 1996, the Court granted the manifestation of the Solicitor General and required the NLRC to file its own comment to the petition.35

On January 7, 1997, the NLRC filed its comment.The petition is meritorious.I. Forum Non-ConveniensThe NLRC was a seriously inconvenient forum.We note that the main aspects of the case transpired in two foreign jurisdictions and the case involves purely foreign elements. The only link that the Philippines has with the case is that respondent Santos is a Filipino citizen. The Palace Hotel and MHICL are foreign corporations. Not all cases involving our citizens can be tried here.The employment contract. — Respondent Santos was hired directly by the Palace Hotel, a foreign employer, through correspondence sent to the Sultanate of Oman, where respondent Santos was then employed. He was hired without the intervention of the POEA or any authorized recruitment agency of the government.36

Under the rule of forum non conveniens, a Philippine court or agency may assume jurisdiction over the case if it chooses to do so provided: (1) that the Philippine court is one to which the parties may conveniently resort to; (2) that the Philippine court is in a position to make an intelligent decision as to the law and the facts; and (3) that the Philippine court has or is likely to have power to enforce its decision.37 The conditions are unavailing in the case at bar.Not Convenient. — We fail to see how the NLRC is a convenient forum given that all the incidents of the case — from the time of recruitment, to employment to dismissal occurred outside the Philippines. The inconvenience is compounded by the fact that the proper defendants, the Palace Hotel and MHICL are not nationals of the Philippines. Neither .are they "doing business in the Philippines." Likewise, the main witnesses, Mr. Shmidt and Mr. Henk are non-residents of the Philippines.No power to determine applicable law. — Neither can an intelligent decision be made as to the law governing the employment contract as such was perfected in foreign soil. This calls to fore the application of the principle of lex loci contractus (the law of the place where the contract was made).38

The employment contract was not perfected in the Philippines. Respondent Santos signified his acceptance by writing a letter while he was in the Republic of Oman. This letter was sent to the Palace Hotel in the People's Republic of China.No power to determine the facts. — Neither can the NLRC determine the facts surrounding the alleged illegal dismissal as all acts complained of took place in Beijing, People's Republic of China. The NLRC was not in a position to determine whether the Tiannamen Square incident truly adversely affected operations of the Palace Hotel as to justify respondent Santos' retrenchment.Principle of effectiveness, no power to execute decision. — Even assuming that a proper decision could be reached by the NLRC, such would not have any binding effect against the employer, the Palace Hotel. The Palace Hotel is a corporation incorporated under the laws of China and was not even served with summons. Jurisdiction over its person was not acquired.This is not to say that Philippine courts and agencies have no power to solve controversies involving foreign employers. Neither are we saying that we do not have power over an employment contract executed in a foreign country. If Santos were an "overseas contract worker", a Philippine forum, specifically the POEA, not the NLRC, would protect him.39 He is not an "overseas contract worker" a fact which he admits with conviction.40

Even assuming that the NLRC was the proper forum, even on the merits, the NLRC's decision cannot be sustained.II. MHC Not LiableEven if we assume two things: (1) that the NLRC had jurisdiction over the case, and (2) that MHICL was liable for Santos' retrenchment, still MHC, as a separate and distinct juridical entity cannot be held liable.True, MHC is an incorporator of MHICL and owns fifty percent (50%) of its capital stock. However, this is not enough to pierce the veil of corporate fiction between MHICL and MHC.Piercing the veil of corporate entity is an equitable remedy. It is resorted to when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend a crime. 41 It is done only when a corporation is a mere alter ego or business conduit of a person or another corporation.In Traders Royal Bank v. Court of Appeals,42 we held that "the mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient reason for disregarding the fiction of separate corporate personalities."The tests in determining whether the corporate veil may be pierced are: First, the defendant must have control or complete domination of the other corporation's finances, policy and business practices with regard to the transaction attacked. There must be proof that the other corporation had no separate mind, will or existence with respect the act complained of. Second, control must be used by the defendant to commit fraud or wrong. Third, the aforesaid control

or breach of duty must be the proximate cause of the injury or loss complained of. The absence of any of the elements prevents the piercing of the corporate veil.43

It is basic that a corporation has a personality separate and distinct from those composing it as well as from that of any other legal entity to which it may be related.44 Clear and convincing evidence is needed to pierce the veil of corporate fiction.45In this case, we find no evidence to show that MHICL and MHC are one and the same entity.III. MHICL not LiableRespondent Santos predicates MHICL's liability on the fact that MHICL "signed" his employment contract with the Palace Hotel. This fact fails to persuade us.First, we note that the Vice President (Operations and Development) of MHICL, Miguel D. Cergueda signed the employment contract as a mere witness. He merely signed under the word "noted".When one "notes" a contract, one is not expressing his agreement or approval, as a party would. 46 In Sichangco v. Board of Commissioners of Immigration,47 the Court recognized that the term "noted" means that the person so noting has merely taken cognizance of the existence of an act or declaration, without exercising a judicious deliberation or rendering a decision on the matter.Mr. Cergueda merely signed the "witnessing part" of the document. The "witnessing part" of the document is that which, "in a deed or other formal instrument is that part which comes after the recitals, or where there are no recitals, after the parties(emphasis ours)."48 As opposed to a party to a contract, a witness is simply one who, "being present, personally sees or perceives a thing; a beholder, a spectator, or eyewitness."49 One who "notes" something just makes a "brief written statement"50 a memorandum or observation.Second, and more importantly, there was no existing employer-employee relationship between Santos and MHICL. In determining the existence of an employer-employee relationship, the following elements are considered:51

"(1) the selection and engagement of the employee;"(2) the payment of wages;"(3) the power to dismiss; and"(4) the power to control employee's conduct."MHICL did not have and did not exercise any of the aforementioned powers. It did not select respondent Santos as an employee for the Palace Hotel. He was referred to the Palace Hotel by his friend, Nestor Buenio. MHICL did not engage respondent Santos to work. The terms of employment were negotiated and finalized through correspondence between respondent Santos, Mr. Schmidt and Mr. Henk, who were officers and representatives of the Palace Hotel and not MHICL. Neither did respondent Santos adduce any proof that MHICL had the power to control his conduct. Finally, it was the Palace Hotel, through Mr. Schmidt and not MHICL that terminated respondent Santos' services.Neither is there evidence to suggest that MHICL was a "labor-only contractor."52 There is no proof that MHICL "supplied" respondent Santos or even referred him for employment to the Palace Hotel.Likewise, there is no evidence to show that the Palace Hotel and MHICL are one and the same entity. The fact that the Palace Hotel is a member of the "Manila Hotel Group" is not enough to pierce the corporate veil between MHICL and the Palace Hotel.IV. Grave Abuse of DiscretionConsidering that the NLRC was forum non-conveniens and considering further that no employer-employee relationship existed between MHICL, MHC and respondent Santos, Labor Arbiter Ceferina J. Diosana clearly had no jurisdiction over respondent's claim in NLRC NCR Case No. 00-02-01058-90.Labor Arbiters have exclusive and original jurisdiction only over the following:53

"1. Unfair labor practice cases;"2. Termination disputes;"3. If accompanied with a claim for reinstatement, those cases that workers may file involving wages, rates of pay, hours of work and other terms and conditions of employment;"4. Claims for actual, moral, exemplary and other forms of damages arising from employer-employee relations;"5. Cases arising from any violation of Article 264 of this Code, including questions involving legality of strikes and lockouts; and"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."In all these cases, an employer-employee relationship is an indispensable jurisdictional requirement.The jurisdiction of labor arbiters and the NLRC under Article 217 of the Labor Code is limited to disputes arising from an employer-employee relationship which can be resolved by reference to the Labor Code, or other labor statutes, or their collective bargaining agreements.54

"To determine which body has jurisdiction over the present controversy, we rely on the sound judicial principle that jurisdiction over the subject matter is conferred by law and is determined by the allegations of the complaint irrespective of whether the plaintiff is entitled to all or some of the claims asserted therein."55

The lack of jurisdiction of the Labor Arbiter was obvious from the allegations of the complaint. His failure to dismiss the case amounts to grave abuse of discretion.56

V. The Fallo

WHEREFORE, the Court hereby GRANTS the petition for certiorari and ANNULS the orders and resolutions of the National Labor Relations Commission dated May 31, 1993, December 15, 1994 and March 30, 1995 in NLRC NCR CA No. 002101-91 (NLRC NCR Case No. 00-02-01058-90).No costs.SO ORDERED.Davide, Jr., C .J ., Puno, Kapunan, Pardo and Ynares-Santiago, JJ ., concur.


Manila

FIRST DIVISION

G.R. No. 130328 May 31, 2000

UBS MARKETING CORPORATION and JOHNNY K.H. UY, petitioners,vs.THE HONORABLE SPECIAL THIRD DIVISION OF THE COURT OF APPEALS, BAN HUA U. FLORES, BAN HA U. CHUA, and ROLANDO M. KING, respondents.

KAPUNAN, J.:

This petition for review on certiorari seeks to reverse the decision of the Court of Appeals (CA), dated 21 August 1997, in CA-G.R. SP No. 41198. In the assailed decision, the CA reversed and set aside the order of the Securities and Exchange Commission (SEC) en banc, dated 21 December 1995, and resolution, dated 24 June 1996, ordering Ban Hua Uy-Flores et al. (respondents) to render a full accounting of all the assets, properties and receivables of Soon Kee Commercial, Inc. and UBS Marketing Corporation.

The factual background of this case, as established by this Court in its earlier decision 1 involving the same parties, is as follows:

Petitioner Johnny K.H. Uy and private respondents Ban Hua Uy-Flores and Ban Ha Uy-Chua are brother and sisters. They belong to the Uy family of Bacolod City which owns several corporations, including UBS Marketing Corporation and the Soon Kee Commercial, Inc. All the three (3) above-named individuals, including other members of the Uy family, were interlocking stockholders and officers of the two (2) aforementioned corporations. Thus, private respondents Ban Hua Uy-Flores and Ban Ha Uy-Chua were the managing directors of the said corporations and were in custody of the corporate accounting and tax records as well as the funds of UBS Marketing Corporation and Soon Kee Commercial, Inc. Private respondent Roland King is the accountant of the said corporations and other allied Uy family enterprises.

Due to serious disagreements and conflicts, the members of the Uy family, through several conciliation meetings held before their selected Board of Mediators, agreed to divide the family business so that the UBS Marketing Corporation would go to petitioner Johnny K.H. Uy while the Soon Kee Commercial, Inc. would go to the rest of the Uy family, including herein private respondents Ban Hua Uy-Flores and Ban Ha Uy-Chua.

Accordingly, on 5 June 1987, several deeds of assignment were executed by the parties wherein all the stockholdings of petitioner Johnny K.H. Uy and his wife, Magdalena Uy in Soon Kee Commercial, Inc. were assigned either to private respondents Ban Hua Uy-Flores, Ban Ha Uy-Chua or other members of the Uy family while all the stockholdings of private respondent Ban Hua Uy-Flores and Ban Ha Uy-Chua in UBS Marketing Corporation were assigned to petitioner Johnny K.H. Uy or the latter's wife. On 1 July 1987 the parties formalized this division of the family business as well as the other terms of the settlement.

On 6 April 1988, petitioners Johnny K.H. Uy and UBS Marketing Corporation filed with the Securities and Exchange Commission a complaint (petition) against the private respondents Ban Hua Uy-Flores, Ban Ha Uy-Chua, Roland King and Soon Kee Commercial, Inc. for the recovery of UBS Marketing Corporation's corporate books,

books of account, and the accounting and turn over of the funds and properties belonging to UBS Marketing Corporation, docketed therein as SEC Case No. 03328. 2

As likewise established by this Court, the petition in SEC Case No. 3328 (petition a quo) alleged that before the segregation of the family business, respondents Ban Hua Uy-Flores and Ban Ha Uy-Chua, aside from being stockholders and directors, were also officers of the UBS Marketing Corporation, who had custody, control and supervision of its records, property and funds; that respondent Roland King was the accountant of all the business concerns of the Uy family including UBS Marketing Corporation; that after the segregation, petitioner demanded for the turn over of the records of the UBS Marketing Corporation but which respondents refused without just cause; and that they held on and refused to account for funds and property, a portion of which should go to or benefit petitioners, in accordance with their settlement agreement made before the Board of Mediators. 3

Instead of filing an answer, respondents filed a motion to dismiss the complaint on the ground that the SEC had no jurisdiction over their person and over the nature of the action because there was no intra-corporate relationship between the parties to the suit. On 30 May 1998, the SEC Hearing Officer Josefina Pasay-Paz issued an order denying respondents' motion to dismiss. On appeal, the CA reversed and set aside the order of the SEC hearing officer ruling that the SEC had no jurisdiction over the controversy in SEC Case No. 3328.

This Court, upon petition for review filed by the SEC and petitioners, declared that the controversy subject of SEC Case No. 3328 is an intra-corporate controversy which falls within the original and exclusive jurisdiction of the SEC under Section 5(b) of PD No. 902-A, as amended. 4

When the above decision of this Court became final and executory, petitioners filed with the SEC hearing officer a motion for ex-parte reception of evidence. Said motion was granted and petitioners presented testimonial and documentary evidence to support their claims. On 3 May 1995, SEC Hearing Officer Enrique L. Flores, Jr. rendered a judgment by default, the dispositive portion of which reads:

WHEREFORE, considering the foregoing, judgment[,] is hereby rendered as follows:

1. Commanding the respondents to produce and immediately turn over to petitioners the Books of Account of Soon Kee Commercial, Inc. and UBS Marketing Corporation from 1981 to 1987;

2. Commanding the respondents to immediately render a full and complete accounting of all the assets, properties and moneys and the receivables for both Soon Kee (from 1981-1991) and UBS (from 1981 to 1987) respectively;

3. Commanding the respondents to pay the petitioners ten percent (10%) of the entire actual income (from 1988 to 1993) of Soon Kee Commercial, Inc., in the amount of P13 Million as damages;

4. To grant and pay petitioners the amount of P48 Million equivalent to 31.183 percent of the actual income from (1981-1987).

5. Cancelling and annulling the Transfer Certificate of Titles in the name of Soon Kee Commercial, Inc. if any, the Certificate of Titles in the name of SK Realty, Inc. if any, and the Certificate of Titles in the name of New Challenge Resources, Inc. if still there is, and all the properties formerly belonging to and in the name of UBS;

presently totalling (8) lots TCT No. T-141057, TCT No. T-141058, TCT No. T-141059, TCT No. T-141060, TCT No. T-141061, TCT No. T-141062, TCT No. T-141063, TCT No. T-141064 and reverting them back to UBS Marketing Corporation.

6. Ordering the respondents to return and/or execute the Deed of Conveyance of all the properties in the name of Soon Kee Commercial, Inc., SK Realty Inc., New Challenge Resources, Inc. which was previously in the name of UBS in favor of the latter/Johnny KH Uy.

7. Ordering the respondents to pay the separation pay of Johnny KH Uy plus interest amounting to P946,455.31.

8. Ordering the respondents to return/pay the petitioners contingency fund representing 31.183 % of P3M plus interest in the amount of P1,957,280.86.

9. Ordering the respondents to turn over to the petitioners the Nissan or Isuzu Truck in good condition or the value thereof in the amount of P500,000.00.

10. Ordering respondent Ban Hua Flores to return to petitioner Johnny KH Uy the Hongkong property in Northpoint Metropole Flat 1121 previously owned by Johnny KH Uy.

11. Ordering respondents to pay P600,000.00 as attorney's fees.

12. Making the Writ of Preliminary Mandatory Injunction permanent.

SO ORDERED. 5

Respondents appealed to the SEC en banc which set aside the decision of the SEC hearing officer save for paragraph number 2 of the dispositive portion thereof. In effect, the SEC en banc directed respondents to render a full and complete accounting of all the assets, properties and receivables of Soon Kee Commercial, Inc. and UBS Marketing Corporation. 6 Respondents moved for partial reconsideration of the aforesaid order but it was denied by the SEC en banc in its resolution of 24 June 1996. 7

The CA, on appeal by respondents, reversed and set aside the order of the SEC en banc. The dispositive portion of the assailed CA decision reads:

WHEREFORE, premises considered, the SEC En Banc's order of December 21, 1995 is REVERSED AND SET ASIDE insofar as it affirmed paragraph 2 of the dispositive portion of the decision of the Hearing Officer, dated May 3, 1995, ordering and commanding petitioners to render a full and complete accounting of all the assets, properties and moneys and the receivables for both Soon Kee (from 1981-1991) and UBS (from 1981 to 1987). The decision, dated May 3, 1995 of the Hearing Officer and the resolution, dated June 24, 1996 of the SEC En Banc are REVERSED AND SET ASIDE in their entirety. There is no pronouncement as to costs.

SO ORDERED. 8

Petitioners now come to this Court alleging that the CA committed reversible errors, to wit:

1. When it gave due course to the petition without the required Affidavit of Material [d]ates attached to the petition;

2. When it sustained private respondents' repetitious claim that the acts complained of in the petition are in the nature of an action for specific performance which must be filed with the Regional Trial Court;

3. When it applied Section 6, Rule 43 of the 1997 Rules on Civil Procedure;

4. When it reversed the decision of the SEC En Banc requiring the parties to render a full and complete accounting. 9

Preliminarily, the procedural issues raised by petitioner, i.e., paragraph numbers 1 and 3 of the assignment of errors, are without merit. There is no showing that petitioners seasonably raised before the CA the matter of respondents' failure to state the verified material dates in their petition. It is thus too late in the day for petitioners to raise the same at this time. Moreover, contrary to petitioners' allegation, respondents correctly did not implead the SEC in their petition for review before the CA. Section 6 of Administrative Circular No. 1-95 (Revised Circular 1-91), the rule then governing respondents' petition for review, expressly provided that the lower court or agency which rendered the appealed judgment or order shall not be impleaded either as petitioner or respondent. 10

This Court, however, finds merit in the other assignment of errors raised by petitioners, i.e., paragraph numbers 3 and 4. In granting respondents' petition for review, the CA basically ruled that the SEC en banc erred when it ordered respondents "to render a full and complete accounting of all the assets, properties and receivables of Soon Kee Commercial, Inc. and UBS Marketing Corporation" because this was not prayed for in the petition filed by petitioners with the SEC hearing officer. The CA apparently applied Section 5, Rule 18 of the old Rules of Court stating:

Sec. 5. — Extent of relief to be awarded. — A judgment entered against a party in default shall not exceed the amount or be different in kind from that prayed for. 11

The CA likewise held that requiring respondents to render a full and complete accounting of the finances of the aforementioned business enterprises was a matter relating to "specific performance" or enforcement of a contract, a subject matter beyond the SEC's jurisdiction.

It must be noted that the Revised Rules of Procedure in the SEC, as amended, has no provision similar to Section 5, Rule 18 of the old Rules of Court. It appears that the CA applied said provision in a suppletory manner. The pertinent provision on default in the SEC rules on procedure reads:

Sec. 6. Default — If the respondent fails to answer within the time fixed by these Rules, the Hearing Officer, motu propio or upon motion of the petitioner or complainant with proof of such failure, shall declare the respondent in default and forthwith receive evidence ex parte and render judgment granting such relief as the petition or complaint and the facts proven may warrant. This provision applies where no answer is made to a permissive counterclaim, cross-claim, or third-party complaint within the period provided in this Rule.

No service of pleadings other than substantially amended or supplemental pleadings and final orders or judgments shall be necessary on a party in default unless he files a motion

to set aside the order of default, in which event he shall be entitled to notice of all further proceedings regardless of whether the order of default is set aside or not. 12

Thus, applying the above provision, the SEC en banc clearly committed no reversible error in granting the relief which was warranted by the petition a quo and the facts proven albeit said relief was not expressly prayed for. Even if the Rules of Court were to be applied in this case, still it cannot be said that the relief granted by the SECen banc was "different in kind from that prayed for" by the petitioners. Rather, said relief was plainly warranted by the allegations contained in the petition a quo as well as by the facts as found by both the SEC hearing officer and the SEC en banc.

Among others, the petition a quo alleged that:

1. Respondents Ban Hua U. Flores and Ban Ha U. Chua "took charge of all accounting and handling of funds of said UBS Marketing Corporation;" 1

2. Said respondents "took charge of all the accounting and collections of all accounts receivables of the Uy Family Corporations and both said Respondents controlled the funds of all the Uy Family Corporations;" 14

3. Respondent Roland M. King had been the accountant of the UBS Marketing Corporation and Soon Kee Commercial, Inc. and as such, "he was in-charge of all the accounting and bookkeeping work" thereof; 15

4. Respondents misappropriated for their personal benefit and gain the contingency fund set aside for the payment of the obligations incurred by the UBS Marketing Corporation and Soon Kee Commercial, Inc.; 16 and

5. Respondents, despite repeated demands, failed and refused to account for the "slow moving receivables" of Soon Kee Commercial, Inc. and to turn over the amounts received therefrom for distribution to the UBS Marketing Copration and Soon Kee Commercial, Inc. 17

The petition a quo thus prayed as follows:

WHEREFORE, Petitioners pray that judgment be rendered:

1. Immediately issuing a temporary mandatory order or a writ of preliminary mandatory injunction commanding the Respondents Ban Hua U. Flores and Ban Ha U. Chua and Roland M. King to turn over, deliver and transfer all corporate accounting records, tax and financial records, property documents, cash and records of all transaction in the custody, supervision and control of Respondents Ban Hua U. Flores, Ban Ha U.Chua and Roland M. King to the Petitioners;

2. After trial, making the mandatory injunction above-mentioned permanent; and ordering Respondents to turn over and deliver all the above-mentioned records to Petitioners at their address at No. 192 Speaker Eugenio Perez St., Sta. Mesa Heights, Quezon City, Philippines permanently;

3. Ordering and requiring the Respondents to deliver and turn over the common contingency fund to the Petitioners to be entrusted to the above-mentioned Board of Mediators;

4. To order the Respondents jointly and severally to account for and turn over collections from slow moving receivables of the Soon Kee Commercial, Inc. to the Board of Mediators for distribution to the UBS Marketing Corporation and the Soon Kee Commercial, Inc. under the Third Cause of Action;

5. Ordering the Respondents jointly and severally to pay Petitioner Johnny KH Uy his separation pay, bonuses and allowances as President of the UBS Marketing Corporation from funds in the hands of Respondents in such amount as shall be determined by this Honorable Commission after trial under the Fourth Cause of Action;

6. Ordering and requiring the Respondents to turn over and deliver to the Petitioners the Isuzu or Nissan Truck which Respondents have obligated themselves to deliver to Petitioners under the Fifth Cause of Action;

7. To order the Respondents jointly and severally to account for and turn over to the Petitioners the latter's share in the orders taken from Soon Kee Commercial, Inc.'s customers obtained by using and appropriating the name Soon Kee Commercial, Inc. in such amount as shall be established during the trial of the case and to order Respondents to cease and desist front using the corporate name Soon Kee Commercial, Inc. under the Sixth Cause of Action;

8. To order and require Respondents to pay Petitioners jointly and severally such amounts of damages as shall be established under the Seventh Cause of Action;

9. Ordering and requiring the Respondents jointly and severally to pay Petitioners such amount of damages as Petitioners' share in the profits as shall be proved under the Eighth Cause of Action;

10. Ordering and requiring the Respondents jointly and severally to pay Petitioners such amount of actual, moral and exemplary damages and attorney's fees under the Ninth Cause of Action as shall be finally determined by the Honorable Commission on the basis of the evidence adduced and to pay the costs of suit.

Petitioners pray for such other relief as may be deemed just and equitable in the premises. 18

Specifically, the foregoing prayers: that respondents be ordered to account for and turn over funds from the "slow moving receivables" of Soon Kee Commercial, Inc (paragraph number 4); that respondents be ordered to pay petitioner Uy his separation pay, bonuses and allowances as President of UBS Marketing Corporation (paragraph number 5); that respondents be ordered to deliver to petitioner Uy the Isuzu or Nissan truck (paragraph number 6); and that respondents be ordered to account for and turn over to petitioner his share in the profits derived from the use of the name Soon Kee Commercial Inc. (paragraph number 7), cannot be taken independently of each other and of the other finances of the aformentioned family corporations. Considering these reliefs prayed for against the backdrop of the allegations in the petition a quo, the full and complete accounting of all the assets, funds and receivables of said corporations was necessarily warranted.

Indeed, "it is a rule of pleading that the prayer for relief, though part of the complaint, is no part of the cause of action, and plaintiff is entitled to as much relief as the facts may warrant." 19 In the present case, the relief granted by the SEC en banc was clearly based on its findings that respondents, as officers of Soon Kee Commercial, Inc. and UBS Marketing Corp., had an obligation, not only to

petitioners but to the other stockholders as well, to render an accounting of said companies' finances. Further, contrary to the ruling of the CA, this relief does not constitute "specific performance" and is well within the jurisdiction of the SEC.

In fine, the CA thus erroneously reversed the order of the SEC en banc as the latter clearly had the authority to grant petitioners "such relief as the complaint and the facts proven warrant" both under the Rules of Court and the Revised Rules of Procedure in the SEC, as amended.

WHEREFORE, premises considered, the Petition is hereby GRANTED. The assailed CA Decision, dated 21 August 1997, is REVERSED and SET ASIDE, and the SEC en banc's Order, dated 21 December 1995, and Resolution, dated 24 June 1996, are REINSTATED.

SO ORDERED.


Manila

EN BANC

G.R. No. 100152 March 31, 2000

ACEBEDO OPTICAL COMPANY, INC., petitioner, vs.THE HONORABLE COURT OF APPEALS, Hon. MAMINDIARA MANGOTARA, in his capacity as Presiding Judge of the RTC, 12th Judicial Region, Br. 1, Iligan City; SAMAHANG OPTOMETRIST Sa PILIPINAS — Iligan City Chapter, LEO T. CAHANAP, City Legal Officer, and Hon. CAMILO P. CABILI, City Mayor of Iligan,respondents.

PURISIMA, J.:

At bar is a petition for review under Rule 45 of the Rules of Court seeking to nullify the dismissal by the Court of Appeals of the original petition for certiorari, prohibition and mandamus filed by the herein petitioner against the City Mayor and City Legal Officer of Iligan and the Samahang Optometrist sa Pilipinas — Iligan Chapter (SOPI, for brevity).

The antecedent facts leading to the filing of the instant petition are as follows:

Petitioner applied with the Office of the City Mayor of Iligan for a business permit. After consideration of petitioner's application and the opposition interposed thereto by local optometrists, respondent City Mayor issued Business Permit No. 5342 subject to the following conditions:

1. Since it is a corporation, Acebedo cannot put up an optical clinic but only a commercial store;

2. Acebedo cannot examine and/or prescribe reading and similar optical glasses for patients, because these are functions of optical clinics;

3. Acebedo cannot sell reading and similar eyeglasses without a prescription having first been made by an independent optometrist (not its employee) or independent optical clinic. Acebedo can only sell directly to the public, without need of a prescription, Ray-Ban and similar eyeglasses;

4. Acebedo cannot advertise optical lenses and eyeglasses, but can advertise Ray-Ban and similar glasses and frames;

5. Acebedo is allowed to grind lenses but only upon the prescription of an independent optometrist. 1

On December 5, 1988, private respondent Samahan ng Optometrist Sa Pilipinas (SOPI), Iligan Chapter, through its Acting President, Dr. Frances B. Apostol, lodged a complaint against the petitioner before the Office of the City Mayor, alleging that Acebedo had violated the conditions set forth in its business permit and requesting the cancellation and/or revocation of such permit.

Acting on such complaint, then City Mayor Camilo P. Cabili designated City Legal Officer Leo T. Cahanap to conduct an investigation on the matter. On July 12, 1989, respondent City Legal Officer submitted a report to the City Mayor finding the herein petitioner guilty of violating all the conditions of its business permit and recommending the disqualification of petitioner from operating its business

in Iligan City. The report further advised that no new permit shall be granted to petitioner for the year 1989 and should only be given time to wind up its affairs.

On July 19, 1989, the City Mayor sent petitioner a Notice of Resolution and Cancellation of Business Permit effective as of said date and giving petitioner three (3) months to wind up its affairs.

On October 17, 1989, petitioner brought a petition for certiorari, prohibition and mandamus with prayer for restraining order/preliminary injunction against the respondents, City Mayor, City Legal Officer and Samahan ng Optometrists sa Pilipinas-Iligan City Chapter (SOPI), docketed as Civil Case No. 1497 before the Regional Trial Court of Iligan City, Branch I. Petitioner alleged that (1) it was denied due process because it was not given an opportunity to present its evidence during the investigation conducted by the City Legal Officer; (2) it was denied equal protection of the laws as the limitations imposed on its business permit were not imposed on similar businesses in Iligan City; (3) the City Mayor had no authority to impose the special conditions on its business permit; and (4) the City Legal Officer had no authority to conduct the investigation as the matter falls within the exclusive jurisdiction of the Professional Regulation Commission and the Board of Optometry.

Respondent SOPI interposed a Motion to Dismiss the Petition on the ground of non-exhaustion of administrative remedies but on November 24, 1989, Presiding Judge Mamindiara P. Mangotara deferred resolution of such Motion to Dismiss until after trial of the case on the merits. However, the prayer for a writ of preliminary injunction was granted. Thereafter, respondent SOPI filed its answer. 1âwphi1.nêt

On May 30, 1990, the trial court dismissed the petition for failure to exhaust administrative remedies, and dissolved the writ of preliminary injunction it earlier issued. Petitioner's motion for reconsideration met the same fate. It was denied by an Order dated June 28, 1990.

On October 3, 1990, instead of taking an appeal, petitioner filed a petition for certiorari, prohibition and mandamus with the Court of Appeals seeking to set aside the questioned Order of Dismissal, branding the same as tainted with grave abuse of discretion on the part of the trial court.

On January 24, 1991, the Ninth Division 2 of the Court of Appeals dismissed the petition for lack of merit. Petitioner's motion reconsideration was also denied in the Resolution dated May 15, 1991.

Undaunted, petitioner has come before this court via the present petition, theorizing that:

A.

THE RESPONDENT COURT, WHILE CORRECTLY HOLDING THAT THE RESPONDENT CITY MAYOR ACTED BEYOND HIS AUTHORITY IN IMPOSING THE SPECIAL CONDITIONS IN THE PERMIT AS THEY HAD NO BASIS IN ANY LAW OR ORDINANCE, ERRED IN HOLDING THAT THE SAID SPECIAL CONDITIONS NEVERTHELESS BECAME BINDING ON PETITIONER UPON ITS ACCEPTANCE THEREOF AS A PRIVATE AGREEMENT OR CONTRACT.

B.

THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT BETWEEN PETITIONER AND THE CITY OF ILIGAN WAS ENTERED INTO BY THE LATTER IN THE PERFORMANCE OF ITS PROPRIETARY FUNCTIONS.

The petition is impressed with merit.

Although petitioner agrees with the finding of the Court of Appeals that respondent City Mayor acted beyond the scope of his authority in imposing the assailed conditions in subject business permit, it has excepted to the ruling of the Court of Appeals that the said conditions nonetheless became binding on petitioner, once accepted, as a private agreement or contract. Petitioner maintains that the said special conditions are null and void for being ultra vires and cannot be given effect; and therefore, the principle of estoppel cannot apply against it.

On the other hand, the public respondents, City Mayor and City Legal Officer, private respondent SOPI and the Office of the Solicitor General contend that as a valid exercise of police power, respondent City Mayor has the authority to impose, as he did, special conditions in the grant of business permits.

Police power as an inherent attribute of sovereignty is the power to prescribe regulations to promote the health, morals, peace, education, good order or safety and general welfare of the people. 9 The State, through the legislature, has delegated the exercise of police power to local government units, as agencies of the State, in order to effectively accomplish and carry out the declared objects of their creation. 4 This delegation of police power is embodied in the general welfare clause of the Local Government Code which provides:

Sec. 6. General Welfare. — Every local government unit shall exercise the powers expressly granted, those necessarily implied therefrom, as well as powers necessary, appropriate, or incidental for its efficient and effective governance, and those which are essential to the promotion of the general welfare. Within their respective territorial jurisdictions, local government units shall ensure and support, among other things, the preservation and enrichment of culture, promote health and safety, enhance the right of the people to a balanced ecology, encourage and support the development of appropriate and self-reliant scientific and technological capabilities, improve public morals, enhance economic prosperity and social justice, promote full employment among their residents, maintain peace and order, and preserve the comfort and convenience of their inhabitants.

The scope of police power has been held to be so comprehensive as to encompass almost all matters affecting the health, safety, peace, order, morals, comfort and convenience of the community. Police power is essentially regulatory in nature and the power to issue licenses or grant business permits, if exercised for a regulatory and not revenue-raising purpose, is within the ambit of this power. 5

The authority of city mayors to issue or grant licenses and business permits is beyond cavil. It is provided for by law. Section 171, paragraph 2 (n) of Batas Pambansa Bilang 337 otherwise known as the Local Government Code of 1983, reads:

Sec. 171. The City Mayor shall:

xxx xxx xxx

n) Grant or refuse to grant, pursuant to law, city licenses or permits, and revoke the same for violation of law or ordinance or the conditions upon which they are granted.

However, the power to grant or issue licenses or business permits must always be exercised in accordance with law, with utmost observance of the rights of all concerned to due process and equal protection of the law.

Succinct and in point is the ruling of this Court, that:

. . . While a business may be regulated, such regulation must, however, be within the bounds of reason, i.e., the regulatory ordinance must be reasonable, and its provision cannot be oppressive amounting to an arbitrary interference with the business or calling subject of regulation. A lawful business or calling may not, under the guise of regulation, be unreasonably interfered with even by the exercise of police power. . . .

xxx xxx xxx

. . . The exercise of police power by the local government is valid unless it contravenes the fundamental law of the land or an act of the legislature, or unless it is against public policy or is unreasonable, oppressive, partial, discriminating or in derogation of a common right. 6

In the case under consideration, the business permit granted by respondent City Mayor to petitioner was burdened with several conditions. Petitioner agrees with the holding by the Court of Appeals that respondent City Mayor acted beyond his authority in imposing such special conditions in its permit as the same have no basis in the law or ordinance. Public respondents and private respondent SOPI, on the other hand, are one in saying that the imposition of said special conditions on petitioner's business permit is well within the authority of the City Mayor as a valid exercise of police power.

As aptly discussed by the Solicitor General in his Comment, the power to issue licenses and permits necessarily includes the corollary power to revoke, withdraw or cancel the same. And the power to revoke or cancel, likewise includes the power to restrict through the imposition of certain conditions. In the case of Austin-Hardware, Inc. vs.Court of Appeals, 7 it was held that the power to license carries with it the authority to provide reasonable terms and conditions under which the licensed business shall be conducted. As the Solicitor General puts it:

If the City Mayor is empowered to grant or refuse to grant a license, which is a broader power, it stands to reason that he can also exercise a lesser power that is reasonably incidental to his express power, i.e. to restrict a license through the imposition of certain conditions, especially so that there is no positive prohibition to the exercise of such prerogative by the City Mayor, nor is there any particular official or body vested with such authority. 8

However, the present inquiry does not stop there, as the Solicitor General believes. The power or authority of the City Mayor to impose conditions or restrictions in the business permit is indisputable. What petitioner assails are the conditions imposed in its particular case which, it complains, amount to a confiscation of the business in which petitioner is engaged.

Distinction must be made between the grant of a license or permit to do business and the issuance of a license to engage in the practice of a particular profession. The first is usually granted by the local authorities and the second is issued by the Board or Commission tasked to regulate the particular profession. A business permit authorizes the person, natural or otherwise, to engage in

business or some form of commercial activity. A professional license, on the other hand, is the grant of authority to a natural person to engage in the practice or exercise of his or her profession.

In the case at bar, what is sought by petitioner from respondent City Mayor is a permit to engage in the business of running an optical shop. It does not purport to seek a license to engage in the practice of optometry as a corporate body or entity, although it does have in its employ, persons who are duly licensed to practice optometry by the Board of Examiners in Optometry.

The case of Samahan ng Optometrists sa Pilipinas vs. Acebedo International Corporation, G.R. No. 117097, 9promulgated by this Court on March 21, 1997, is in point. The factual antecedents of that case are similar to those of the case under consideration and the issue ultimately resolved therein is exactly the same issue posed for resolution by this Court en banc.

In the said case, the Acebedo International Corporation filed with the Office of the Municipal Mayor an application for a business permit for the operation of a branch of Acebedo Optical in Candon, Ilocos Sur. The application was opposed by the Samahan ng Optometrists sa Pilipinas-Ilocos Sur Chapter, theorizing that Acebedo is a juridical entity not qualified to practice optometry. A committee was created by the Office of the Mayor to study private respondent's application. Upon recommendation of the said committee, Acebedo's application for a business permit was denied. Acebedo filed a petition with the Regional Trial Court but the same was dismissed. On appeal, however, the Court of Appeals reversed the trial court's disposition, prompting the Samahan ng Optometrists to elevate the matter to this Court.

The First Division of this Court, then composed of Honorable Justice Teodoro Padilla, Josue Bellosillo, Jose Vitug and Santiago Kapunan, with Honorable Justice Regino Hermosisima, Jr. as ponente, denied the petition and ruled in favor of respondent Acebedo International Corporation, holding that "the fact that private respondent hires optometrists who practice their profession in the course of their employment in private respondent's optical shops, does not translate into a practice of optometry by private respondent itself," 10 The Court further elucidated that in both the old and new Optometry Law, R.A. No. 1998, superseded by R.A. No. 8050, it is significant to note that there is no prohibition against the hiring by corporations of optometrists. The Court concluded thus:

All told, there is no law that prohibits the hiring by corporations of optometrists or considers the hiring by corporations of optometrists as a practice by the corporation itself of the profession of optometry.

In the present case, the objective of the imposition of subject conditions on petitioner's business permit could be attained by requiring the optometrists in petitioner's employ to produce a valid certificate of registration as optometrist, from the Board of Examiners in Optometry. A business permit is issued primarily to regulate the conduct of business and the City Mayor cannot, through the issuance of such permit, regulate the practice of a profession, like that of optometry. Such a function is within the exclusive domain of the administrative agency specifically empowered by law to supervise the profession, in this case the Professional Regulations Commission and the Board of Examiners in Optometry.

It is significant to note that during the deliberations of the bicameral conference committee of the Senate and the House of Representatives on R.A. 8050 (Senate Bill No. 1998 and House Bill No. 14100), the committee failed to reach a consensus as to the prohibition on indirect practice of optometry by corporations. The proponent of the bill, former Senator Freddie Webb, admitted thus:

Senator Webb: xxx xxx xxx

The focus of contention remains to be the proposal of prohibiting the indirect practice of optometry by corporations. We took a second look and even a third look at the issue in the bicameral conference, but a compromise remained elusive. 11

Former Senator Leticia Ramos-Shahani likewise voted her reservation in casting her vote:

Senator Shahani: Mr. President.

The optometry bills have evoked controversial views from the members of the panel. While we realize the need to uplift the standards of optometry as a profession, the consesnsus of both Houses was to avoid touching sensitive issues which properly belong to judicial determination. Thus, the bicameral conference committee decided to leave the issue of indirect practice of optometry and the use of trade names open to the wisdom of the Courts which are vested with the prerogative of interpreting the laws. 12

From the foregoing, it is thus evident that Congress has not adopted a unanimous position on the matter of prohibition of indirect practice of optometry by corporations, specifically on the hiring and employment of licensed optometrists by optical corporations. It is clear that Congress left the resolution of such issue for judicial determination, and it is therefore proper for this Court to resolve the issue.

Even in the United States, jurisprudence varies and there is a conflict of opinions among the federal courts as to the right of a corporation or individual not himself licensed, to hire and employ licensed optometrists. 13

Courts have distinguished between optometry as a learned profession in the category of law and medicine, and optometry as a mechanical art. And, insofar as the courts regard optometry as merely a mechanical art, they have tended to find nothing objectionable in the making and selling of eyeglasses, spectacles and lenses by corporations so long as the patient is actually examined and prescribed for by a qualified practitioner. 14

The primary purpose of the statute regulating the practice of optometry is to insure that optometrical services are to be rendered by competent and licensed persons in order to protect the health and physical welfare of the people from the dangers engendered by unlicensed practice. Such purpose may be fully accomplished although the person rendering the service is employed by a corporation. 15

Furthermore, it was ruled that the employment of a qualified optometrist by a corporation is not against public policy. 16 Unless prohibited by statutes, a corporation has all the contractual rights that an individual has 17 and it does not become the practice of medicine or optometry because of the presence of a physician or optometrist. 18The manufacturing, selling, trading and bartering of eyeglasses and spectacles as articles of merchandise do not constitute the practice of optometry. 19

In the case of Dvorine vs. Castelberg Jewelry Corporation, 20 defendant corporation conducted as part of its business, a department for the sale of eyeglasses and the furnishing of optometrical services to its clients. It employed a registered optometrist who was compensated at a regular salary and commission and who was furnished instruments and appliances needed for the work, as well as an office. In holding that corporation was not engaged in the practice of optometry, the court ruled that there is no public policy forbidding the commercialization of optometry, as in law and medicine, and recognized the general practice of making it a commercial business by advertising and selling eyeglasses.

To accomplish the objective of the regulation, a state may provide by statute that corporations cannot sell eyeglasses, spectacles, and lenses unless a duly licensed physician or a duly qualified optometrist is in charge of, and in personal attendance at the place where such articles are sold. 21 In such a case, the patient's primary and essential safeguard lies in the optometrist's control of the "treatment" by means of prescription and preliminary and finalexamination. 22

In analogy, it is noteworthy that private hospitals are maintained by corporations incorporated for the purpose of furnishing medical and surgical treatment. In the course of providing such treatments, these corporations employ physicians, surgeons and medical practitioners, in the same way that in the course of manufacturing and selling eyeglasses, eye frames and optical lenses, optical shops hire licensed optometrists to examine, prescribe and dispense ophthalmic lenses. No one has ever charged that these corporations are engaged in the practice of medicine. There is indeed no valid basis for treating corporations engaged in the business of running optical shops differently.

It also bears stressing, as petitioner has pointed out, that the public and private respondents did not appeal from the ruling of the Court of Appeals. Consequently, the holding by the Court of Appeals that the act of respondent City Mayor in imposing the questioned special conditions on petitioner's business permit is ultra vires cannot be put into issue here by the respondents. It is well-settled that:

A party who has not appealed from the decision may not obtain any affirmative relief from the appellate court other than what he had obtain from the lower court, if any, whose decision is brought up on appeal. 23

. . . an appellee who is not an appellant may assign errors in his brief where his purpose is to maintain the judgment on other grounds, but he cannot seek modification or reversal of the judgment or affirmative relief unless he has also appealed. 24

Thus, respondents' submission that the imposition of subject special conditions on petitioner's business permit is not ultra vires cannot prevail over the finding and ruling by the Court of Appeals from which they (respondents) did not appeal.

Anent the second assigned error, petitioner maintains that its business permit issued by the City Mayor is not a contract entered into by Iligan City in the exercise of its proprietary functions, such that although petitioner agreed to such conditions, it cannot be held in estoppel since ultra vires acts cannot be given effect.

Respondents, on the other hand, agree with the ruling of the Court of Appeals that the business permit in question is in the nature of a contract between Iligan City and the herein petitioner, the terms and conditions of which are binding upon agreement, and that petitioner is estopped from questioning the same. Moreover, in the Resolution denying petitioner's motion for reconsideration, the Court of Appeals held that the contract between the petitioner and the City of Iligan was entered into by the latter in the performance of its proprietary functions.

This Court holds otherwise. It had occasion to rule that a license or permit is not in the nature of a contract but a special privilege.

. . . a license or a permit is not a contract between the sovereignty and the licensee or permitee, and is not a property in the constitutional sense, as to which the constitutional proscription against impairment of the obligation of contracts may extend. A license is rather in the nature of a special privilege, of a permission or authority to do what is within its terms. It is not in any way vested, permanent or absolute. 25

It is therefore decisively clear that estoppel cannot apply in this case. The fact that petitioner acquiesced in the special conditions imposed by the City Mayor in subject business permit does not preclude it from challenging the said imposition, which is ultra vires or beyond the ambit of authority of respondent City Mayor. Ultra vires acts or acts which are clearly beyond the scope of one's authority are null and void and cannot be given any effect. The doctrine of estoppel cannot operate to give effect to an act which is otherwise null and void or ultra vires.

The Court of Appeals erred in adjudging subject business permit as having been issued by responded City Mayor in the performance of proprietary functions of Iligan City. As hereinabove elaborated upon, the issuance of business licenses and permits by a municipality or city is essentially regulatory in nature. The authority, which devolved upon local government units to issue or grant such licenses or permits, is essentially in the exercise of the police power of the State within the contemplation of the general welfare clause of the Local Government Code.

WHEREFORE, the petition is GRANTED; the Decision of the Court of Appeals in CA-GR SP No. 22995 REVERSED: and the respondent City Mayor is hereby ordered to reissue petitioner's business permit in accordance with law and with this disposition. No pronouncement as to costs.

SO ORDERED.


Manila

FIRST DIVISION

G.R. No. 133969 January 26, 2000

NEMESIO GARCIA, petitioner, vs.NICOLAS JOMOUAD, Ex-officio Provincial Sheriff of Cebu and SPOUSES JOSE ATINON & SALLY ATINON,respondents.

KAPUNAN, J.:

In this petition for review on certiorari, Nemesio Garcia (herein petitioner) seeks the reversal of the Decision, dated 27 October 1997, of the Court of Appeals in CA G.R. CV No. 52255 and its Resolution, dated 22 April 1998, denying petitioner's motion for reconsideration of said decision.

Petitioner filed with the Regional Trial Court, Branch 23 of Cebu, an action for injunction with prayer for preliminary injunction against respondents spouses Jose and Sally Atinon and Nicolas Jomouad, ex-officio sheriff of Cebu. Said action stemmed from an earlier case for collection of sum of money, docketed as Civil Case No. CEB-10433, before the RTC, Branch 10 of Cebu, filed by the spouses Atinon against Jaime Dico. In that case (collection of sum of money), the trial court rendered judgment ordering Dico to pay the spouses Atinon the sum of P900,000.00 plus interests. After said judgment became final and executory, respondent sheriff proceeded with its execution. In the course thereof, the Proprietary Ownership Certificate (POC) No. 0668 in the Cebu Country Club, which was in the name of Dico, was levied on and scheduled for public auction. Claiming ownership over the subject certificate, petitioner filed the aforesaid action for injunction with prayer for preliminary injunction to enjoin respondents from proceeding with the auction.

After trial, the lower court rendered its Decision, dated 28 July 1995, dismissing petitioner's complaint for injunction for lack of merit. On appeal, the CA affirmed in toto the decision of the RTC upon finding that it committed no reversible error in rendering the same. Hence, this petition. 1âwphi1.nêt

Petitioner avers that Dico, the judgment debtor of the spouses Atinon, was employed as manager of his (petitioner's) Young Auto Supply. In order to assist him in entertaining clients, petitioner "lent" his POC, then bearing the number 1459, in the Cebu Country Club to Dico so the latter could enjoy the "signing" privileges of its members. The Club issued POC No. 0668 in the name of Dico. Thereafter, Dico resigned as manager of petitioner's business. Upon demand of petitioner, Dico returned POC No. 0668 to him. Dico then executed a Deed of Transfer, dated 18 November 1992, covering the subject certificate in favor of petitioner. The Club was furnished with a copy of said deed but the transfer was not recorded in the books of the Club because petitioner failed to present proof of payment of the requisite capital gains tax.

In assailing the decision of the CA, petitioner mainly argues that the appellate court erroneously relied on Section 63 of the Corporation Code in upholding the levy on the subject certificate to satisfy the judgment debt of Dico in Civil Case No. CEB-14033. Petitioner contends that the subject stock of certificate, albeit in the name of Dico, cannot be levied upon the execution to satisfy his judgment debt because even prior to the institution of the case for collection of sum of money against him:

1. The spouses Atinon had knowledge that Dico already conveyed back the ownership of the subject, certificate to petitioner;

2. Dico executed a deed of transfer, dated 18 November 1992, covering the subject certificate in favor of petitioner and the Club was furnished with a copy thereof; and

3. Dico resigned as a proprietary member of the Club and his resignation was accepted by the board of directors at their meeting on 4 May 1993.

The petition is without merit.

Sec. 63 of the Corporation Code reads:

Sec. 63 Certificate of stock and transfer of shares. — The capital stock of corporations shall be divided into shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation.

The sole issue in this case is similar to that raised in Uson vs. Diosomito,1 i.e., "whether a bona fide transfer of the shares of a corporation, not registered or noted in the books of the corporation, is valid as against a subsequent lawful attachment of said shares, regardless of whether the attaching creditor had actual notice of said transfer or not."2 In that case, we held that the attachment prevails over the unrecorded transfer stating thus —

[w]e think that the true meaning of the language is, and the obvious intention of the legislature in using it was, that all transfers of shares should be entered, as here required, on the books of the corporation. And it is equally clear to us that all transfers of shares not so entered are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subsequent purchasers in good faith, and, indeed, as to all persons interested, except the parties to such transfers. All transfers not so entered on the books of the corporation are absolutely void; not because they are without notice or fraudulent in law or fact, but because they are made so void by statute.3

Applying the foregoing jurisprudence in this case, we hold that the transfer of the subject certificate made by Dico to petitioner was not valid as to the spouses Atinon, the judgment creditors, as the same still stood in the name of Dico, the judgment debtor, at the time of the levy on execution. In addition, as correctly ruled by the CA, the entry in the minutes of the meeting of the Club's board of directors noting the resignation of Dico as proprietary member thereof does not constitute compliance with Section 63 of the Corporation Code. Said provision of law strictly requires the recording of the transfer in the books of the corporation, and not elsewhere, to be valid as against third parties. Accordingly, the CA committed no reversible error in rendering the assailed decision.

IN VIEW OF THE FOREGOING, the Court RESOLVED to DENY the petition.

FIRST DIVISION

[G.R. No. 119002. October 19, 2000]

INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, vs. HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL FEDERATION, respondents.

D E C I S I O N

KAPUNAN, J.:

On June 30 1989, petitioner International Express Travel and Tour Services, Inc., through its managing director, wrote a letter to the Philippine Football Federation (Federation), through its president private respondent Henri Kahn, wherein the former offered its services as a travel agency to the latter.[1] The offer was accepted.

Petitioner secured the airline tickets for the trips of the athletes and officials of the Federation to the South East Asian Games in Kuala Lumpur as well as various other trips to the People's Republic of China and Brisbane. The total cost of the tickets amounted to P449,654.83. For the tickets received, the Federation made two partial payments, both in September of 1989, in the total amount of P176,467.50.[2]

On 4 October 1989, petitioner wrote the Federation, through the private respondent a demand letter requesting for the amount of P265,894.33.[3] On 30 October 1989, the Federation, through the Project Gintong Alay, paid the amount of P31,603.00.[4]

On 27 December 1989, Henri Kahn issued a personal check in the amount of P50,000 as partial payment for the outstanding balance of the Federation. [5] Thereafter, no further payments were made despite repeated demands.

This prompted petitioner to file a civil case before the Regional Trial Court of Manila. Petitioner sued Henri Kahn in his personal capacity and as President of the Federation and impleaded the Federation as an alternative defendant. Petitioner sought to hold Henri Kahn liable for the unpaid balance for the tickets purchased by the Federation on the ground that Henri Kahn allegedly guaranteed the said obligation.[6]

Henri Kahn filed his answer with counterclaim. While not denying the allegation that the Federation owed the amount P207,524.20, representing the unpaid balance for the plane tickets, he averred that the petitioner has no cause of action against him either in his personal capacity or in his official capacity as president of the Federation. He maintained that he did not guarantee payment but merely acted as an agent of the Federation which has a separate and distinct juridical personality.[7]

On the other hand, the Federation failed to file its answer, hence, was declared in default by the trial court.[8]

In due course, the trial court rendered judgment and ruled in favor of the petitioner and declared Henri Kahn personally liable for the unpaid obligation of the Federation. In arriving at the said ruling, the trial court rationalized:

http://sc.judiciary.gov.ph/jurisprudence/2000/oct2000/119002.htm#_edn8








Defendant Henri Kahn would have been correct in his contentions had it been duly established that defendant Federation is a corporation. The trouble, however, is that neither the plaintiff nor the defendant Henri Kahn has adduced any evidence proving the corporate existence of the defendant Federation. In paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football Federation is a sports association xxx." This has not been denied by defendant Henri Kahn in his Answer. Being the President of defendant Federation, its corporate existence is within the personal knowledge of defendant Henri Kahn. He could have easily denied specifically the assertion of the plaintiff that it is a mere sports association, if it were a domestic corporation. But he did not.

x x x

A voluntary unincorporated association, like defendant Federation has no power to enter into, or to ratify, a contract. The contract entered into by its officers or agents on behalf of such association is not binding on, or enforceable against it. The officers or agents are themselves personally liable.

x x x[9]

The dispositive portion of the trial court's decision reads:

WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the plaintiff the principal sum of P207,524.20, plus the interest thereon at the legal rate computed from July 5, 1990, the date the complaint was filed, until the principal obligation is fully liquidated; and another sum of P15,000.00 for attorney's fees.

The complaint of the plaintiff against the Philippine Football Federation and the counterclaims of the defendant Henri Kahn are hereby dismissed.

With the costs against defendant Henri Kahn.[10]

Only Henri Kahn elevated the above decision to the Court of Appeals. On 21 December 1994, the respondent court rendered a decision reversing the trial court, the decretal portion of said decision reads:

WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET ASIDE and another one is rendered dismissing the complaint against defendant Henri S. Kahn.[11]

In finding for Henri Kahn, the Court of Appeals recognized the juridical existence of the Federation. It rationalized that since petitioner failed to prove that Henri Kahn guaranteed the obligation of the Federation, he should not be held liable for the same as said entity has a separate and distinct personality from its officers.




Petitioner filed a motion for reconsideration and as an alternative prayer pleaded that the Federation be held liable for the unpaid obligation. The same was denied by the appellate court in its resolution of 8 February 1995, where it stated that:

As to the alternative prayer for the Modification of the Decision by expressly declaring in the dispositive portion thereof the Philippine Football Federation (PFF) as liable for the unpaid obligation, it should be remembered that the trial court dismissed the complaint against the Philippine Football Federation, and the plaintiff did not appeal from this decision. Hence, the Philippine Football Federation is not a party to this appeal and consequently, no judgment may be pronounced by this Court against the PFF without violating the due process clause, let alone the fact that the judgment dismissing the complaint against it, had already become final by virtue of the plaintiff's failure to appeal therefrom. The alternative prayer is therefore similarly DENIED.[12]

Petitioner now seeks recourse to this Court and alleges that the respondent court committed the following assigned errors:[13]

A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION (PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF AS HAVING A CORPORATE PERSONALITY.

B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING PRIVATE RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE OBLIGATION OF THE UNINCORPORATED PFF, HAVING NEGOTIATED WITH PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF OF THE PFF, MADE A PARTIAL PAYMENT AND ASSURED PETITIONER OF FULLY SETTLING THE OBLIGATION.

C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY LIABLE FOR THE OBLIGATION.

The resolution of the case at bar hinges on the determination of the existence of the Philippine Football Federation as a juridical person. In the assailed decision, the appellate court recognized the existence of the Federation. In support of this, the CA cited Republic Act 3135, otherwise known as the Revised Charter of the Philippine Amateur Athletic Federation, and Presidential Decree No. 604 as the laws from which said Federation derives its existence.

As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604 recognized the juridical existence of national sports associations. This may be gleaned from the powers and functions granted to these associations. Section 14 of R.A. 3135 provides:



SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall have the following functions, powers and duties:

1. To adopt a constitution and by-laws for their internal organization and government;

2. To raise funds by donations, benefits, and other means for their purposes.

3. To purchase, sell, lease or otherwise encumber property both real and personal, for the accomplishment of their purpose;

4. To affiliate with international or regional sports' Associations after due consultation with the executive committee;

x x x

13. To perform such other acts as may be necessary for the proper accomplishment of their purposes and not inconsistent with this Act.

Section 8 of P.D. 604, grants similar functions to these sports associations:

SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports associations shall have the following functions, powers, and duties:

1. Adopt a Constitution and By-Laws for their internal organization and government which shall be submitted to the Department and any amendment thereto shall take effect upon approval by the Department: Provided,however, That no team, school, club, organization, or entity shall be admitted as a voting member of an association unless 60 per cent of the athletes composing said team, school, club, organization, or entity are Filipino citizens;

2. Raise funds by donations, benefits, and other means for their purpose subject to the approval of the Department;

3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the accomplishment of their purpose;

4. Conduct local, interport, and international competitions, other than the Olympic and Asian Games, for the promotion of their sport;

5. Affiliate with international or regional sports associations after due consultation with the Department;

x x x

13. Perform such other functions as may be provided by law.

The above powers and functions granted to national sports associations clearly indicate that these entities may acquire a juridical personality. The power to purchase, sell, lease and encumber property are acts which may only be done by persons, whether natural or artificial, with juridical capacity. However, while we agree with the appellate court that national sports associations may be accorded corporate status, such does not automatically take place by the mere passage of these laws.

It is a basic postulate that before a corporation may acquire juridical personality, the State must give its consent either in the form of a special law or a general enabling act. We cannot agree with the view of the appellate court and the private respondent that the Philippine Football Federation came into existence upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the Philippine Football Federation. These laws merely recognized the existence of national sports associations and provided the manner by which these entities may acquire juridical personality. Section 11 of R.A. 3135 provides:

SEC. 11. National Sports' Association; organization and recognition. - A National Association shall be organized for each individual sports in the Philippines in the manner hereinafter provided to constitute the Philippine Amateur Athletic Federation. Applications for recognition as a National Sports' Association shall be filed with the executive committee together with, among others, a copy of the constitution and by-laws and a list of the members of the proposed association, and a filing fee of ten pesos.

The Executive Committee shall give the recognition applied for if it is satisfied that said association will promote the purposes of this Act and particularly section three thereof. No application shall be held pending for more than three months after the filing thereof without any action having been taken thereon by the executive committee. Should the application be rejected, the reasons for such rejection shall be clearly stated in a written communication to the applicant. Failure to specify the reasons for the rejection shall not affect the application which shall be considered as unacted upon: Provided, however, That until the executive committee herein provided shall have been formed, applications for recognition shall be passed upon by the duly elected members of the present executive committee of the Philippine Amateur Athletic Federation. The said executive committee shall be dissolved upon the organization of the executive committee herein provided: Provided, further, That the functioning executive committee is charged with the responsibility of seeing to it that the National Sports' Associations are formed and organized within six months from and after the passage of this Act.

Section 7 of P.D. 604, similarly provides:

SEC. 7. National Sports Associations. - Application for accreditation or recognition as a national sports association for each individual sport in the Philippines shall be filed with the Department together with, among others, a copy of the Constitution and By-Laws and a list of the members of the proposed association.

The Department shall give the recognition applied for if it is satisfied that the national sports association to be organized will promote the objectives of this Decree and has substantially complied with the rules and regulations of the Department: Provided, That the Department may withdraw accreditation or recognition for violation of this Decree and such rules and regulations formulated by it.

The Department shall supervise the national sports association: Provided, That the latter shall have exclusive technical control over the development and promotion of the particular sport for which they are organized.

Clearly the above cited provisions require that before an entity may be considered as a national sports association, such entity must be recognized by the accrediting organization, the Philippine Amateur Athletic Federation under R.A. 3135, and the Department of Youth and Sports Development under P.D. 604. This fact of recognition, however, Henri Kahn failed to substantiate. In attempting to prove the juridical existence of the Federation, Henri Kahn attached to his motion for reconsideration before the trial court a copy of the constitution and by-laws of the Philippine Football Federation. Unfortunately, the same does not prove that said Federation has indeed been recognized and accredited by either the Philippine Amateur Athletic Federation or the Department of Youth and Sports Development. Accordingly, we rule that the Philippine Football Federation is not a national sports association within the purview of the aforementioned laws and does not have corporate existence of its own.

Thus being said, it follows that private respondent Henry Kahn should be held liable for the unpaid obligations of the unincorporated Philippine Football Federation. It is a settled principal in corporation law that any person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and becomes personally liable for contract entered into or for other acts performed as such agent.[14] As president of the Federation, Henri Kahn is presumed to have known about the corporate existence or non-existence of the Federation. We cannot subscribe to the position taken by the appellate court that even assuming that the Federation was defectively incorporated, the petitioner cannot deny the corporate existence of the Federation because it had contracted and dealt with the Federation in such a manner as to recognize and in effect admit its existence.[15] The doctrine of corporation by estoppel is mistakenly applied by the respondent court to the petitioner. The application of the doctrine applies to a third party only when he tries to escape liability on a contract from which he has benefited on the irrelevant ground of defective incorporation. [16] In the case at bar, the petitioner is not trying to escape liability from the contract but rather is the one claiming from the contract.




WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The decision of the Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-53595 is hereby REINSTATED.

SO ORDERED.

Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.

SECOND DIVISION[G.R. No. 117416. December 8, 2000]

Avelina G. Ramoso, Renato B. Salvatierra, Benefrido M. Cruz, Leticia L. Medina, Pelagio Pascual, Domingo P. Santiago, Amado S. Veloira, Concepcion F. Blaylock, in their own behalf and in behalf of numerous other persons similarly situated, Commercial Credit Corp. of North Manila, Commercial Credit Corp. of Cagayan

Valley, Commercial Credit Corp. of Olongapo City, and Commercial Credit Corp. of Quezon City, petitioners, vs. Court of Appeals, General Credit Corp. (Formerly Commercial Credit Corp.), CCC Equity Corp., Resource

and Finance Corp., Generoso G. Villanueva and Leonardo B. Alejandrino, and Securities and Exchange Commission,Respondents.

D E C I S I O N

QUISUMBING, J.:

This petition for review on certiorari assails the decision[1 of the Court of Appeals dated October 8, 1993, and its resolution[2 dated September 22, 1994 in CA G.R. SP No. 29225, which affirmed the Securities and Exchange Commissions decision stating thus: chanrobles virtual law libraryWHEREFORE, the appealed decision of the hearing officer in SEC Case No. 2581 is hereby MODIFIED as follows: chanrobles virtual law library1. Piercing the veil of corporate fiction among GCC, CCC Equity and the franchise companies - Commercial Credit Corporation of North Manila, Commercial Credit Corporation of Cagayan Valley, Commercial Credit Corporation of Olongapo City, and Commercial Credit Corporation of Quezon City - is not proper for being without merit; and chanrobles virtual law library2. The declaration that petitioning franchise corporations and individual petitioners are not liable for the payment of bad accounts assigned to, and discounted by GCC is SET ASIDE for being in excess of jurisdiction.[3 chanrobles virtual law libraryThe facts of this case as gleaned from the records are as follows: chanrobles virtual law libraryOn March 11, 1957, Commercial Credit Corporation was registered with SEC as a general financing and investment corporation. CCC made proposals to several investors for the organization of franchise companies in different localities. The proposed trade names and indicated areas were: (a) Commercial Credit Corporation - Cagayan Valley; (b) Commercial Credit Corporation - Olongapo City; and (c) Commercial Credit Corporation - Quezon City. chanrobles virtual law libraryPetitioners herein invested and bought majority shares of stocks, while CCC retained minority holdings. Management contracts were executed between each franchise company and CCC, under the following terms and conditions: (1) The franchise company shall be managed by CCCs resident manager. (2) Management fee equivalent to 10% of net profit before taxes shall be paid to CCC. (3) All expenses shall be borne by the franchise company, except the salary of the resident manager and the cost of credit investigation. (4) CCC shall set prime rates for discounting or rediscounting of receivables. Apart from these, each investor was required to sign a continuing guarantee for bad accounts that might be incurred by CCC due to discounting activities. chanrobles virtual law libraryIn 1974, CCC attempted to obtain a quasi-banking license from Central Bank of the Philippines. But there was a hindrance because Section 1326 of CBs Manual of Regulations for Banks and Other Financial Intermediaries, states: chanrobles virtual law librarySec. 1326. General Policy. Dealings of a bank with any of its directors, officers or stockholders and their related interests should be in the regular course of business and upon terms not less favorable to the bank than those offered to others. (Emphasis supplied) chanrobles virtual law libraryThe above DOSRI regulation and set guidelines are entitled to make sure that lendings by banks or other financial institutions to its own directors, officers, stockholders or related interests are above board. In view of said hindrance, what CCC did was divest itself of its shareholdings in the franchise companies. It incorporated CCC Equity to take over the administration of the franchise companies under new management contracts. In the meantime, CCC continued providing a discounting line for receivables of the franchise companies through CCC Equity. Thereafter, CCC changed its name to General Credit Corporation (GCC). chanrobles virtual law libraryThe companies operations were on course until 1981, when adverse media reports unraveled anomalies in the business of GCC. Upon investigation, petitioners allegedly discovered the dissipation of the assets of their respective franchise companies. Among the alleged fraudulent schemes by GCC involved transfer or assignment of its uncollectible notes and accounts; utilization of spurious commercial papers to generate paper revenues; and release of collateral in connivance with unauthorized loans. Furthermore, GCC allegedly divested itself of its assets through a questionable offset of receivables arrangement with one of its creditors, Resource and Finance Corporation. chanrobles virtual law libraryOn February 24, 1984, petitioners filed a suit against GCC, CCC Equity and RFC. Petitioners prayed for (1) receivership, (2) an order directing GCC and CCC Equity solidarily to pay petitioners and depositors for the losses they sustained, and (3) nullification of the agreement between GCC and RFC. chanrobles virtual law libraryOn June 6, 1984, all respondents, except CCC Equity, filed a motion to dismiss asserting that SEC lacked jurisdiction, and that petitioners were not the real parties in interest. Both motions, for receivership and for dismissal, were subsequently denied by the hearing officer. chanrobles virtual law libraryOn February 23, 1990, the hearing officer ordered piercing the corporate veil of GCC, CCC Equity, and the franchise companies. He later declared that GCC was not liable to individual petitioners for the losses, since as investors they assumed the risk of their respective investments. The franchise companies and the individual petitioners were held not liable to GCC for the bad accounts incurred by the latter through the discounting process. The decretal portion of his order reads: chanrobles virtual law library




WHEREFORE, judgment is hereby rendered, as follows: chanrobles virtual law library1. Declaring GCC, CCC-Equity and the franchised companies - Commercial Credit Corporation of North Manila, Commercial Credit Corporation of Cagayan Valley, Commercial Credit Corporation of Olongapo City and Commercial Credit Corporation of Quezon City - as one corporation; chanrobles virtual law library2. Declaring that the petitioning franchised companies are not liable for the payment of bad accounts assigned to, and discounted by GCC; chanrobles virtual law library3. Declaring the individual petitioners who executed continuing guaranties to secure the obligation of the franchised companies to GCC arising from the discounting accounts should not be held liable thereon; chanrobles virtual law library4. Declaring that GCC is not liable to individual petitioners for the investments they made in the franchised companies; chanrobles virtual law library5. Dismissing the petition with respect to respondent Resource Finance Corporation, Generoso Villanueva and Leonardo Alejandrino.[4 chanrobles virtual law libraryIn an en banc decision, dated October 6, 1992, the SEC reversed the ruling of its hearing officer. Petitioners appealed to the Court of Appeals. On October 8, 1993, the appellate court affirmed respondent SECs decision. Petitioners moved for a reconsideration, but it was denied on September 22, 1994. chanrobles virtual law libraryHence, the instant petition raising the following issues: chanrobles virtual law libraryI. WHETHER THE COURT OF APPEALS ERRED GRAVELY IN FAILING TO RULE THAT GCCS FRAUD UPON PETITIONERS AND MISMANAGEMENT OF THE FRANCHISE COMPANIES WARRANT THE PIERCING OF ITS VEIL OF CORPORATE FICTION. chanrobles virtual law libraryII. WHETHER THE COURT OF APPEALS ERRED GRAVELY IN FAILING TO RULE THAT ONLY THE SEC HAS JURISDICTION OVER THE ISSUE OF WHETHER INDIVIDUAL PETITIONERS MAY BE HELD LIABLE ON THE SURETY AGREEMENTS FOR BAD ACCOUNTS INCURRED BY GCC THROUGH THE DISCOUNTING PROCESS. chanrobles virtual law libraryIII.WHETHER THE COURT OF APPEALS ERRED GRAVELY IN FAILING TO REVERSE AND SET ASIDE THE 06, OCTOBER 1992 SEC DECISION. chanrobles virtual law libraryPetitioners pray for the piercing of the corporate fiction of GCC, CCC Equity, RFC and the franchise companies. They allege that (1) GCC was the alter-ego of CCC Equity and the franchise companies; (2) GCC created CCC Equity to circumvent CBs DOSRI Regulation; and (3) GCC mismanaged the franchise companies. Ultimately, petitioners pray that the SEC en banc reinstate the decision of the hearing officer absolving individual investors of their respective liabilities attached to the continuing guaranty of bad debts. They pray that should the afore-stated companies be considered as one, then petitioners liabilities should be nullified. chanrobles virtual law librarySEC en banc decided against the petitioners, saying: chanrobles virtual law libraryWhere one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the fiction of the corporate entity of the instrumentality may be disregarded... [T]he control and breach of duty must proximately cause the injury or unjust loss for which the complaint is made. chanrobles virtual law libraryThe test may be stated as follows: chanrobles virtual law libraryIn any given case, except express agency, estoppel, or direct tort, three elements must be proved: chanrobles virtual law library1. Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; chanrobles virtual law library2. Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of the statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal rights; and chanrobles virtual law library3. the aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of. chanrobles virtual law libraryThe absence of any one of these elements prevents piercing the corporate veil.[5 chanrobles virtual law libraryThe SEC stated further that: chanrobles virtual law libraryThe second element required for the application of the instrumentality rule is not present in this case. Upon close scrutiny of the various testamentary and documentary evidence presented during trial, it may be observed that petitioners claim of dissipation of assets and resources belonging to the franchise companies has not been reasonably supported by said evidence at hand with the Commission. In fact, the disputed decision of the hearing officer dealt mainly with the aspect of control exercised by GCC over the franchise companies without a concrete finding of fraud on the part of the former to the prejudice of individual petitioners interests. As previously discussed, mere control on the part of GCC through CCC Equity over the operations and business policies of the franchise companies does not necessarily warrant piercing the veil of corporate fiction without proof of fraud. In order to determine whether or not the control exercised by GCC through CCC Equity over the franchise companies was used to commit fraud or wrong, to violate a statutory or other positive legal duty, or dishonest and unjust act in contravention of petitioners legal rights, the circumstances that caused the bankruptcy of the franchise companies must be taken into consideration.[6 chanrobles virtual law library




As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. 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.[7 Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both instances, there must have been fraud, and proof of it. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established.[8 It cannot be presumed.[9 chanrobles virtual law libraryWe agree with the findings of the SEC concurred in by the appellate court that there was no fraud nor mismanagement in the control exercised by GCC and by CCC Equity, over the franchise companies. Whether the existence of the corporation should be pierced depends on questions of facts, appropriately pleaded. Mere allegation that a corporation is the alter ego of the individual stockholders is insufficient. The presumption is that the stockholders or officers and the corporation are distinct entities. The burden of proving otherwise is on the party seeking to have the court pierce the veil of the corporate entity.[10 In this, petitioner failed. chanrobles virtual law libraryPetitioners contend that the issue of whether the investors may be held liable on the surety agreements for bad accounts incurred by GCC through the discounting process cannot be isolated from the fundamental issue of validly piercing GCCs corporate veil. They argue that since these surety agreements are intra-corporate matters, only the SEC has the specialized knowledge to evaluate whether fraud was perpetrated. chanrobles virtual law libraryWe note, however, that petitioners signed the continuing guaranty of the franchise companies bad debts in their own personal capacities. Consequently, they are responsible for their individual acts. The liabilities of petitioners as investors arose out of the regular financing venture of the franchise companies. There is no evidence that these bad debts were fraudulently incurred. Any taint of bad faith on the part of GCC in enticing investors may be resolved in ordinary courts, inasmuch as this is in the nature of a contractual relationship. Changing petitioners subsidiary liabilities by converting them to guarantors of bad debts cannot be done by piercing the veil of corporate identity. chanrobles virtual law libraryPrivate respondents claim they had actually filed collection cases against most, if not all, of the petitioners to enforce the suretyship liability on accounts discounted with then CCC (now GCC).[11 In such cases, the trial court may determine the validity of the promissory notes and the corresponding guarantee contracts. The existence of the corporate entities need not be disregarded. chanrobles virtual law libraryOn the matter of jurisdiction, we agree with the Court of Appeals when it held that: chanrobles virtual law library. . . [T]he ruling of the hearing officer in relation to the liabilities of the franchise companies and individual petitioners for the bad accounts incurred by GCC through the discounting process would necessary entail a prior interpretation of the discounting agreements entered into between GCC and the various franchise companies as well as the continuing guaranties executed to secure the same. A judgment on the aforementioned liabilities incurred through the discounting process must likewise involve a determination of the validity of the said discounting agreements and continuing guaranties in order to properly pass upon the enforcement or implementation of the same. It is crystal clear from the aforecited authorities and jurisprudence[12 that there is no need to apply the specialized knowledge and skill of the SEC to interpret the said discounting agreements and continuing guaranties executed to secure the same because the regular courts possess the utmost competence to do so by merely applying the general principles laid down under civil law on contracts.x x x chanrobles virtual law libraryThe matter of whether the petitioners must be held liable on their separate suretyship is one that belongs to the regular courts. As the respondent SEC notes in its comment, the franchised companies accounts discounted by GCC would arise even if there is no intra-corporate relationship between the parties. In other words, the controversy did not arise out of the parties relationships as stockholders. The Court agrees. This matter is better left to the regular courts in which the private respondents have filed suits to enforce the suretyship agreements allegedly executed by the petitioners.[13 chanrobles virtual law libraryNot every conflict between a corporation and its stockholders involves corporate matters that only the SEC can resolve. In Viray vs. Court of Appeals, 191 SCRA 308, 323 (1990), we stressed that a contrary interpretation would dissipate the powers of the regular courts and distort the meaning and intent of PD No. 902-A. chanrobles virtual law libraryIt is true that the trend is toward vesting administrative bodies like the SEC with the power to adjudicate matters coming under their particular specialization, to insure a more knowledgeable solution of the problems submitted to them. This would also relieve the regular courts of a substantial number of cases that would otherwise swell their already clogged dockets. But as expedient as this policy may be, it should not deprive the courts of justice of their power to decide ordinary cases in accordance with the general laws that do not require any particular expertise or training to interpret and apply. Otherwise, the creeping take-over by the administrative agencies of the judicial power vested in the courts would render the Judiciary virtually impotent in the discharge of the duties assigned to it by the Constitution.chanrobles virtual law libraryFinally, we note that petitioners were given ample opportunity to present evidence in support of their claims. But mere allegations do not constitute convincing evidence. We find no sufficient reason to overturn the decisions of both the SEC and the appellate court. chanrobles virtual law library








WHEREFORE, the instant petition is DENIED for lack of merit. The assailed decision and resolution of the Court of Appeals dated October 8, 1993 and September 22, 1994, respectively, are AFFIRMED. Costs against petitioners. chanrobles virtual law library

SO ORDERED.


Manila

SECOND DIVISION

G.R. No. 129777 January 5, 2001

TCL SALES CORPORATION and ANNA TENG, petitioners, vs.HON. COURT OF APPEALS and TING PING LAY, respondents.

QUISUMBING, J.:

Before us is a petition for review on certiorari under rule 45 assailing the decsion1 dated January 31, 1997 and the resolution2 dated July 2, 1997 of the Court of Appeals in CA G.R. SP No. 42035 captioned "TCL Sales Corporation, et al., vs. Ting Ping Lay." The decision and resolution of respondent court affirmed the en bancdecision3 of the Securities and Exchange Commission (SEC) dated June 11, 1996, which affirmed with modification the decision4 of the SEC hearing officer dated July 20, 1994.1âwphi1.nêt

The facts as found by the Court of Appeals are as follows:

"Respondent TCL Corporation was organized and registered sometime in 1973. The incorporators were Teng Ching Lay, Henry Teng (son of Teng Ching Lay), Anna Teng (daughter of Teng Ching Lay), Ismaelita Maluto and Peter Chiu. The corporation started with an authorized capital stock of 5,000 shares valued at P1,000.00 per share with an aggregate value of P500,000.00. In 1974 the Articles of Incorporation was amended increasing its authorized capital stock to 20,000 shares valued at P2,000,000.00 of which 8,000 shares were subscribed and fully paid, as follows:

Teng Ching Lay 2,800 shares

Henry Leng 2,000 shares

Anna Teng 1,280 shares

Ismaelita Maluto 1,440 shares

Peter Chiu 480 shares

Total 8,000 shares

On 2 February 1979, petitioner Ting Ping Lay (the brother of Teng Ching Lay) acquired by purchase four-hundred eighty (480) shares of stocks (sic) of the corporation from stockholder Peter Chiu.

On 22 September 1985, Ting Ping Lay purchased another one-thousand four-hundred (1,400) shares from his brother Teng Ching Lay.

On 2 September 1989, Ting Ping Lay acquired 1,440 more shares from Ismaelita Maluto.

Teng Ching Lay served as president and operations manager until his death in 1989. Respondent Anna Teng served as the Corporate Secretary.

Thereafter, Henry Teng took over the management of the company after his father's death.

On 31 August 1989, Ting Ping Lay in order to protect his shareholdings with the company requested Anna Teng to enter the transfer of shares of stocks (sic) for the proper recording of his acquisitions in the Stock and Transfer Book of the corporation. Likewise, he demanded the issuance of the new certificates of stock in his favor. However, respondents refused despite repeated demands.

Ting Ping Lay filed a petition for mandamus with the Securities and Exchange Commission against TCL Corporation and Anna T[e]ng which case was docketed as SEC Case No. 3990.

x x x x x x

After the trial, the hearing officer found for the petitioner, thus:

'A. Ordering respondents to record in the Books of the Corporation the following shares:

1. 480 shares acquired by petitioner from Peter Chiu per Deed of Sales (sic) dated February 20, 1979;

2. 1,400 shares acquired by petitioner from Teng Ching Lay per Deed of Sale dated September 22, 1989;

B. Ordering respondents to issue corresponding new certificates of stocks (sic) in the name of the petitioner.

C. Ordering respondents to pay petitioner moral damages in the amount of One Hundred Thousand (P100,000.00) Pesos and Fifty Thousand (P50,000.00) Pesos for attorney's fees". (pp. 28-29 Rollo).

On 11 June 1996, the Commission en banc modified the aforequoted ruling by deleting the liability of TCL Corporation relative to the award of moral damages and attorney's fees. The attempt to reconsider said ruling likewise failed in an order dated 6 August 1996."5

Subsequently, herein petitioners filed with respondent Court of Appeals a petition for review of the Order of the SEC en banc dated June 11, 1996 and its Order dated August 23, 1996 denying their motion for reconsideration. On January 31, 1997, the Court of Appeals promulgated its decision dismissing said petition for being filed out of time.6 It concluded:

"In fine, we find no cogent and justifiable grounds to disturb the findings of the SEC en banc.

WHEREFORE, the petition for review is DENIED due course and is hereby DISMISSED. The Clerk of Court is hereby directed to remand the records of the case to the SEC for the proper execution of the appealed orders."

SO ORDERED."7

Hence, the present petition, assigning the following questions for resolution:

"I. WHETHER OR NOT THE PERIOD FOR FILING PETITION FOR REVIEW WITH RESPONDENT COURT IS RECKONED FROM THE DATE THE QUESTIONED ORDER (ANNEX 'D') WAS RECEIVED BY PETITIONERS' PRESIDENT OR FROM THE DATE OF RECEIPT THEREOF BY PETITIONERS' COUNSEL.

"II. WHETHER OR NOT THE SECURITIES AND EXCHANGE COMMISSION HAS JURISDICTION OVER THE PETITION FOR MANDAMUS FILED BY PRIVATE RESPONDENT.

III. WHETHER OR NOT THE ALLEGED TRANSFER OF SHARES IN FAVOR OF PRIVATE RESPONDENT ARE VALID AND CAN BE ORDERED RECORDED.

IV. WHETHER OR NOT PETITIONER ANNA TENG'S FAILURE TO ACCEDE TO PRIVATE RESPONDENT'S REQUEST FOR TRANSFER OF SHARES IN HIS NAME AMOUNTS TO BAD FAITH AS WOULD WARRANT PAYMENT OF MORAL DAMAGES AND ATTORNEY'S FEES."8

Thus the Court must determine if (1) petitioners filed their petition for review with the Court of Appeals on time; (2) if the Securities and Exchange Commission (SEC) has jurisdiction over the petition for mandamus; and (3) if moral damages and attorney's fees may be granted for failure of petitioner Anna Teng to record the transfer of shares to private respondent. We shall resolve these questions seriatim.

Records reveal that petitioners received a copy of the decision of the SEC en banc on June 14, 1996. They had fifteen days from this date within which to file a petition for review with the Court of Appeals. This period was interrupted when petitioners, through Henry Teng, filed a motion for reconsideration on June 23, 1996, thirteen days into the fifteen-day reglementary period of appeal. The order denying this motion for reconsideration was received by Henry Teng on August 6, 1996, when he sent his representative to the SEC to obtain a copy thereof. Subsequently, a petition for review was filed by the petitioners with the Court of Appeals on September 25, 1996.

In its decision promulgated January 31, 1997 the Court of Appeals ruled that the petition for review was filed out of time. It tolled the remaining period to file said petition from August 6, 1996, the day Henry Teng received a copy of the decision denying the motion for reconsideration filed on June 23, 1996. The respondent court held that the petitioners should have filed the petition not later than August 21, 1996, or fifteen days after August 6, 1996.

The respondent court erred in making such ruling. August 6, 1996, was the date when petitioners themselves through Henry Teng received notice of the decision of the SEC denying their motion for reconsideration, not counsel of record of said party. When a party is represented by counsel, service of process must be made on counsel and not on the party.9 This well-settled rule applies to proceedings before the SEC, as the Rules of Court apply suppletorily thereto.10 However, petitioners' counsel eventually received notice of the decision. Atty. Ruben V. Lopez, petitioners' counsel of record at the time, was aware of the order denying the motion for reconsideration on August 22, 1996, when his messenger, a certain Mario Ballesteros, verified the records of the case in the SEC on said date. Said counsel's motion requesting a copy of the August 6, 1996 decision manifests this.11Furthermore, the petition for review was prepared for filing and the verification affidavit was executed by Henry Teng both on September 13, 1996 or ten days before the alleged date of receipt by petitioners' counsel of the SEC order denying petitioners' motion for reconsideration.12 These material dates in the record betray counsel's claim of receipt of notice of the SEC en banc decision only on September 23, 1996. When Atty. Lopez had notice of the SEC order through his messenger on August 22, 1996, petitioners had fifteen days from this date or until September 6, 1996, within

which to file the petition for review with the Court of Appeals. Instead, petitioners filed their petition on September 25, 1996, or nineteen days after the last date for filing the petition. Petitioners thus filed their petition with the Court of Appeals way beyond the reglementary period, and it did not acquire jurisdiction over the case.1âwphi1.nêt

But even if the Court of Appeals had acquired jurisdiction over the case, the petition would still fail for lack of merit. The petitioners allege in the present petition that the SEC did not have jurisdiction over the petition for mandamus filed by Ting Ping Lay, as the same did not arise out of an intra-corporate controversy. They claim that Ting Ping Lay was not yet a stockholder of record of TCL Corporation. In the case of Abejo vs. de la Cruz,13 this Court has ruled that jurisdiction over an action for mandamus lies with the SEC even if the proponent thereof is not yet a stockholder of record. Thus –

"…But as to the sale and transfer of the Abejos' shares, the Bragas cannot oust the SEC of its original and exclusive jurisdiction to hear and decide the case, by blocking through the corporate secretary, their son, the due recording of the transfer and sale of the shares in question and claiming that Telectronics is not a stockholder of the corporation – which is the very issue that the SEC is called upon to resolve. As the SEC maintains 'There is no requirement that a stockholder of a corporation must be a registered one in order that the Securities and Exchange Commission may take cognizance of a suit seeking to enforce his rights as such stockholder.' This is because the SEC by express mandate has absolute jurisdiction, supervision and control over all corporations and is called upon to enforce the provisions of the Corporation Code, among which is the stock purchaser's right to secure the corresponding certificate in his name under the provisions of Section 63 of the Code. Needless to say, any problem encountered in securing the certificates of stock representing the investment made by the buyer must be expeditiously dealt with through administrative mandamus proceedings with the SEC, rather than through the usual tedious court procedure. x x x" (Italics supplied)14

Moreover, the SEC en banc found that the petitioners did not refute the validity of the transfers of shares of stock to Ting Ping Lay, insofar as those shares covered duly indorsed stock certificates were concerned.15 Petitioners themselves conceded that they could not assail the documents evincing the transfer of the shares to Ting Ping Lay.16

In Lim Tay vs. Court of Appeals,17 we held that the registration of shares in a stockholder's name, the issuance of stock certificates, and the right to receive dividends which pertain to the shares are all rights that flow from ownership. Respondent Ting Ping Lay was able to establish prima facie ownership over the shares of stocks in question, through deeds of transfer of shares of stock of TCL Corporation.18 Petitioners could not repudiate these documents. Hence, the transfer of shares to him must be recorded on the corporation's stock and transfer book.

Noteworthy, Annex "F" of the petition before us contains a listing of the corporation's stockholders and their respective shares before and after the execution of a certain deed of assignment.19 Respondent Ting Ping Lay is listed as a stockholder of the corporation in this document. By this inclusion, petitioners have in effect rebutted their own claim in their petition that Ting Ping Lay "is not and has neither been an incorporator nor a stockholder of the corporation".20 Undoubtedly then, the dispute is an intra-corporate controversy, involving as it does stockholders of TCL Corporation.

The determination of whether or not a shareholder is entitled to exercise the rights of a stockholder is within the jurisdiction of the SEC.21 As held by the Court, thru Justice A. Panganiban in Lim Tay:

"The duty of a corporate secretary to record transfers of stocks is ministerial. However, he cannot be compelled to do so when the transferee's title to said shares has no prima facie validity or is uncertain. More specifically, a pledgor, prior to foreclosure and sale, does not acquire ownership rights over the pledged shares and thus cannot compel the corporate secretary to record his alleged ownership of such shares on the basis merely of the contract of pledge. Similarly, the SEC does not acquire jurisdiction over a dispute when a party's claim to being a shareholder is, on the face of the complaint, invalid or inadequate or is otherwise negated by the very allegations of such complaint. Mandamus will not issue to establish a right, but only to enforce one that is already established."22

The fact that Ting Ping Lay is allegedly not yet a stockholder of record does not remove the case from the jurisdiction of the SEC, for it is precisely the right of recording and the right to be issued stock certificates that said respondent sought to enforce by mandamus.

In addition, even if Ting Ping Lay were not a stockholder, he is nonetheless a member of the public whose investment in the corporation the law seeks to protect and encourage, as his purchase of the shares of stock has been established.23 After all, the principal function of the SEC is the supervision and control of corporations, partnerships and associations with the end in view that investments in these entities may be encouraged and protected, and their activities pursued for the protection of economic development.24 In other words, the jurisdiction of the SEC should be construed in relation to its power of control and supervision over all corporations to encourage active public participation in the affairs of private corporations by way of investments.25

Petitioners are also barred from questioning the jurisdiction of the SEC. While it is a rule that a jurisdictional question may be raised at any time, this, however, admits of an exception where, as in this case, estoppel has supervened.26 The Court has time and again frowned upon the undesirable practice of a party submitting his case for decision and then accepting the judgment, only if favorable, and attacking it for lack of jurisdiction when adverse.27 Instead of opposing the exercise of jurisdiction by SEC seasonably, petitioners invoked said jurisdiction by participating in the proceedings before it. Petitioners cannot now be allowed to adopt an inconsistent posture on this score.

Lastly, on issue of the propriety of moral damages and attorney's fees imposed on petitioners, the SEC en bancheld that petitioners' refusal to record the transfer of shares to respondent Ting Ping Lay was not based on any lawful and valid ground. As admitted by Henry Teng during the trial before the SEC hearing officer, what motivated petitioners to ignore Ting Ping Lay's request to record the transfer of the shares was the fact that they simply did not want to grant the same.28 Such action, being capricious, whimsical and unwarranted, constitutes bad faith that must be sanctioned. However, the SEC en banc had modified and deleted the award of moral damages and attorney's fees imposed on petitioner corporation. The matter of damages now concerns only petitioner Anna Teng. For it was her refusal as corporate secretary to record the transfer of the shares, without evidence that such refusal was authorized by TCL's board of directors, that caused damage. On this point, no error was committed by respondent court in refusing to disturb the SEC's decision.

WHEREFORE, the petition is DENIED, and the Decision dated January 31, 1997 as well as the Resolution dated July 3, 1997 of respondent Court of Appeals are hereby AFFIRMED. Costs against petitioners.

SO ORDERED.


Manila

G.R. No. 158589 June 27, 2006

PHILIP MORRIS, INC., BENSON & HEDGES (CANADA), INC., and FABRIQUES DE TABAC REUNIES, S.A., (now known as PHILIP MORRIS PRODUCTS S.A.), Petitioners, vs.FORTUNE TOBACCO CORPORATION, Respondent.

D E C I S I O N

GARCIA, J.:

Via this petition for review under Rule 45 of the Rules of Court, herein petitioners Philip Morris, Inc., Benson & Hedges (Canada) Inc., and Fabriques de Tabac Reunies, S.A. (now Philip Morris Products S.A.) seek the reversal and setting aside of the following issuances of the Court of Appeals (CA) in CA-G.R. CV No. 66619, to wit:

1. Decision dated January 21, 20031 affirming an earlier decision of the Regional Trial Court of Pasig City, Branch 166, in its Civil Case No. 47374, which dismissed the complaint for trademark infringement and damages thereat commenced by the petitioners against respondent Fortune Tobacco Corporation; and

2. Resolution dated May 30, 20032 denying petitioners’ motion for reconsideration.

Petitioner Philip Morris, Inc., a corporation organized under the laws of the State of Virginia, United States of America, is, per Certificate of Registration No. 18723 issued on April 26, 1973 by the Philippine Patents Office (PPO), the registered owner of the trademark "MARK VII" for cigarettes. Similarly, petitioner Benson & Hedges (Canada), Inc., a subsidiary of Philip Morris, Inc., is the registered owner of the trademark "MARK TEN" for cigarettes as evidenced by PPO Certificate of Registration No. 11147. And as can be seen in Trademark Certificate of Registration No. 19053, another subsidiary of Philip Morris, Inc., the Swiss company Fabriques de Tabac Reunies, S.A., is the assignee of the trademark "LARK," which was originally registered in 1964 by Ligget and Myers Tobacco Company. On the other hand, respondent Fortune Tobacco Corporation, a company organized in the Philippines, manufactures and sells cigarettes using the trademark "MARK."

The legal dispute between the parties started when the herein petitioners, on the claim that an infringement of their respective trademarks had been committed, filed, on August 18, 1982, a Complaint for Infringement of Trademark and Damages against respondent Fortune Tobacco Corporation, docketed as Civil Case No. 47374 of the Regional Trial Court of Pasig, Branch 166.

The decision under review summarized what happened next, as follows:

In the Complaint xxx with prayer for the issuance of a preliminary injunction, [petitioners] alleged that they are foreign corporations not doing business in the Philippines and are suing on an isolated transaction. xxx they averred that the countries in which they are domiciled grant xxx to corporate or juristic persons of the Philippines the privilege to bring

http://www.lawphil.net/judjuris/juri2006/jun2006/gr_158589_2006.html#fnt2


action for infringement, xxx without need of a license to do business in those countries. [Petitioners] likewise manifested [being registered owners of the trademark "MARK VII" and "MARK TEN" for cigarettes as evidenced by the corresponding certificates of registration and an applicant for the registration of the trademark "LARK MILDS"]. xxx. [Petitioners] claimed that they have registered the aforementioned trademarks in their respective countries of origin and that, by virtue of the long and extensive usage of the same, these trademarks have already gained international fame and acceptance. Imputing bad faith on the part of the [respondent], petitioners claimed that the [respondent], without any previous consent from any of the [petitioners], manufactured and sold cigarettes bearing the identical and/or confusingly similar trademark "MARK" xxx Accordingly, they argued that [respondent’s] use of the trademark "MARK" in its cigarette products have caused and is likely to cause confusion or mistake, or would deceive purchasers and the public in general into buying these products under the impression and mistaken belief that they are buying [petitioners’] products.

Invoking the provisions of the Paris Convention for the Protection of Industrial and Intellectual Property (Paris Convention, for brevity), to which the Philippines is a signatory xxx, [petitioners] pointed out that upon the request of an interested party, a country of the Union may prohibit the use of a trademark which constitutes a reproduction, imitation, or translation of a mark already belonging to a person entitled to the benefits of the said Convention. They likewise argued that, in accordance with Section 21-A in relation to Section 23 of Republic Act 166, as amended, they are entitled to relief in the form of damages xxx [and] the issuance of a writ of preliminary injunction which should be made permanent to enjoin perpetually the [respondent] from violating [petitioners’] right to the exclusive use of their aforementioned trademarks.

[Respondent] filed its Answer xxx denying [petitioners’] material allegations and xxx averred [among other things] xxx that "MARK" is a common word, which cannot particularly identify a product to be the product of the [petitioners] xxx

xxx xxx xxx.lawphil.net

Meanwhile, after the [respondent] filed its Opposition (Records, Vo. I, p. 26), the matter of the [petitioners’] prayer for the issuance of a writ of preliminary injunction was negatively resolved by the court in an Order xxx dated March 28, 1973. [The incidental issue of the propriety of an injunction would eventually be elevated to the CA and would finally be resolved by the Supreme Court in its Decision dated July 16, 1993 in G.R. No. 91332]. xxx.

xxx xxx xxx

After the termination of the trial on the merits xxx trial court rendered its Decision xxx dated November 3, 1999 dismissing the complaint and counterclaim after making a finding that the [respondent] did not commit trademark infringement against the [petitioners]. Resolving first the issue of whether or not [petitioners] have capacity to institute the instant action, the trial court opined that [petitioners’] failure to present evidence to support their allegation that their respective countries indeed grant Philippine corporations reciprocal or similar privileges by law xxx justifies the dismissal of the complaint xxx. It added that the testimonies of [petitioners’] witnesses xxx essentially declared that [petitioners] are in fact

doing business in the Philippines, but [petitioners] failed to establish that they are doing so in accordance with the legal requirement of first securing a license. Hence, the court declared that [petitioners] are barred from maintaining any action in Philippine courts pursuant to Section 133 of the Corporation Code.

The issue of whether or not there was infringement of the [petitioners’] trademarks by the [respondent] was likewise answered xxx in the negative. It expounded that "in order for a name, symbol or device to constitute a trademark, it must, either by itself or by association, point distinctly to the origin or ownership of the article to which it is applied and be of such nature as to permit an exclusive appropriation by one person". Applying such principle to the instant case, the trial court was of the opinion that the words "MARK", "TEN", "LARK" and the Roman Numerals "VII", either alone or in combination of each other do not by themselves or by association point distinctly to the origin or ownership of the cigarettes to which they refer, such that the buying public could not be deceived into believing that [respondent’s] "MARK" cigarettes originated either from the USA, Canada, or Switzerland.

Emphasizing that the test in an infringement case is the likelihood of confusion or deception, the trial court stated that the general rule is that an infringement exists if the resemblance is so close that it deceives or is likely to deceive a customer exercising ordinary caution in his dealings and induces him to purchase the goods of one manufacturer in the belief that they are those of another. xxx. The trial court ruled that the [petitioners] failed to pass these tests as it neither presented witnesses or purchasers attesting that they have bought [respondent’s] product believing that they bought [petitioners’] "MARK VII", "MARK TEN" or "LARK", and have also failed to introduce in evidence a specific magazine or periodical circulated locally, which promotes and popularizes their products in the Philippines. It, moreover, elucidated that the words consisting of the trademarks allegedly infringed by [respondent] failed to show that they have acquired a secondary meaning as to identify them as [petitioners’] products. Hence, the court ruled that the [petitioners] cannot avail themselves of the doctrine of secondary meaning.

As to the issue of damages, the trial court deemed it just not to award any to either party stating that, since the [petitioners] filed the action in the belief that they were aggrieved by what they perceived to be an infringement of their trademark, no wrongful act or omission can be attributed to them. xxx.3 (Words in brackets supplied)

Maintaining to have the standing to sue in the local forum and that respondent has committed trademark infringement, petitioners went on appeal to the CA whereat their appellate recourse was docketed as CA-G.R. CV No. 66619.

Eventually, the CA, in its Decision dated January 21, 2003, while ruling for petitioners on the matter of their legal capacity to sue in this country for trademark infringement, nevertheless affirmed the trial court’s decision on the underlying issue of respondent’s liability for infringement as it found that:

xxx the appellants’ [petitioners’] trademarks, i.e., "MARK VII", "MARK TEN" and "LARK", do not qualify as well-known marks entitled to protection even without the benefit of actual use in the local market and that the similarities in the trademarks in question are insufficient as to cause deception or confusion tantamount to infringement. Consequently, as regards the third issue, there is likewise no basis for the award of damages prayed for


by the appellants herein.4 (Word in bracket supplied)

With their motion for reconsideration having been denied by the CA in its equally challenged Resolution of May 30, 2003, petitioners are now with this Court via this petition for review essentially raising the following issues: (1) whether or not petitioners, as Philippine registrants of trademarks, are entitled to enforce trademark rights in this country; and (2) whether or not respondent has committed trademark infringement against petitioners by its use of the mark "MARK" for its cigarettes, hence liable for damages.

In its Comment,5 respondent, aside from asserting the correctness of the CA’s finding on its liability for trademark infringement and damages, also puts in issue the propriety of the petition as it allegedly raises questions of fact.

The petition is bereft of merit.

Dealing first with the procedural matter interposed by respondent, we find that the petition raises both questions of fact and law contrary to the prescription against raising factual questions in a petition for review on certiorari filed before the Court. A question of law exists when the doubt or difference arises as to what the law is on a certain state of facts; there is a question of fact when the doubt or difference arises as to the truth or falsity of alleged facts.6

Indeed, the Court is not the proper venue to consider factual issues as it is not a trier of facts.7 Unless the factual findings of the appellate court are mistaken, absurd, speculative, conflicting, tainted with grave abuse of discretion, or contrary to the findings culled by the court of origin,8 we will not disturb them.

It is petitioners’ posture, however, that their contentions should

be treated as purely legal since they are assailing erroneous conclusions deduced from a set of undisputed facts.

Concededly, when the facts are undisputed, the question of whether or not the conclusion drawn therefrom by the CA is correct is one of law.9 But, even if we consider and accept as pure questions of law the issues raised in this petition, still, the Court is not inclined to disturb the conclusions reached by the appellate court, the established rule being that all doubts shall be resolved in favor of the correctness of such conclusions.10

Be that as it may, we shall deal with the issues tendered and determine whether the CA ruled in accordance with law and established jurisprudence in arriving at its assailed decision.

A "trademark" is any distinctive word, name, symbol, emblem, sign, or device, or any combination thereof adopted and used by a manufacturer or merchant on his goods to identify and distinguish them from those manufactured, sold, or dealt in by others.11 Inarguably, a trademark deserves protection. For, as Mr. Justice Frankfurter observed in Mishawaka Mfg. Co. v. Kresge Co.:12

The protection of trademarks is the law’s recognition of the psychological function of symbols. If it is true that we live by symbols, it is no less true that we purchase goods by










them. A trade-mark is a merchandising short-cut which induces a purchaser to select what he wants, or what he has been led to believe what he wants. The owner of a mark exploits this human propensity by making every effort to impregnate the atmosphere of the market with the drawing power of a congenial symbol. Whatever the means employed, the aim is the same - to convey through the mark, in the minds of potential customers, the desirability of the commodity upon which it appears. Once this is attained, the trade-mark owner has something of value. If another poaches upon the commercial magnetism of the symbol he has created, the owner can obtain legal redress.

It is thus understandable for petitioners to invoke in this recourse their entitlement to enforce trademark rights in this country, specifically, the right to sue for trademark infringement in Philippine courts and be accorded protection against unauthorized use of their Philippine-registered trademarks.

In support of their contention respecting their right of action, petitioners assert that, as corporate nationals of member-countries of the Paris Union, they can sue before Philippine courts for infringement of trademarks, or for unfair competition, without need of obtaining registration or a license to do business in the Philippines, and without necessity of actually doing business in the Philippines. To petitioners, these grievance right and mechanism are accorded not only by Section 21-A of Republic Act (R.A.) No. 166, as amended, or the Trademark Law, but also by Article 2 of the Paris Convention for the Protection of Industrial Property, otherwise known as the Paris Convention.

In any event, petitioners point out that there is actual use of their trademarks in the Philippines as evidenced by the certificates of registration of their trademarks. The marks "MARK TEN" and "LARK" were registered on the basis of actual use in accordance with Sections 2-A13 and 5(a)14 of R.A. No. 166, as amended, providing for a 2-month pre-registration use in local commerce and trade while the registration of "MARK VII" was on the basis of registration in the foreign country of origin pursuant to Section 37 of the same law wherein it is explicitly provided that prior use in commerce need not be alleged.15

Besides, petitioners argue that their not doing business in the Philippines, if that be the case, does not mean that cigarettes bearing their trademarks are not available and sold locally. Citing Converse Rubber Corporation v. Universal Rubber Products, Inc.,16 petitioners state that such availability and sale may be effected through the acts of importers and distributors.

Finally, petitioners would press on their entitlement to protection even in the absence of actual use of trademarks in the country in view of the Philippines’ adherence to the Trade Related Aspects of Intellectual Property Rights or the TRIPS Agreement and the enactment of R.A. No. 8293, or the Intellectual Property Code (hereinafter the "IP Code"), both of which provide that the fame of a trademark may be acquired through promotion or advertising with no explicit requirement of actual use in local trade or commerce.

Before discussing petitioners’ claimed entitlement to enforce trademark rights in the Philippines, it must be emphasized that their standing to sue in Philippine courts had been recognized, and rightly so, by the CA. It ought to be pointed out, however, that the appellate court qualified its holding with a statement, following G.R. No. 91332, entitled Philip Morris, Inc., et al. v. The Court of Appeals and Fortune Tobacco Corporation,17 that such right to sue does not necessarily mean protection of their registered marks in the






absence of actual use in the Philippines.

Thus clarified, what petitioners now harp about is their entitlement to protection on the strength of registration of their trademarks in the Philippines.

As we ruled in G.R. No. 91332,18 supra, so it must be here.

Admittedly, the registration of a trademark gives the registrant, such as petitioners, advantages denied non-registrants or ordinary users, like respondent. But while petitioners enjoy the statutory presumptions arising from such registration,19 i.e., as to the validity of the registration, ownership and the exclusive right to use the registered marks, they may not successfully sue on the basis alone of their respective certificates of registration of trademarks. For, petitioners are still foreign corporations. As such, they ought, as a condition to availment of the rights and privileges vis-à-vis their trademarks in this country, to show proof that, on top of Philippine registration, their country grants substantially similar rights and privileges to Filipino citizens pursuant to Section 21-A20 of R.A. No. 166.

In Leviton Industries v. Salvador,21 the Court further held that the aforementioned reciprocity requirement is a condition sine qua non to filing a suit by a foreign corporation which, unless alleged in the complaint, would justify dismissal thereof, a mere allegation that the suit is being pursued under Section 21-A of R.A. No. 166 not being sufficient. In a subsequent case,22however, the Court held that where the complainant is a national of a Paris Convention- adhering country, its allegation that it is suing under said Section 21-A would suffice, because the reciprocal agreement between the two countries is embodied and supplied by the Paris Convention which, being considered part of Philippine municipal laws, can be taken judicial notice of in infringement suits.23

As well, the fact that their respective home countries, namely, the United States, Switzerland and Canada, are, together with the Philippines, members of the Paris Union does not automatically entitle petitioners to the protection of their trademarks in this country absent actual use of the marks in local commerce and trade.

True, the Philippines’ adherence to the Paris Convention24 effectively obligates the country to honor and enforce its provisions25 as regards the protection of industrial property of foreign nationals in this country. However, any protection accorded has to be made subject to the limitations of Philippine laws.26 Hence, despite Article 2 of the Paris Convention which substantially provides that (1) nationals of member-countries shall have in this country rights specially provided by the Convention as are consistent with Philippine laws, and enjoy the privileges that Philippine laws now grant or may hereafter grant to its nationals, and (2) while no domicile requirement in the country where protection is claimed shall be required of persons entitled to the benefits of the Union for the enjoyment of any industrial property rights,27 foreign nationals must still observe and comply with the conditions imposed by Philippine law on its nationals.

Considering that R.A. No. 166, as amended, specifically Sections 228 and 2-A29 thereof, mandates actual use of the marks and/or emblems in local commerce and trade before they may be registered and ownership thereof acquired, the petitioners cannot, therefore, dispense with the element of actual use. Their being nationals of member-countries of the Paris Union does not alter the legal situation.













In Emerald Garment Mfg. Corporation v. Court of Appeals,30 the Court reiterated its rulings in Sterling Products International, Inc. v. Farbenfabriken Bayer Aktiengesellschaft,31 Kabushi Kaisha Isetan v. Intermediate Appellate Court,32 and Philip Morris v. Court of Appeals and Fortune Tobacco Corporation33 on the importance of actual commercial use of a trademark in the Philippines notwithstanding the Paris Convention:

The provisions of the 1965 Paris Convention … relied upon by private respondent and Sec. 21-A of the Trademark Law were sufficiently expounded upon and qualified in the recent case of Philip Morris, Inc., et. al. vs. Court of Appeals:

xxx xxx xxx

Following universal acquiescence and comity, our municipal law on trademarks regarding the requirements of actual use in the Philippines must subordinate an international agreement inasmuch as the apparent clash is being decided by a municipal tribunal. Xxx. Withal, the fact that international law has been made part of the law of the land does not by any means imply the primacy of international law over national law in the municipal sphere. Under the doctrine of incorporation as applied in most countries, rules of International Law are given a standing equal, not superior, to national legislative enactments.

xxx xxx xxx

In other words, (a foreign corporation) may have the capacity to sue for infringement … but the question of whether they have an exclusive right over their symbol as to justify issuance of the controversial writ will depend on actual use of their trademarks in the Philippines in line with Sections 2 and 2-A of the same law. It is thus incongruous for petitioners to claim that when a foreign corporation not licensed to do business in the Philippines files a complaint for infringement, the entity need not be actually using its trademark in commerce in the Philippines. Such a foreign corporation may have the personality to file a suit for infringement but it may not necessarily be entitled to protection due to absence of actual use of the emblem in the local market.

Contrary to what petitioners suggest, the registration of trademark cannot be deemed conclusive as to the actual use of such trademark in local commerce. As it were, registration does not confer upon the registrant an absolute right to the registered mark. The certificate of registration merely constitutes prima facie evidence that the registrant is the owner of the registered mark. Evidence of non-usage of the mark rebuts the presumption of trademark ownership,34 as what happened here when petitioners no less admitted not doing business in this country.35

Most importantly, we stress that registration in the Philippines of trademarks does not ipso facto convey an absolute right or exclusive ownership thereof. To borrow from Shangri-La International Hotel Management, Ltd. v. Development Group of Companies, Inc.36 trademark is a creation of use and, therefore, actual use is a pre-requisite to exclusive ownership; registration is only an administrative confirmation of the existence of the right of ownership of the mark, but does not perfect such right; actual use thereof is the perfecting ingredient.37

Petitioners’ reliance on Converse Rubber Corporation38 is quite misplaced, that case being cast in a different factual milieu. There, we ruled that a foreign owner of a Philippine










trademark, albeit not licensed to do, and not so engaged in, business in the Philippines, may actually earn reputation or goodwill for its goods in the country. But unlike in the instant case, evidence of actual sales of Converse rubber shoes, such as sales invoices, receipts and the testimony of a legitimate trader, was presented in Converse.

This Court also finds the IP Code and the TRIPS Agreement to be inapplicable, the infringement complaint herein having been filed in August 1982 and tried under the aegis of R.A. No. 166, as amended. The IP Code, however, took effect only on January 1, 1998 without a provision as to its retroactivity.39 In the same vein, the TRIPS Agreement was inexistent when the suit for infringement was filed, the Philippines having adhered thereto only on December 16, 1994.

With the foregoing perspective, it may be stated right off that the registration of a trademark unaccompanied by actual use thereof in the country accords the registrant only the standing to sue for infringement in Philippine courts. Entitlement to protection of such trademark in the country is entirely a different matter.

This brings us to the principal issue of infringement.

Section 22 of R.A. No. 166, as amended, defines what constitutes trademark infringement, as follows:

Sec. 22. Infringement, what constitutes. – Any person who shall use, without the consent of the registrant, any reproduction, counterfeit, copy or colorable imitation of any registered mark or tradename in connection with the sale, offering for sale, or advertising of any goods, business or services on or in connection with which such use is likely to cause confusion or mistake or to deceive purchasers or others as to the source or origin of such goods or services, or identity of such business; or reproduce, counterfeit, copy of color ably imitate any such mark or tradename and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used upon or in connection with such goods, business, or services, shall be liable to a civil action by the registrant for any or all of the remedies herein provided.

Petitioners would insist on their thesis of infringement since respondent’s mark "MARK" for cigarettes is confusingly or deceptively similar with their duly registered "MARK VII," "MARK TEN" and "LARK" marks likewise for cigarettes. To them, the word "MARK" would likely cause confusion in the trade, or deceive purchasers, particularly as to the source or origin of respondent’s cigarettes.

The "likelihood of confusion" is the gravamen of trademark infringement.40 But likelihood of confusion is a relative concept, the particular, and sometimes peculiar, circumstances of each case being determinative of its existence. Thus, in trademark infringement cases, more than in other kinds of litigation, precedents must be evaluated in the light of each particular case.41

In determining similarity and likelihood of confusion, jurisprudence has developed two tests: the dominancy test and the holistic test.42 The dominancy test43 sets sight on the similarity of the prevalent features of the competing trademarks that might cause confusion and deception, thus constitutes infringement. Under this norm, the question at issue turns on whether the use of the marks involved would be likely to cause confusion or






mistake in the mind of the public or deceive purchasers.44

In contrast, the holistic test45 entails a consideration of the entirety of the marks as applied to the products, including the labels and packaging, in determining confusing similarity.

Upon consideration of the foregoing in the light of the peculiarity of this case, we rule against the likelihood of confusion resulting in infringement arising from the respondent’s use of the trademark "MARK" for its particular cigarette product.

For one, as rightly concluded by the CA after comparing the trademarks involved in their entirety as they appear on the products,46 the striking dissimilarities are significant enough to warn any purchaser that one is different from the other. Indeed, although the perceived offending word "MARK" is itself prominent in petitioners’ trademarks "MARK VII" and "MARK TEN," the entire marking system should be considered as a whole and not dissected, because a discerning eye would focus not only on the predominant word but also on the other features appearing in the labels. Only then would such discerning observer draw his conclusion whether one mark would be confusingly similar to the other and whether or not sufficient differences existed between the marks.47

This said, the CA then, in finding that respondent’s goods cannot be mistaken as any of the three cigarette brands of the petitioners, correctly relied on the holistic test.

But, even if the dominancy test were to be used, as urged by the petitioners, but bearing in mind that a trademark serves as a tool to point out distinctly the origin or ownership of the goods to which it is affixed,48 the likelihood of confusion tantamount to infringement appears to be farfetched. The reason for the origin and/or ownership angle is that unless the words or devices do so point out the origin or ownership, the person who first adopted them cannot be injured by any appropriation or imitation of them by others, nor can the public be deceived.49

Since the word "MARK," be it alone or in combination with the word "TEN" and the Roman numeral "VII," does not point to the origin or ownership of the cigarettes to which they apply, the local buying public could not possibly be confused or deceived that respondent’s "MARK" is the product of petitioners and/or originated from the U.S.A., Canada or Switzerland. And lest it be overlooked, no actual commercial use of petitioners’ marks in local commerce was proven. There can thus be no occasion for the public in this country, unfamiliar in the first place with petitioners’ marks, to be confused.

For another, a comparison of the trademarks as they appear on the goods is just one of the appreciable circumstances in determining likelihood of confusion. Del Monte Corp. v. CA50 dealt with another, where we instructed to give due regard to the "ordinary purchaser," thus:

The question is not whether the two articles are distinguishable by their label when set side by side but whether the general confusion made by the article upon the eye of the casual purchaser who is unsuspicious and off his guard, is such as to likely result in his confounding it with the original. As observed in several cases, the general impression of the ordinary purchaser, buying under the normally prevalent conditions in trade and giving the attention such purchasers usually give in buying that class of goods is the touchstone.








When we spoke of an "ordinary purchaser," the reference was not to the "completely unwary customer" but to the "ordinarily intelligent buyer" considering the type of product involved.51

It cannot be over-emphasized that the products involved are addicting cigarettes purchased mainly by those who are already predisposed to a certain brand. Accordingly, the ordinary buyer thereof would be all too familiar with his brand and discriminating as well. We, thus, concur with the CA when it held, citing a definition found in Dy Buncio v. Tan Tiao Bok,52 that the "ordinary purchaser" in this case means "one accustomed to buy, and therefore to some extent familiar with, the goods in question."

Pressing on with their contention respecting the commission of trademark infringement, petitioners finally point to Section 22 of R.A. No. 166, as amended. As argued, actual use of trademarks in local commerce is, under said section, not a requisite before an aggrieved trademark owner can restrain the use of his trademark upon goods manufactured or dealt in by another, it being sufficient that he had registered the trademark or trade-name with the IP Office. In fine, petitioners submit that respondent is liable for infringement, having manufactured and sold cigarettes with the trademark "MARK" which, as it were, are identical and/or confusingly similar with their duly registered trademarks "MARK VII," "MARK TEN" and "LARK".

This Court is not persuaded.

In Mighty Corporation v. E & J Gallo Winery,53 the Court held that the following constitute the elements of trademark infringement in accordance not only with Section 22 of R.A. No. 166, as amended, but also Sections 2, 2-A, 9-A54 and 20 thereof:

(a) a trademark actually used in commerce in the Philippines and registered in the principal register of the Philippine Patent Office,

(b) is used by another person in connection with the sale, offering for sale, or advertising of any goods, business or services or in connection with which such use is likely to cause confusion or mistake or to deceive purchasers or others as to the source or origin of such goods or services, or identity of such business; or such trademark is reproduced, counterfeited, copied or colorably imitated by another person and such reproduction, counterfeit, copy or colorable imitation is applied to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used upon or in connection with such goods, business or services as to likely cause confusion or mistake or to deceive purchasers,

(c) the trademark is used for identical or similar goods, and

(d) such act is done without the consent of the trademark registrant or assignee. lawphil.net

As already found herein, while petitioners have registered the trademarks "MARK VII," "MARK TEN" and "LARK" for cigarettes in the Philippines, prior actual commercial use thereof had not been proven. In fact, petitioners’ judicial admission of not doing business in this country effectively belies any pretension to the contrary.

Likewise, we note that petitioners even failed to support their claim that their respective





marks are well-known and/or have acquired goodwill in the Philippines so as to be entitled to protection even without actual use in this country in accordance with Article 6bis55 of the Paris Convention. As correctly found by the CA, affirming that of the trial court:

xxx the records are bereft of evidence to establish that the appellants’ [petitioners’] products are indeed well-known in the Philippines, either through actual sale of the product or through different forms of advertising. This finding is supported by the fact that appellants admit in their Complaint that they are not doing business in the Philippines, hence, admitting that their products are not being sold in the local market. We likewise see no cogent reason to disturb the trial court’s finding that the appellants failed to establish that their products are widely known by local purchasers as "(n)o specific magazine or periodical published in the Philippines, or in other countries but circulated locally" have been presented by the appellants during trial. The appellants also were not able to show the length of time or the extent of the promotion or advertisement made to popularize their products in the Philippines.56

Last, but not least, we must reiterate that the issue of trademark infringement is factual, with both the trial and appellate courts having peremptorily found allegations of infringement on the part of respondent to be without basis. As we said time and time again, factual determinations of the trial court, concurred in by the CA, are final and binding on this Court.57

For lack of convincing proof on the part of the petitioners of actual use of their registered trademarks prior to respondent’s use of its mark and for petitioners’ failure to demonstrate confusing similarity between said trademarks, the dismissal of their basic complaint for infringement and the concomitant plea for damages must be affirmed. The law, the surrounding circumstances and the equities of the situation call for this disposition.

WHEREFORE, the petition is hereby DENIED. Accordingly, the assailed decision and resolution of the Court of Appeals are AFFIRMED.

Costs against the petitioners.

SO ORDERED.





Manila

FIRST DIVISION

G.R. No. 137592 December 12, 2001

ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA BANSANG PILIPINAS, INC.,petitioner, vs.IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG KATOTOHANAN, respondent.


This is a petition for review assailing the Decision dated October 7, 19971 and the Resolution dated February 16, 19992 of the Court of Appeals in CA-G.R. SP No. 40933, which affirmed the Decision of the Securities and Exchange and Commission (SEC) in SEC-AC No. 539.3

Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng Katotohanan (Church of God in Christ Jesus, the Pillar and Ground of Truth),4 is a non-stock religious society or corporation registered in 1936. Sometime in 1976, one Eliseo Soriano and several other members of respondent corporation disassociated themselves from the latter and succeeded in registering on March 30, 1977 a new non-stock religious society or corporation, namedIglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan.

On July 16, 1979, respondent corporation filed with the SEC a petition to compel the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name, which petition was docketed as SEC Case No. 1774. On May 4, 1988, the SEC rendered judgment in favor of respondent, ordering the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate name to another name that is not similar or identical to any name already used by a corporation, partnership or association registered with the Commission.5No appeal was taken from said decision.

It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused the registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa Iglesia ng Dios Kay Kristo Hesus, H.S.K, sa Bansang Pilipinas. The acronym "H.S.K." stands for Haligi at Saligan ng Katotohanan.6

On March 2, 1994, respondent corporation filed before the SEC a petition, docketed as SEC Case No. 03-94-4704, praying that petitioner be compelled to change its corporate name and be barred from using the same or similar name on the ground that the same causes confusion among their members as well as the public.

Petitioner filed a motion to dismiss on the ground of lack of cause of action. The motion to dismiss was denied. Thereafter, for failure to file an answer, petitioner was declared in default and respondent was allowed to present its evidence ex parte.

On November 20, 1995, the SEC rendered a decision ordering petitioner to change its corporate name. The dispositive portion thereof reads:

PREMISES CONSIDERED, judgment is hereby rendered in favor of the petitioner (respondent herein).

Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K. sa Bansang Pilipinas (petitioner herein) is hereby MANDATED to change its corporate name to another not deceptively similar or identical to the same already used by the Petitioner, any corporation, association, and/or partnership presently registered with the Commission.

Let a copy of this Decision be furnished the Records Division and the Corporate and Legal Department [CLD] of this Commission for their records, reference and/or for whatever requisite action, if any, to be undertaken at their end.

SO ORDERED.7

Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC No. 539. In a decision dated March 4, 1996, the SEC En Banc affirmed the above decision, upon a finding that petitioner's corporate name was identical or confusingly or deceptively similar to that of respondent's corporate name.8

Petitioner filed a petition for review with the Court of Appeals. On October 7, 1997, the Court of Appeals rendered the assailed decision affirming the decision of the SEC En Banc. Petitioner's motion for reconsideration was denied by the Court of Appeals on February 16, 1992.

Hence, the instant petition for review, raising the following assignment of errors:

I

THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE PROCESS, THE HONORABLE COURT OF APPEALS DISREGARDED THE JURISPRUDENCE APPLICABLE TO THE CASE AT BAR AND INSTEAD RELIED ON TOTALLY INAPPLICABLE JURISPRUDENCE.

II

THE HONORABLE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF THE CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY RESULTING IN ITS FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF ACTION TO INSTITUTE THE SEC CASE HAS SINCE PRESCRIBED PRIOR TO ITS INSTITUTION.

III

THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND PROPERLY APPLY THE EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN THE APPLICATION OF SECTION 18 OF THE CORPORATION CODE TO THE INSTANT CASE.

IV

THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE THE SCOPE OF THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS FREEDOM, THEREBY FAILING TO APPLY THE SAME TO PROTECT PETITIONER'S RIGHTS.9

Invoking the case of Legarda v. Court of Appeals,10 petitioner insists that the decision of the Court of Appeals and the SEC should be set aside because the negligence of its former counsel of record, Atty. Joaquin Garaygay, in failing to file an answer after its motion to dismiss was denied by the SEC, deprived them of their day in court.

The contention is without merit. As a general rule, the negligence of counsel binds the client. This is based on the rule that any act performed by a lawyer within the scope of his general or implied authority is regarded as an act of his client.11 An exception to the foregoing is where the reckless or gross negligence of the counsel deprives the client of due process of law. 12 Said exception, however, does not obtain in the present case.

In Legarda v. Court of Appeals, the effort of the counsel in defending his client's cause consisted in filing a motion for extension of time to file answer before the trial court. When his client was declared in default, the counsel did nothing and allowed the judgment by default to become final and executory. Upon the insistence of his client, the counsel filed a petition to annul the judgment with the Court of Appeals, which denied the petition, and again the counsel allowed the denial to become final and executory. This Court found the counsel grossly negligent and consequently declared as null and void the decision adverse to his client.

The factual antecedents of the case at bar are different. Atty. Garaygay filed before the SEC a motion to dismiss on the ground of lack of cause of action. When his client was declared in default for failure to file an answer, Atty. Garaygay moved for reconsideration and lifting of the order of default.13 After judgment by default was rendered against petitioner corporation, Atty. Garaygay filed a motion for extension of time to appeal/motion for reconsideration, and thereafter a motion to set aside the decision.14

Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed to file an answer that led to the rendition of a judgment by default against petitioner, his efforts were palpably real, albeit bereft of zeal.15

Likewise, the issue of prescription, which petitioner raised for the first time on appeal to the Court of Appeals, is untenable. Its failure to raise prescription before the SEC can only be construed as a waiver of that defense.16 At any rate, the SEC has the authority to de-register at all times and under all circumstances corporate names which in its estimation are likely to spawn confusion. It is the duty of the SEC to prevent confusion in the use of corporate names not only for the protection of the corporations involved but more so for the protection of the public.17

Section 18 of the Corporation Code provides:

Corporate Name. — No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or is contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name.

Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate Names states:

(d) If the proposed name contains a word similar to a word already used as part of the firm name or style of a registered company, the proposed name must contain two other words different from the name of the company already registered;

Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure in the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right, by a suit for injunction against the new corporation to prevent the use of the name.18

Petitioner claims that it complied with the aforecited SEC guideline by adding not only two but eight words to their registered name, to wit: "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.," which, petitioner argues, effectively distinguished it from respondent corporation.

The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in petitioner's name are, as correctly observed by the SEC, merely descriptive of and also referring to the members, or kaanib, of respondent who are likewise residing in the Philippines. These words can hardly serve as an effective differentiating medium necessary to avoid confusion or difficulty in distinguishing petitioner from respondent. This is especially so, since both petitioner and respondent corporations are using the same acronym — H.S.K.;19 not to mention the fact that both are espousing religious beliefs and operating in the same place. Parenthetically, it is well to mention that the acronym H.S.K. used by petitioner stands for "Haligi at Saligan ng Katotohanan."20

Then, too, the records reveal that in holding out their corporate name to the public, petitioner highlights the dominant words "IGLESIA NG DIOS KAY KRISTO HESUS, HALIGI AT SALIGAN NG KATOTOHANAN," which is strikingly similar to respondent's corporate name, thus making it even more evident that the additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.", are merely descriptive of and pertaining to the members of respondent corporation.21

Significantly, the only difference between the corporate names of petitioner and respondent are the wordsSALIGAN and SUHAY. These words are synonymous — both mean ground, foundation or support. Hence, this case is on all fours with Universal Mills Corporation v. Universal Textile Mills, Inc.,22 where the Court ruled that the corporate names Universal Mills Corporation and Universal Textile Mills, Inc., are undisputably so similar that even under the test of "reasonable care and observation" confusion may arise.

Furthermore, the wholesale appropriation by petitioner of respondent's corporate name cannot find justification under the generic word rule. We agree with the Court of Appeals' conclusion that a contrary ruling would encourage other corporations to adopt verbatim and register an existing and protected corporate name, to the detriment of the public.

The fact that there are other non-stock religious societies or corporations using the names Church of the Living God, Inc., Church of God Jesus Christ the Son of God the Head, Church of God in Christ & By the Holy Spirit, and other similar names, is of no consequence. It does not authorize the use by petitioner of the essential and distinguishing feature of respondent's registered and protected corporate name.23

We need not belabor the fourth issue raised by petitioner. Certainly, ordering petitioner to change its corporate name is not a violation of its constitutionally guaranteed right to religious freedom. In so doing, the SEC merely compelled petitioner to abide by one of the SEC guidelines in the approval of

partnership and corporate names, namely its undertaking to manifest its willingness to change its corporate name in the event another person, firm, or entity has acquired a prior right to the use of the said firm name or one deceptively or confusingly similar to it.

WHEREFORE, in view of all the foregoing, the instant petition for review is DENIED. The appealed decision of the Court of Appeals is AFFIRMED in toto.


Manila

THIRD DIVISION

G.R. No. 150711 August 10, 2006

CALTEX (PHILIPPINES), INC., Petitioner, vs.PNOC SHIPPING AND TRANSPORT CORPORATION, Respondent.

D E C I S I O N

CARPIO, J.:

The Case

Before the Court is a petition for review1 assailing the 31 May 2001 Decision2 and 9 November 2001 Resolution3 of the Court of Appeals in CA-G.R. CV No. 46097. The Court of Appeals reversed the 1 June 1994 Decision4 of the Regional Trial Court of Manila, Branch 51 ("trial court"), and dismissed the complaint filed by Caltex (Philippines), Inc. ("Caltex") against PNOC Shipping and Transport Corporation (PSTC).

The Antecedent Facts

On 6 July 1979, PSTC and Luzon Stevedoring Corporation ("LUSTEVECO") entered into an Agreement of Assumption of Obligations ("Agreement"). The Agreement provides that PSTC shall assume all the obligations of LUSTEVECO with respect to the claims enumerated in Annexes "A" and "B" ("Annexes") of the Agreement. The Agreement also provides that PSTC shall control the conduct of any litigation pending or which may be filed with respect to the claims in the Annexes. The Agreement further provides that LUSTEVECO shall deliver to PSTC all papers and records of the claims in the Annexes. Finally, the Agreement provides that LUSTEVECO appoints and constitutes PSTC as its attorney-in-fact to demand and receive any claim out of the countersuits and counterclaims arising from the claims in the Annexes.

Among the actions enumerated in the Annexes is Caltex (Phils.), Inc. v. Luzon Stevedoring Corporation docketed as AC-G.R. CV No. 62613 which at that time was pending before the then Intermediate Appellate Court (IAC). The case was an appeal from the Decision by the then Court of First Instance of Manila (CFI) directing LUSTEVECO to pay Caltex P103,659.44 with legal interest from the filing of the action until full payment. In its 12 November 1985 Decision,5 the IAC affirmed with modification the Decision of the

http://www.lawphil.net/judjuris/juri2006/aug2006/__#_ftn5





CFI. The dispositive portion of the Decision reads:

WHEREFORE, the decision appealed from is hereby MODIFIED and judgment is rendered ordering the defendant [LUSTEVECO] to pay plaintiff [Caltex]:

(a) P126,771.22 under the first cause of action, with legal interest until fully paid;

(b) P103,659.44 under the second cause of action with legal interest until fully paid;

(c) 10% of the sums due as and for attorney’s fees;

(d) costs of the suit.

SO ORDERED.6

The Decision of the IAC became final and executory.

The Regional Trial Court of Manila, Branch 12, issued a writ of execution in favor of Caltex. However, the judgment was not satisfied because of the prior foreclosure of LUSTEVECO’s properties. The Manila Bank Intramuros Branch and the Traders Royal Bank Aduana Branch did not respond to the notices of garnishment.

Caltex subsequently learned of the Agreement between PSTC and LUSTEVECO. Caltex sent successive demands to PSTC asking for the satisfaction of the judgment rendered by the CFI. PSTC requested for the copy of the records of AC-G.R. CV No. 62613. Later, PSTC informed Caltex that it was not a party to AC-G.R. CV No. 62613 and thus, PSTC would not pay LUSTEVECO’s judgment debt. PSTC advised Caltex to demand satisfaction of the judgment directly from LUSTEVECO.

Caltex continued to send several demand letters to PSTC. On 5 February 1992, Caltex filed a complaint for sum of money against PSTC. The case was docketed as Civil Case No. 91-59512.

On 1 June 1994, the trial court rendered its Decision, the dispositive portion of which reads:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff, ordering defendant to pay plaintiff the sums due the latter in the decision rendered by the Court of Appeals in CA-G.R. No. 62613, CALTEX vs. LUSTEVECO, or to pay plaintiff (Exhibit "C"):

(a) P126,771.22 under the first cause of action, with legal interest from the date of the promulgation of the decision on November 12, 1985 until fully paid;

(b) P103,659.44 under the second cause of action with legal interest from the date of the promulgation of the decision on November 12, 1985 until fully paid;

(c) 10% of the sums due as and for attorney’s fees; and


(d) Costs of suit.

SO ORDERED.7

PSTC appealed the trial court’s Decision.

The Ruling of the Court of Appeals

In its 31 May 2001 Decision, the Court of Appeals found the appeal meritorious. The Court of Appeals ruled that Caltex has no personality to sue PSTC. The Court of Appeals held that non-compliance with the Agreement could only be questioned by the signatories to

the contract, namely, LUSTEVECO and PSTC. The Court of Appeals stated that LUSTEVECO and PSTC are the only parties who can file an action to enforce the

Agreement. The Court of Appeals considered fatal the omission of LUSTEVECO, the real party in interest, as a party defendant in the case. The Court of Appeals further ruled that Caltex is not a beneficiary of a stipulation pour autrui because there is no stipulation in the

Agreement which clearly and deliberately favors Caltex.

The dispositive portion of the Decision of the Court of Appeals reads:

WHEREFORE, premises considered, the appealed Decision dated June 1, 1994, rendered by the Regional Trial Court of Manila, Branch 51, is hereby REVERSED and SET ASIDE and a new one entered DISMISSING the complaint filed by appellee [Caltex], against appellant [PSTC], for want of cause of action.

SO ORDERED.8

Caltex filed a motion for reconsideration of the 31 May 2001 Decision. In a Resolution promulgated on 9 November 2001, the Court of Appeals denied the motion for lack of merit.

Hence, this petition before this Court.

The Issues

The issues in this case are:

1. Whether PSTC is bound by the Agreement when it assumed all

the obligations of LUSTEVECO; and

2. Whether Caltex is a real party in interest to file an action to recover from PSTC the judgment debt against LUSTEVECO.

The Ruling of this Court

The petition is meritorious.



Caltex May Recover from PSTC Under the Terms of the Agreement

Caltex may recover the judgment debt from PSTC not because of a stipulation in Caltex’s favor but because the Agreement provides that PSTC shall assume all the obligations of LUSTEVECO.

In this case, LUSTEVECO transferred, conveyed and assigned to PSTC all of LUSTEVECO’s business, properties and assets pertaining to its tanker and bulk business "together with all the obligations relating to the said business, properties and assets." The Agreement, reproduced here in full, provides:

AGREEMENT OF ASSUMPTION

OF OBLIGATIONS

KNOW ALL MEN BY THESE PRESENTS:

This Agreement of Assumption of Obligations made and executed this 6th day of July 1979, in the City of Manila, by and between:

LUZON STEVEDORING CORPORATION, a corporation duly organized and existing under and by virtue of Philippine Laws, with offices at Tacoma and Second Streets, Port Area, Manila, represented by GERONIMO Z. VELASCO, in his capacity as Chairman of the Board, hereinafter referred to as ASSIGNOR,

- and -

PNOC SHIPPING AND TRANSPORT CORPORATION, a corporation duly organized and existing under and by virtue of Philippine Laws, with offices at Makati Avenue, Makati, Metro Manila, represented by MARIO V. TIAOQUI, in his capacity as Vice-President, hereinafter referred to as ASSIGNEE,

WITNESSETH : T h a t -

WHEREAS, on April 1, 1979, ASSIGNOR, for valuable consideration, executed an Agreement of Transfer with ASSIGNEE whereby ASSIGNOR transferred, conveyed and assigned unto ASSIGNEE all of ASSIGNOR’s business, properties and assets appertaining to its tanker and bulk all (sic) departments, together with all the obligations relating to said business, properties and assets;

WHEREAS, relative to the conduct, operation and management of the business, properties and assets transferred, conveyed and assigned by ASSIGNOR to ASSIGNEE certain actions and claims particularly described in Annex "A" consisting of four (4) pages and Annex "B", consisting of one (1) page, attached hereto and made integral parts hereof, have been filed, either with ASSIGNOR or with appropriate courts and administrative tribunals.

WHEREAS, under the terms and conditions hereinafter mentioned, ASSIGNEE agree[s] to assume the obligations incident and relative to the actions and claims enumerated and

described in Annexes "A" and "B" hereof.

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereto have agreed as follows:

1. ASSIGNEE shall assume, as it hereby assumes all the obligations of ASSIGNOR in respect to the actions and claims and described in Annexes "A" and "B";

2. ASSIGNEE shall have complete control in the conduct of any and all litigations now pending or may be filed with respect to the actions and claims enumerated and described in Annexes "A" and "B";

3. ASSIGNOR shall deliver and convey unto ASSIGNEE all papers, documents, files and any other records appertaining to the actions and claims enumerated and described in Annexes "A" and "B";

4. ASSIGNOR hereby constitutes and appoints ASSIGNEE, its successors and assigns, the true and lawful attorney of ASSIGNOR, with full power of substitution, for it and in its name, place and stead or otherwise, but on behalf and for the benefit of ASSIGNEE, its successors and assigns, to demand and receive any and all claim[s] out of countersuits or counterclaims arising from the actions and claims enumerated and described in Annexes "A" and "B".9 (Emphasis supplied)

When PSTC assumed all the properties, business and assets of LUSTEVECO pertaining to LUSTEVECO’s tanker and bulk business, PSTC also assumed all of LUSTEVECO’s obligations pertaining to such business. The assumption of obligations was stipulated not only in the Agreement of Assumption of Obligations but also in the Agreement of Transfer. The Agreement specifically mentions the case between LUSTEVECO and Caltex, docketed as AC-G.R. CV No. 62613, then pending before the IAC. The Agreement provides that PSTC may demand and receive any claim out of counter-suits or counterclaims arising from the actions enumerated in the Annexes.

PSTC is bound by the Agreement. PSTC cannot accept the benefits without assuming the obligations under the same Agreement. PSTC cannot repudiate its commitment to assume the obligations after taking over the assets for that will amount to defrauding the creditors of LUSTEVECO. It will also result in failure of consideration since the assumption of obligations is part of the consideration for the transfer of the assets from LUSTEVECO to PSTC. Failure of consideration will revert the assets to LUSTEVECO for the benefit of the creditors of LUSTEVECO. Thus, PSTC cannot escape from its undertaking to assume the obligations of LUSTEVECO as stated in the Agreement.

Disposition of Assets should not Prejudice Creditors

Even without the Agreement, PSTC is still liable to Caltex.

The disposition of all or substantially all of the assets of a corporation is allowed under Section 40 of Batas Pambansa Blg. 68, otherwise known as The Corporation Code of the Philippines ("Corporation Code"). Section 40 provides:

SEC. 40. Sale or other disposition of assets. ─ Subject to the provisions of existing laws


on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors, or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock; or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholders’ or members’ meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all the corporate property and assets, if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purposes for which it was incorporated.

x x x x

While the Corporation Code allows the transfer of all or substantially all the properties and assets of a corporation, the transfer should not prejudice the creditors of the assignor. The only way the transfer can proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes the assumption of the assignor’s liabilities,10 unless the creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud.11 To allow an assignor to transfer all its business, properties and assets without the consent of its creditors and without requiring the assignee to assume the assignor’s obligations will defraud the creditors. The assignment will place the assignor’s assets beyond the reach of its creditors.

Here, Caltex could not enforce the judgment debt against LUSTEVECO. The writ of execution could not be satisfied because LUSTEVECO’s remaining properties had been foreclosed by lienholders. In addition, all of LUSTEVECO’s business, properties and assets pertaining to its tanker and bulk business had been assigned to PSTC without the knowledge of its creditors. Caltex now has no other means of enforcing the judgment debt except against PSTC.

If PSTC refuses to honor its written commitment to assume the obligations of LUSTEVECO, there will be fraud on the creditors of LUSTEVECO. PSTC agreed to take over, and in fact took over, all the assets of LUSTEVECO upon its express written commitment to pay all obligations of LUSTEVECO pertaining to those assets, including specifically the claim of Caltex. LUSTEVECO no longer informed its creditors of the transfer of all of its assets presumably because PSTC committed to pay all such creditors. Such transfer, leaving the claims of creditors unenforceable against the debtor, is fraudulent and rescissible.12 To allow PSTC now to welsh on its commitment is to sanction a fraud on LUSTEVECO’s creditors.13

In Oria v. McMicking, the Court enumerated the badges of fraud as follows:





1. The fact that the consideration of the conveyance is fictitious or is inadequate.

2. A transfer made by a debtor after suit has been begun and while it is pending against him.

3. A sale upon credit by an insolvent debtor.

4. Evidence of large indebtedness or complete insolvency.

5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially.

6. The fact that the transfer is made between father and son, when there are present other of the above circumstances.

7. The failure of the vendee to take exclusive possession of all the property.14 (Emphasis supplied)

In Pepsi-Cola Bottling Co. v. NLRC,15 which involved the illegal dismissal of the employees of Pepsi-Cola Distributors of the Philippines (PCD), the Court has ruled that Pepsi-Cola Products Philippines, Inc. (PCPPI) which acquired the franchise of PCD is liable for the reinstatement of PCD’s employees. The Court rejected PCPPI’s argument that it is a company separate and distinct from PCD. The Court ruled that the complaint was filed when PCD was still in existence. Further, there was no evidence that PCPPI, as the new entity or purchasing company, was free from any liabilities incurred by PCD.

In this case, PSTC was aware of the pendency of the case between Caltex and LUSTEVECO. PSTC assumed LUSTEVECO’s obligations, including specifically any obligation that might arise from Caltex’s suit against LUSTEVECO. The Agreement transferred the unencumbered assets of LUSTEVECO to PSTC, making any money judgment in favor of Caltex unenforceable against LUSTEVECO. To allow PSTC to renege on its obligation under the Agreement will allow PSTC to defraud Caltex. This militates against the statutory policy of protecting creditors from fraudulent contracts.

Article 1313 of the Civil Code provides that "[c]reditors are protected in cases of contracts intended to defraud them." Further, Article 1381 of the Civil Code provides that contracts entered into in fraud of creditors may be rescinded when the creditors cannot in any manner collect the claims due them.16 Article 1381 applies to contracts where the creditors are not parties, for such contracts are usually made without their knowledge. Thus, a creditor who is not a party to a contract can sue to rescind the contract to prevent fraud upon him. Or, the same creditor can instead choose to enforce the contract if a specific provision in the contract allows him to collect his claim, and thus protect him from fraud.

If PSTC does not assume the obligations of LUSTEVECO as PSTC had committed under the Agreement, the creditors of LUSTEVECO could no longer collect the debts of LUSTEVECO. The assignment becomes a fraud on the part of PSTC, because PSTC would then have inveigled LUSTEVECO to transfer the assets on the promise to pay LUSTEVECO’s creditors. However, after taking over the assets, PSTC would now turn




around and renege on its promise.

The Agreement, under Article 1291 of the Civil Code,17 is also a novation of LUSTEVECO’s obligations by substituting the person of the debtor. Under Article 1293 of the Civil Code, a novation which consists in substituting a new debtor in place of the original debtor cannot be made without the consent of the creditor.18 Here, since the Agreement novated the debt without the knowledge and consent of Caltex, the Agreement cannot prejudice Caltex. Thus, the assets that LUSTEVECO transferred to PSTC in consideration, among others, of the novation, or the value of such assets, remain even in the hands of PSTC subject to execution to satisfy the judgment claim of Caltex.

Caltex is a Real Party in Interest

Section 2, Rule 3 of the 1997 Rules of Civil Procedure provides:

SEC. 2. Parties in interest. ─ A real party in interest is the party who stands to be benefited or injured by the judgment in the suit, or the party entitled to the avails of the suit. Unless otherwise authorized by law or these Rules, every action must be prosecuted or defended in the name of the real party in interest.

Ordinarily, one who is not a privy to a contract may not bring an action to enforce it. However, this case falls under the exception. In Oco v. Limbaring, we ruled:

The parties to a contract are the real parties in interest in an action upon it, as consistently held by the Court. Only the contracting parties are bound by the stipulation in the contract; they are the ones who would benefit from and could violate it. Thus, one who is not a party to a contract, and for whose benefit it was not expressly made, cannot maintain an action on it. One cannot do so, even if the contract performed by the contracting parties would incidentally inure to one’s benefit.

As an exception, parties who have not taken part in a contract may show that they have a real interest affected by its performance or annulment. In other words, those who are not principally or subsidiarily obligated in a contract, in which they had no intervention, may show their detriment that could result from it. x x x19 (Emphasis supplied)

Caltex may enforce its cause of action against PSTC because PSTC expressly assumed all the obligations of LUSVETECO pertaining to its tanker and bulk business and specifically, those relating to AC-G.R. CV No. 62613. While Caltex is not a party to the Agreement, it has a real interest in the performance of PSTC’s obligations under the Agreement because the non-performance of PSTC’s obligations will defraud Caltex.

Even if PSTC did not expressly assume to pay the creditors of LUSTEVECO, PSTC would still be liable to Caltex up to the value of the assets transferred. The transfer of all or substantially all of the unencumbered assets of LUSTEVECO to PSTC cannot work to defraud the creditors of LUSTEVECO. A creditor has a real interest to go after any person to whom the debtor fraudulently transferred its assets.

WHEREFORE, we REVERSE and SET ASIDE the 31 May 2001 Decision and 9 November 2001 Resolution of the Court of Appeals in CA-G.R. CV No. 46097.




We AFFIRM the 1 June 1994 Decision of the Regional Trial Court of Manila, Branch 51, in Civil Case No. 91-59512. Costs against respondent.

SO ORDERED.


Manila

FIRST DIVISION

G.R. No. 118692 July 28, 2006

COASTAL PACIFIC TRADING, INC., petitioner, vs.SOUTHERN ROLLING MILLS, CO., INC. (now known as Visayan Integrated Steel Corporation), FAR EAST BANK & TRUST COMPANY, PHILIPPINE COMMERCIAL INDUSTRIAL1BANK, EQUITABLE BANKING CORPORATION, PRUDENTIAL BANK, BOARD OF TRUSTEES-CONSORTIUM OF BANKS-VISCO, UNITED COCONUT PLANTERS BANK, CITYTRUST BANKING CORPORATION, ASSOCIATED BANK, INSULAR BANK OF ASIA AND AMERICA, INTERNATIONAL CORPORATE BANK, COMMER-CIAL BANK OF MANILA, BANK OF THE PHILIPPINE ISLANDS, NATIONAL STEEL CORPORA-TION, THE PROVINCIAL SHERIFF OF BOHOL, and DEPUTY SHERIFF JOVITO DIGAL,2 respondents.

D E C I S I O N

PANGANIBAN, C.J.:

Directors owe loyalty and fidelity to the corporation they serve and to its creditors. When these directors sit on the board as representatives of shareholders who are also major creditors, they cannot be allowed to use their offices to secure undue advantage for those shareholders, in fraud of other creditors who do not have a similar representation in the board of directors.

The Case

Before us is a Petition for Review3 under Rule 45 of the Rules of Court, assailing the September 27, 1994 Decision4 and the January 5, 1995 Resolution5 of the Court of Appeals (CA) in CA-GR CV No. 39385. The challenged Decision disposed as follows:

http://www.lawphil.net/judjuris/juri2006/jul2006/gr_118692_2006.html#fnt5





"WHEREFORE, the decision of the Regional Trial Court is hereby AFFIRMED in toto."6

The challenged Resolution denied reconsideration.

The Facts

Respondent Southern Rolling Mills Co., Inc. was organized in 1959 for the purpose of engaging in a steel processing business. It was later renamed Visayan Integrated Steel Corporation (VISCO).7

On December 11, 1961, VISCO obtained a loan from the Development Bank of the Philippines (DBP) in the amount of P836,000. This loan was secured by a duly recorded Real Estate Mortgage over VISCO's three (3) parcels of land, including all the machineries and equipment found there.8

On August 15, 1963, VISCO entered into a Loan Agreement9 with respondent banks (later referred to as "Consortium"10) for the amount of US$5,776,186.71 or P21,745,707.36 (at the then prevailing exchange rate) to finance its importation of various raw materials. To secure the full and faithful performance of its obligation, VISCO executed on August 3, 1965, a second mortgage11 over the same land, machineries and equipment in favor of respondent banks. This second mortgage remained unrecorded.12

VISCO eventually defaulted in the performance of its obligation to respondent banks. This prompted the Consortium to file on January 26, 1966, Civil Case No. 1841, which was a Petition for Foreclosure of Mortgage with Petition for Receivership.13 This case was eventually dismissed for failure to prosecute.14

Afterwards, negotiations were conducted between VISCO and respondent banks for the conversion of the unpaid loan into equity in the corporation.15 Vicente Garcia, vice-president of VISCO and of Far East Bank and Trust Company (FEBTC),16 testified that sometime in 1966, the creditor banks were given management of and control over VISCO.17 In time,18 in order to reorganize it, its principal creditors agreed to group themselves into a creditors' consortium.19 As a result of the reorganized corporate structure of VISCO, respondent banks acquired more than 90 percent of its equity. Notwithstanding this conversion, it remained indebted to the Consortium in the amount of P16,123,918.02.20

Meanwhile from 1964 to 1965, VISCO also entered into a processing agreement with Petitioner Coastal Pacific Trading, Inc. ("Coastal"). Pursuant to that agreement, petitioner delivered 3,000 metric tons of hot rolled steel coils to VISCO for processing into block iron sheets. Contrary to their agreement, the latter was able to process and deliver to petitioner only 1,600 metric tons of those sheets. Hence, a total of 1,400 metric tons of hot rolled steel coils remained unaccounted for.21 The fact that petitioner was among the major creditors of VISCO was recognized by the latter's vice-president, Vicente Garcia.22 Indeed, on October 9, 1970, it forwarded to petitioner a proposal for a Compromise Agreement.23 Subsequent developments indicate, however, that the parties did not arrive at a compromise.

Two years later, on October 20, 1972, Garcia wrote Arturo P. Samonte, representative of



















FEBTC24 and director of VISCO,25 a letter that reads as follows:

"In the light of recent development on IISMI and Elirol which were taken over by the government, I suggest that we take certain precautionary measures to protect the interests of the Consortium of Banks. One such step may be to insure the safety of the unexpended funds of VISCO from any contingencies in the future. As of now VISCO's account with the Far East Bank is in the name of BOARD OF TRUSTEES VISCO CONSORTIUM OF BANKS. It may be better to eliminate the term VISCO and just call the account BOARD OF TRUSTEES CONSORTIUM OF BANKS."26

According to a notation on this letter, an FEBTC assistant cashier named Silverio duly complied with the above request.27 Indeed, events would later reveal that the bank held a deposit account in the name of the "Board of Trustees-Consortium of Banks."28

On September 20, 1974, respondent banks held a luncheon meeting29 in the FEBTC Boardroom to discuss how they would address the insistent demands of the DBP for VISCO to settle its obligations. Jose B. Fernandez, Jr., VISCO's then chairman and concurrent FEBTC President,30 expressed his apprehension that either the DBP or the government would soon pursue extra-judicial foreclosure against VISCO.

In this regard, Fernandez informed the members of the Consortium that he had received letter-offers from two corporations that were interested in purchasing VISCO's generator sets.31 After deliberating on the matter, the members decided to approve the sale of these two generator sets to Filmag (Phil.), Inc. It was also agreed that the proceeds of the sale would be used to pay VISCO's indebtedness to DBP and to secure the release of the first mortgage.32 The Consortium agreed with Filmag on the following payment procedure:

"The payment procedure will be as follows: Filmag pays to VISCO; VISCO pays the Consortium; and then the Consortium pays the DBP with the arrangement that the Consortium subrogates to the rights of the DBP as first mortgagee to the VISCO plant. The Consortium further agreed to call a meeting of the VISCO board of directors for the purpose of considering and formally approving the proposed sale of the 2 generators to Filmag."33

Accordingly, on October 4, 1974, the VISCO board of directors had a meeting in the FEBTC Boardroom.34 The board was asked to decide how VISCO would settle its debt to DBP: whether by asking the Consortium to put up the necessary amount or by accepting Filmag's offer to purchase VISCO's generator sets.35 The latter option was unanimously chosen36 in a Resolution worded as follows:

"RESOLVED, That the offer of Filmag (Philippines) Inc. in their letters of December 14, 1973 and March 19, 1974 to purchase two (2) units of generator sets, including standard accessories, of VISCO is hereby accepted under the following terms and conditions:

x x x x x x x x x

"2. The price for the two (2) generator sets is PESOS: ONE MILLION FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY TWO ONLY














(P1,550,572) x x x and shall be payable upon signing of a letter-agreement and which shall be later formalized into a Deed of Sale. The amount, however, shall be held by the depositary bank of VISCO, Far East Bank and Trust Company, in escrow and shall be at VISCO's disposal upon the signing of Filmag of the receipt/s of delivery of the said two (2) generator sets.

x x x x x x x x x

"FURTHER RESOLVED, That the sales proceeds of PESOS: ONE MILLION FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY TWO ONLY (P1,550,572) shall be utilized to pay the liability of VISCO with the Development Bank of the Philippines."37

The sale of the generator sets to Filmag took place and, according to the testimony of Garcia, the proceeds were deposited with FEBTC in a special account held in trust for the Consortium.38

A year after, on May 22, 1975, petitioner filed with the Pasig Regional Trial Court (RTC) a Complaint39 for Recovery of Property and Damages with Preliminary Injunction and Attachment.40Petitioner's allegation was that VISCO had fraudulently misapplied or converted the finished steel sheets entrusted to it.41 On June 3, 1975, Judge Pedro A. Revilla issued a Writ of Preliminary Attachment over its properties that were not exempt from execution.42

In compliance with the Writ, Sheriff Andres R. Bonifacio attempted to garnish the account of VISCO in FEBTC,43 which denied holding that account. Instead, the bank admitted that what it had was a deposit account in the name of the Board of Trustees-Consortium of Banks, particularly Account No. 2479-1.44 FEBTC reported to Sheriff Bonifacio that it had instructed its accounting department to hold the account, "subject to the prior liens or rights in favor of [FEBTC] and other entities."45

While petitioner's case was pending, VISCO's vice-president (Garcia) and director (Arturo Samonte) requested from FEBTC a cash advance of P1,342,656.88 for the full settlement of VISCO's account with DBP.46 On June 29, 1976, FEBTC complied by issuing Check No. FE239249 for P1,342,656.88, payable to "[DBP] for [the] account of VISCO."47 On even date, DBP executed a Deed of Assignment of Mortgage Rights Interest and Participation48 in favor of Respondent Consortium of Banks. The deed stated that, in consideration of the payment made, all of DBP's rights under the mortgage agreement with VISCO were being transferred and conveyed to the Consortium.49 Thus did the latter obtain DBP's recorded primary lien over the real and chattel properties of VISCO.

On September 23, 1980, the Consortium filed a Petition for Extra-Judicial Foreclosure with the Office of the Provincial Sheriff of Bohol.50 The Notice of Extrajudicial Foreclosure of Mortgage, published in the Bohol Newsweek on October 10, 1980, announced that the auction sale was scheduled for November 11, 1980.51

On November 3, 1980, Southern Industrial Projects, Inc. (SIP), which was a judgment creditor52 of VISCO, filed Civil Case No. 3383. It was a Complaint53 for Declaration of Nullity of the Mortgage and Injunction to Restrain the Consortium from Proceeding with the Auction Sale. SIP argued that DBP had actually been paid by VISCO with the proceeds from the sale of the generator sets. Hence, the mortgage in favor of that bank


















had been extinguished by the payment and could not have been assigned to the Consortium.54 A temporary restraining order against the latter was thus successfully obtained; the provincial sheriff could not proceed with the auction sale of the mortgaged assets.55 But SIP's victory was short-lived. On March 2, 1984, Civil Case No. 3383 was decided in favor of the Consortium.56 Judge Andrew S. Namocatcat ruled thus:

"The evidence of the plaintiff is only anchored on the fact that the deed of assignment executed by the DBP in favor of the defendant banks is an act which would defraud creditors. It is the thinking of the court that the payment of defendant banks to DBP of VISCO's loan and the execution of the DBP of the deed of assignment of credit and rights to the defendant banks is in accordance with Article 1302 and 1303 of the New Civil Code, and said transaction is not to defraud creditors because the defendant banks are also creditors of VISCO."57

On June 14, 1985, this Decision was affirmed by the Intermediate Appellate Court in CA-GR No. 03719. 58

The auction sale of VISCO's mortgaged properties took place on March 19, 1985 and the Consortium emerged as the highest bidder.59 The Certificate of Sale60 in its favor was registered on May 22, 1985.61

On June 27, 1985, VISCO executed through Vicente Garcia, a Deed of Assignment of Right of Redemption62 in favor of the National Steel Corporation (NSC), in consideration of P100,000.63 On the same day, the Consortium sold the foreclosed real and personal properties of VISCO to the NSC.64

On August 16, 1985, petitioner filed against respondents Civil Case No. 3929, which was a Complaint for Annulment or Rescission of Sale, Damages with Preliminary Injunction.65 Coastal alleged that, despite the Writ of Attachment issued in its favor in the still pending Civil Case No. 21272, the Consortium had sold the properties to NSC. Further, despite the attachment of the properties, the Consortium was allegedly able to sell and place them beyond the reach of VISCO's other creditors.66 Thus imputing bad faith to respondent banks' actions, petitioner said that the sale was intended to defraud VISCO's other creditors.

Petitioner further contended that the assignment in favor of the Consortium was fraudulent, because DBP had been paid with the proceeds from the sale of the generator sets owned by VISCO, and not with the Consortium's own funds.67 Petitioner offered as proof the minutes of the meeting68 in which the transaction was decided. Respondent Consortium countered that the minutes would in fact readily disclose that the intention of its members was to apply the proceeds to a partial payment to DBP.69 Respondent insisted that it used its own funds to pay the bank.70

On August 20, 1985, a temporary restraining order (TRO)71 was issued by Judge Mercedes Gozo-Dadole against VISCO, enjoining it from proceeding with the removal or disposal of its properties; the execution and/or consummation of the foreclosure sale; and the sale of the foreclosed properties to NSC. On September 6, 1985, the trial court issued an Order requiring the Consortium to post a bond of P25 million in favor of Coastal for damages that petitioner may suffer from the lifting of the TRO. The bond filed was then approved by the RTC in its Order of September 13, 1985.72




















On December 15, 1986, Civil Case No. 21272 was finally decided by Judge Nicolas P. Lapena, Jr., in favor of Coastal.73 VISCO was ordered to pay petitioner the sum of P851,316.19 with interest at the legal rate, plus attorney's fees of P50,000.00 and costs.74 Coastal filed a Motion for Execution,75 but the judgment has remained unsatisfied to date.

On January 5, 1992, a Decision76 on Civil Case No. 3929 was rendered as follows:

"WHEREFORE, this Court hereby renders judgment in favor of the defendants and against the plaintiff Coastal Pacific Trading, Inc. BY WAY OF THE MAIN COMPLAINT, to wit:

"1. Declaring the extrajudicial foreclosure sale conducted by the sheriff and the corresponding certificate of sale executed by the defendant sheriffs on March 15, 1985 relative to the real properties of the defendant SRM/VISCO of Cortes, Bohol, Philippines, which were registered in the Register of Deeds of Bohol, on May 22, 1985 and the Transfer of Assignment to the defendant National Steel Corporation of any or part of the foreclosed properties arising from the extrajudicial foreclosure sale as valid and legal;

"2. Ordering the plaintiff Coastal Pacific Trading Inc. to pay the defendant Consortium of Banks[,] Southern Rolling Mills, Co., Inc., Far East Bank & Trust Company, Philippine Commercial Industrial Bank, Equitable Banking Corporation, Prudential Bank, Board of Trustees-Consortium of Banks- [VISCO], United Coconut Planters Bank, City Trust Banking Corporation, Associated Bank, Insular Bank of Asia and America, International Corporate Bank, Commercial Bank of Manila, Bank of the Philippine Islands and the National Steel Corporation in the instant case the amount of FIVE HUNDRED THOUSAND PESOS (P500,000.00) representing damages;

"3. Ordering the plaintiff The (sic) Coastal Pacific Trading Inc. to pay the defendants the amount of FIFTEEN THOUSAND PESOS (P15,000.00) representing attorney's fees;

"4. Dismissing the Amended Complaint of the plaintiff;

"5. Ordering the plaintiff to pay the cost; AND

"BY WAY OF CROSS CLAIM INTERPOSED

"BY THE DEFENDANT National Steel Corporation against the Consortium of Banks and SRM/VISCO, the same is dismissed for lack of merit, without pronouncement as to cost."77

Insisting that the trial court erred in holding that it had failed to prove its case by preponderance of evidence, Coastal filed an appeal with the CA. Allegedly, the purported insufficiency of proof was based on the sole ground that petitioner did not file an objection when the properties were sold on execution. It contended that the court a quo had arrived






at this erroneous conclusion by relying on inapplicable jurisprudence.78

Additionally, Coastal argued that the trial court had erred in not annulling the foreclosure proceedings and sale for being fictitious and done to defraud petitioner as VISCO's creditor. Supposedly, the DBP mortgage had already been extinguished by payment; thus, the bank could not have assigned the contract to the Consortium.79

Petitioner also prayed for the annulment of the sale in favor of NSC on the ground that the latter was a party to the fraudulent foreclosure and, hence, not a buyer in good faith.80


At the outset, the CA stressed that the validity of the Consortium's mortgage, foreclosure, and assignments had already been upheld in CA-GR CV No. 03719, entitled Southern Industrial Projects v. United Coconut Planters Bank81 Citing Valencia v. RTC of Quezon City, Br. 9082 and Vda. de Cruzo v. Carriaga,83 the CA explained that the absolute identity of parties was not necessary for the application of res judicata. All that was required was a shared identity of interests, as shown by the identity of reliefs sought by one person in a prior case and by another in a subsequent case.

While Coastal was not a party to Southern Industrial Projects, it should nevertheless be bound by that Decision, because it had raised substantially the same claim and cause of action as SIP, according to the appellate court. The CA held that the basic reliefs sought by Coastal and SIP were substantially the same: the nullification of the Deed of Assignment in favor of the Consortium, the foreclosure sale, and the subsequent sale to NSC. Because this identity of reliefs sought showed an identity of interests, the CA concluded that it need not rule on those issues.84

As to the issue that the DBP mortgage had been extinguished by payment, the CA quoted its earlier Decision in Southern Industrial Projects:

"The evidence shows that the proceeds of the sale of the two generating sets were applied by defendants-appellees in the payment of the outstanding obligation of VISCO. It appears that said proceeds were deposited in the bank account of the consortium of creditors to avoid it being garnished by the creditors notwithstanding the set-off, VISCO was still indebted to the defendants-appellees.

"The evidence x x x shows that upon VISCO's request for [cash] advance, the Far East Banks (sic) and Trust Co., the manager of the consortium of creditors, issued FEBTC check No. 239249 on June 29, 1976 in the amount of P1,342,656.68 payable to the DBP to pay off its loan to the latter.

x x x x x x x x x

"x x x. A public document celebrated with all the legal formalities under the safeguard of notarial certificate is evidence against a party, and a high degree [of] proof is necessary to overcome the legal presumption that the recital is true. The biased and interested testimony of one of the parties to such instrument who attempts to vary or repudiate what it purports to be, cannot overcome the








evidentiary force of what is recited in the document."85

The appellate court also rejected petitioner's contention that the Consortium's Petition for Extrajudicial Foreclosure was already barred by the earlier resort to a judicial foreclosure. The CA clarified that in filing a Petition for Judicial Foreclosure, the Consortium had pursued its right as junior encumbrancer. On the other hand, the Consortium filed a Petition for Extrajudicial Foreclosure as a first encumbrancer by virtue of DBP's assignment in its favor.86

The CA also rejected petitioner's theory of extinguishment of obligation by merger. It observed that the merger could not have possibly taken place, because respondent banks and VISCO were not creditors and debtors in their own right.87

Petitioner's Motion for Reconsideration,88 which was received by the CA on November 15, 1994,89 was denied for lack of merit.


Issues

Petitioner raises the following issues for our consideration:

"I

"Respondent Court of Appeals, seemingly to avoid the irrefutable evidence of fraud and collusion practised by [respondents] against [Petitioner] Coastal, erroneously sustained the trial court's holding that the present case is barred by res judicata because of the previous decision in the case of Southern Industrial Projects, Inc., vs. United Coconut Planters Bank, CA-G.R. No. 03719, considering that the elements that call for the application of this rule are not present in the case at bar, and the exceptions allowed by this Honorable Supreme Court are not applicable here for variance or distinction in facts and issues, x x x:"91

"II

"Respondent Court of Appeals further erred in not annulling the Deed of Assignment of the DBP mortgage x x x, the extrajudicial foreclosure proceedings of the two mortgages x x x, and the separate sale of the land and machineries as real and personal properties by the foreclosing banks to NSC, as well as the assignment or waiver of SRM/Visco's legal right of redemption over the foreclosed properties, for being fraudulently executed through collusion among the [respondents] and in fraud of SRM/Visco's creditor, [Petitioner] Coastal, x x x;"92

Stripped of nonessentials, the two issues may be restated as follows:

1. Whether the present action is barred by res judicata

2. Whether respondents disposed of VISCO's assets in fraud of the creditors









The Court's Ruling

The Petition is meritorious.

First Issue:Res judicata

The CA cited Valencia v. RTC of Quezon City93 to support the finding that SIP and Coastal were substantially the same parties. We distinguish.

In Valencia, the plaintiff-intervenor in the first case, Cariño, claimed Lot 4 based on an alleged purchase of Valencia's "squatter's rights" over the property. The trial court dismissed the claim and held that no such purchase ever took place.94 It also held that, on the assumption that a sale had taken place, the sale was null and void for being contrary to the pertinent housing law. It also found that all current occupants of Lot 4 were illegal squatters; thus, it ordered their ejectment.

When this first case attained finality, Carino's daughter, Catbagan, filed another suit against Valencia. Catbagan challenged the applicability of the ejectment Order issued to her; as an occupant of the lot, she was allegedly not a party to the first case. Her Petition was denied for lack of merit.95

The execution of the Decision in the first case was again forestalled when Llanes, Cariño's sister-in-law who was another occupant of Lot 4, filed another suit against the same respondent. Like Cariño, Llanes insisted on having purchased the subject lot from Valencia.96 This Court ruled that the suit was barred by res judicata. There was a substantial identity of parties, because the right claimed by both Cariño and Llanes were based on each one's alleged purchase of Valencia's "squatter's rights."97

In the first case, sales of "squatter's rights" were already categorically declared null and void for being contrary to law. Thus, Llanes' admission that she had purchased Valencia's "squatter's rights" placed her in the same category as Cariño. The purchase could not be treated differently, because the final and executory Decision held that all purchases of "squatter's rights" (regardless of who the purchasers were) were null and void.98

Further, the earlier ruling held that "the present occupants are illegal squatters." That ruling included Llanes, who was admittedly one of the occupants.99 Simply put, she and Valencia were considered identical parties for purposes of res judicata, because they were obviously litigating under the same void title and capacity as vendees of "squatter's rights" and as occupants of Lot 4.

Moreover, we held in Valencia that Llanes' suit was merely a clear attempt to prevent or delay the execution of the judgment in the first case, which had become final by reason of the three affirmances by this Court. The pattern to obstruct the execution of the first judgment was obvious: after Cariño lost the first case, her daughter filed a second one. When the daughter lost the second, the daughter-in-law filed a third case. It may be observed that the three successive plaintiffs were all occupants of the same property and belonged to the same family; this fact was also indicative of their privity.

Given this background, it becomes clear that the finding of a substantial identity of parties








in Valencia was based on its peculiar factual circumstances, which are different from those in the present case.

Unlike Llanes, Coastal is not asserting a right that has been categorically declared null and void in a prior case. In fact, its right based on the processing agreement was upheld in Civil Case No. 21272. Clearly, Coastal cannot be treated in the same manner as Llanes.

The CA erred in applying Southern Industrial Projects v. United Coconut Planters Bank100 as a bar by res judicata with respect to the present case. For this principle to apply, the following elements must concur: a) the former judgment was final; b) the court that rendered it had jurisdiction over the subject matter and the parties; c) the judgment was based on the merits; and, d) between the first and the second actions, there is an identity of parties, subject matters, and causes of action.101

It is axiomatic that res judicata does not require an absolute, but only a substantial, identity of parties. There is a substantial identity when there is privity between the two parties or they are successors-in-interest by title subsequent to the commencement of the action, litigating for the same thing, under the same title, and in the same capacity.102 Petitioner was not acting in the same capacity as SIP when it filed Civil Case No. 3383, which eventually became AC-GR CV No. 03719. It brought this latter action as a creditor under a processing agreement with VISCO; on the other hand, the latter was sued by SIP, based on an alleged breach of their management contract. Very clearly, their rights were entirely distinct and separate from each other. In no manner were these two creditors privies of each other.

The causes of action in the two Complaints were also different. Causes of action arise from violations of rights. A single right may be violated by several acts or omissions, in which case the plaintiff has only one cause of action. Likewise, a single act or omission may violate several rights at the same time, as when the act constitutes a violation of separate and distinct legal obligations.103 The violation of each of these separate rights is a separate cause of action in itself.104 Hence, although these causes of action arise from the same state of facts, they are distinct and independent and may be litigated separately; recovery on one is not a bar to subsequent actions on the others.105

In the present case, the right of SIP (arising from its management contract with VISCO) is totally distinct and separate from the right of Coastal (arising from its processing contract with VISCO). SIP and Coastal are asserting distinct rights arising from different legal obligations of the debtor corporation. Thus, VISCO's violation of those separate rights has given rise to separate causes of action.

The confusion in the resolution of the issue of identity of parties occurred, because the two creditors were assailing the same transactions of VISCO on the same grounds. Since the two cases they filed presented similar legal issues, the appellate court held that its ruling in AC-GR CV No. 03719 was also applicable to the instant case.

Common but palpable is this misconception of the doctrine of res judicata. Persons do not become privies by the mere fact that they are interested in the same question or in proving the same set of facts, or that one person is interested in the result of a litigation involving the other. Hence, several creditors of one debtor cannot be considered as identical parties for the purpose of assailing the acts of the debtor. They have distinct







credits, rights, and interests, such that the failure of one to recover should not preclude the other creditors from also pursuing their legal remedies.

Further, petitioner, which was not a party to Southern Industrial Projects (their causes of action being separate and distinct), did not have the opportunity to be heard in that case, much less to present its own evidence. Thus, to bind petitioner to the Decision in that case would clearly violate its rights to due process. As a separate party, it has the right to have its arguments and evidence evaluated on their own merits.

Second Issue:Fraud of Creditors

We now come to the heart of the Petition. Coastal alleges that the assignment of mortgage, the extrajudicial foreclosure proceedings, and the sale of the properties of VISCO should all be rescinded on the ground that they were done to defraud the latter's creditors.

The CA found no merit in petitioner's arguments. It ruled that the assignment conformed to the requirements of law; that the consideration for the assignment had allegedly been given by FEBTC; and that, hence, the Consortium had a right to foreclose on the mortgaged properties.

By focusing on the innate validity of these Contracts, the CA totally overlooked the issue of fraud as a ground for rescission. Elementary is the principle that the validity of a contract does notpreclude its rescission. Under Articles 1380 and 1381 (3) of the Civil Code, contracts that are otherwise valid between the contracting parties may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors.106 In fact, rescission implies that there is a contract that, while initially valid, produces a lesion or pecuniary damage to someone.107 Thus, when the CA confined itself to the issue of the validity of these contracts, it did not at all address the heart of petitioner's cause of action: whether these transactions had been undertaken by the Consortium to defraud VISCO's other creditors.

There is more than a preponderance of evidence showing the Consortium's deliberate plan to defraud VISCO's other creditors.

Consortium Banks as Directors

It will be recalled that Respondent Consortium took over management and control of VISCO by acquiring 90 percent of the latter's equity. Thus, 9 out of the 10 directors of the corporation were all officials of the Consortium,108 which may thus be said to have effectively occupied and/or controlled the board. Significantly, nowhere in the records can we find any denial by respondent of this allegation by petitioner.109

As directors of VISCO, the officials of the Consortium were in a position of trust; thus, they owed it a duty of loyalty. This trust relationship sprang from the fact that they had control and guidance over its corporate affairs and property.110 Their duty was more stringent when it became insolvent or without sufficient assets to meet its outstanding obligations that arose. Because they were deemed trustees of the creditors in those instances, they should have managed the corporation's assets with strict regard for the creditors'






interests. When these directors became corporate creditors in their own right, they should not have permitted themselves to secure any undue advantage over other creditors.111 In the instant case, the Consortium miserably failed to observe its duty of fidelity towards VISCO and its creditors.

Duty of the Consortium Banks to VISCO's Creditors

Recall that as early as 1966, the Consortium, through its directors on the board of VISCO, had already assumed management and control over the latter. Hence, when VISCO recognized its outstanding liability to petitioner in 1970 and offered a Compromise Agreement,112 respondent banks were already at the helm of the debtor corporation. The members of the Consortium, therefore, cannot deny that they were aware of those claims against the corporation. Nonetheless, they did not adopt any measure to protect petitioner's credit.

Quite the opposite, they even took steps to hide VISCO's unexpended funds. Garcia's 1972 letter to Samonte unmistakably reveals that they kept those funds in an account named "Board of Trustees VISCO Consortium of Banks." This fact alone shows an effort to hide, with the evident intent to keep, those funds for themselves. The letter even says that, for the protection of the Consortium, the name "VISCO" should be eliminated entirely, so that the account name would read "Board of Trustees Consortium of Banks." Clearly, this particular move was found to be necessary to avoid a takeover by the government, which was also a creditor of VISCO.113 This express intent of the latter, under the direction and for the benefit of the Consortium, corroborated petitioner's contention that respondent banks had defrauded VISCO's creditors.

Assignment of Mortgage in Favor of the Consortium Banks

The assignment of mortgage in favor of the Consortium also bears the earmarks of fraud. Initially, respondent banks had agreed that VISCO should sell two of its generator sets, so that the proceeds could be utilized to pay DBP. This plan was direct, simple, and would extinguish the encumbrance in favor of the bank.

Then, quite surprisingly, the Consortium set down the following payment procedure: Filmag would pay VISCO; the latter would pay the Consortium, which would pay DBP; and the Consortium would then subrogate DBP to the latter's rights as first mortgagee. One is then led to ask: if the intention was to pay DBP; from the sales proceeds of the generator sets, why did the money have to pass through the Consortium?

The answer lies in the nature of respondent's mortgage. It will be recalled that this mortgage remained unrecorded and not legally binding on the other creditors.114 Thus, if DBP had been directly paid by VISCO, the latter could have freed up its properties to the satisfaction of all its other creditors. This procedure would have been fair to all, but it was not followed by the Consortium.

Instead, the proceeds from the sale of the generator sets were first paid to respondent banks, which used the money to pay DBP. The last step in the payment procedure explains the reason for this preferred though roundabout manner of payment. This final step entitled the Consortium to obtain DBP's primary lien through an assignment by





allowing it to pay VISCO's loan to the bank, without incurring additional expenses.

In the end, by collecting the money from VISCO, respondent banks recovered what they had ostensibly remitted to DBP. Moreover, the primary lien that respondent banks acquired allowed them, as unsecured creditors of VISCO, to foreclose on the assets of the corporation without regard to its inferior claims. It was a clever ruse that would have worked, were it not done by creditors who were duty-bound, as directors, not to take clever advantage of other creditors.

To be sure, there was undue advantage. The payment scheme devised by the Consortium continued the efficacy of the primary lien, this time in its favor, to the detriment of the other creditors. When one considers its knowledge that VISCO's assets might not be enough to meet its obligations to several creditors,115 the intention to defraud the other creditors is even more striking. Fraud is present when the debtor knows that its actions would cause injury.116

The assignment in favor of the Consortium was a rescissible contract for having been undertaken in fraud of creditors.117 Article 1385 of the Civil Code provides for the effect of rescission, as follows:

"Rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest; consequently, it can be carried out only when he who demands rescission can return whatever he may be obliged to restore.

"Neither shall rescission take place when the things which are the object of the contract are legally in the possession of third persons who did not act in bad faith.

"In this case, indemnity for damages may be demanded from the person causing the loss."

Indeed, mutual restitution is required in all cases involving rescission. But when it is no longer possible to return the object of the contract, an indemnity for damages operates as restitution. The important consideration is that the indemnity for damages should restore to the injured party what was lost.

In the case at bar, it is no longer possible to order the return of VISCO's properties. They have already been sold to the NSC, which has not been shown to have acted in bad faith. The party alleging bad faith must establish it by competent proof. Sans that proof, purchasers are deemed to be in good faith, and their interest in the subject property must not be disturbed. Purchasers in good faith are those who buy the property of another without notice that some other person has a right to or interest in the property; and who pay the full and fair price for it at the time of the purchase, or before they get notice of some other persons' claim of interest in the property.118

In the present case, petitioner failed to discharge its burden of proving bad faith on the part of NSC. There is insufficient evidence on record that the latter participated in the design to defraud VISCO's creditors. To NSC, petitioner imputes fraud from the sole fact that the former was allegedly aware that its vendor, the Consortium, had taken control over VISCO including the corporation's assets.119 We cannot appreciate how knowledge of






the takeover would necessarily implicate anyone in the Consortium's fraudulent designs. Besides, NSC was not shown to be privy to the information that VISCO had no other assets to satisfy other creditors' respective claims.

The right of an innocent purchaser for value must be respected and protected, even if its vendors obtained their title through fraud.120 Pursuant to this principle, the remedy of the defrauded creditor is to sue for damages against those who caused or employed the fraud. Hence, petitioner is entitled to damages from the Consortium.

Award of Damages

It is essential that for damages to be awarded, a claimant must satisfactorily prove during the trial that they have a factual basis, and that the defendant's acts have a causal connection to them.121 Thus, the question of damages should normally call for a remand of the case to the lower court for further proceedings. Considering, however, the length of time that petitioner's just claim has been thwarted, we find it in the best interest of substantial justice to decide the issue of damages now on the basis of the available records. A remand for further proceedings would only result in a needless delay.

Going over the records of the case, we find that petitioner has a final and executory judgment in its favor in Civil Case No. 21272. The judgment in that case reads as follows:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs ordering defendant VISCO/SRM to pay the plaintiffs the sum of P851,316.19 with interest thereon at the legal rate from the filing of this complaint, plus attorney's fees of P50,000.00 and to pay the costs."122

The foregoing is the judgment credit that petitioner cannot enforce against VISCO because of Respondent Consortium's fraudulent disposition of the corporation's assets. In other words, the above amounts define the extent of the actual damage suffered by Coastal and the amount that respondent has to restore pursuant to Article 1385.

On the basis of the finding of fraud, the award of exemplary damages is in order, to serve as a warning to other creditors not to abuse their rights. Under Article 2229 of the Civil Code, exemplary or corrective damages are imposed by way of example or correction for the public good. By their nature, exemplary damages should be imposed in an amount sufficient and effective to deter possible future similar acts by respondent banks. The court finds the amount of P250,000 sufficient in the instant case.

As a rule, a corporation is not entitled to moral damages because, not being a natural person, it cannot experience physical suffering or sentiments like wounded feelings, serious anxiety, mental anguish and moral shock.123 The only exception to this rule is when the corporation has a good reputation that is debased, resulting in its humiliation in the business realm.124 In the present case, the records do not show any evidence that the name or reputation of petitioner has been sullied as a result of the Consortium's fraudulent acts. Accordingly, moral damages are not warranted.

WHEREFORE, the Petition is GRANTED. The assailed Decision of the Court of Appeals dated September 27, 1994, and its Resolution dated January 5, 1995, are hereby REVERSED andSET ASIDE. Respondent Consortium of Banks is ordered to PAY






Petitioner Coastal Pacific Trading, Inc., the sum adjudged by the Regional Trial Court of Pasig, Branch 167, in Civil Case No. 21272 entitled Coastal Pacific Trading, Felix de la Costa, and Aurora del Banco v. Visayan Integrated Corporation, to wit: "x x x the sum of P851,316.19 with interest thereon at the legal rate from the filing of [the] [C]omplaint, plus attorney's fees of P50,000 and x x x the costs." Respondent Consortium of Banks is further ordered to pay petitioner exemplary damages in the amount of P250,000.

SO ORDERED.


Manila

SECOND DIVISION

G.R. No. 122174 October 3, 2002

INDUSTRIAL REFRACTORIES CORPORATION OF THE PHILIPPINES, petitioner, vs.COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and REFRACTORIES CORPORATION OF THE PHILIPPINES, respondents.

AUSTRIA-MARTINEZ, J.:

Filed before us is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the Decision of the Court of Appeals in CA-G.R. SP No. 35056, denying due course and dismissing the petition filed by Industrial Refractories Corp. of the Philippines (IRCP).

Respondent Refractories Corporation of the Philippines (RCP) is a corporation duly organized on October 13, 1976 for the purpose of engaging in the business of manufacturing, producing, selling, exporting and otherwise dealing in any and all refractory bricks, its by-products and derivatives. On June 22, 1977, it registered its corporate and business name with the Bureau of Domestic Trade.

Petitioner IRCP on the other hand, was incorporated on August 23, 1979 originally under the name "Synclaire Manufacturing Corporation". It amended its Articles of Incorporation on August 23, 1985 to change its corporate name to "Industrial Refractories Corp. of the Philippines". It is engaged in the business of manufacturing all kinds of ceramics and other products, except paints and zincs.

Both companies are the only local suppliers of monolithic gunning mix.1

Discovering that petitioner was using such corporate name, respondent RCP filed on April 14, 1988 with the Securities and Exchange Commission (SEC) a petition to compel petitioner to change its corporate name on the ground that its corporate name is confusingly similar with that of petitioner’s such that the public may be confused or deceived into believing that they are one and the same corporation.2

The SEC decided in favor of respondent RCP and rendered judgment on July 23, 1993 with the following dispositive portion:

"WHEREFORE, judgment is hereby rendered in favor of the petitioner and against the respondent declaring the latter’s corporate name ‘Industrial Refractories Corporation of the Philippines’ as deceptively and confusingly similar to that of petitioner’s corporate name ‘Refractories Corporation of the Philippines’. Accordingly, respondent is hereby directed to amend its Articles of Incorporation by deleting the name ‘Refractories Corporation of the Philippines’ in its corporate name within thirty (30) days from finality of this Decision. Likewise, respondent is hereby ordered to pay the petitioner the sum of P50,000.00 as attorney’s fees."3

Petitioner appealed to the SEC En Banc, arguing that it does not have any jurisdiction over the case, and that respondent RCP has no right to the exclusive use of its corporate name as it is composed of generic or common words.4

In its Decision dated July 23, 1993, the SEC En Banc modified the appealed decision in that petitioner was ordered to delete or drop from its corporate name only the word "Refractories".5

Petitioner IRCP elevated the decision of the SEC En Banc through a petition for review on certiorari to the Court of Appeals which then rendered the herein assailed decision. The appellate court upheld the jurisdiction of the SEC over the case and ruled that the corporate names of petitioner IRCP and respondent RCP are confusingly or deceptively similar, and that respondent RCP has established its prior right to use the word "Refractories" as its corporate name.6 The appellate court also found that the petition was filed beyond the reglementary period.7

Hence, herein petition which we must deny.

Petitioner contends that the petition before the Court of Appeals was timely filed. It must be noted that at the time the SEC En Banc rendered its decision on May 10, 1994, the governing rule on appeals from quasi-judicial agencies like the SEC was Supreme Court Circular No. 1-91. As provided therein, the remedy should have been a petition for review filed before the Court of Appeals within fifteen (15) days from notice, raising questions of fact, of law, or mixed questions of fact and law.8 A motion for reconsideration suspends the running of the period.9

In the case at bench, there is a discrepancy between the dates provided by petitioner and respondent. Petitioner alleges the following dates of receipt and filing:10

June 10, 1994 Receipt of SEC’s Decision dated May 10, 1994

June 20, 1994 Filing of Motion for Reconsideration

September 1, 1994 Receipt of SEC’s Order dated August 3, 1994 denying petitioner’s motion for reconsideration

September 2, 1994 Filing of Motion for extension of time

September 6, 1994 Filing of Petition

Respondent RCP, however, asserts that the foregoing dates are incorrect as the certifications issued by the SEC show that petitioner received the SEC’s Decision dated May 10, 1994 on June 9, 1994, filed the motion for reconsideration via registered mail on June 25, 1994, and received the Order dated August 3, 1994 on August 15, 1994.11 Thus, the petition was filed twenty-one (21) days beyond the reglementary period provided in Supreme Court Circular No. 1-91.12

If reckoned from the dates supplied by petitioner, then the petition was timely filed. On the other hand, if reckoned from the dates provided by respondent RCP, then it was filed way beyond the reglementary period. On this score, we agree with the appellate court’s finding that petitioner failed to rebut respondent RCP’s allegations of material dates of receipt and filing.13 In addition, the certifications were executed by the SEC officials based on their official records14 which enjoy the presumption of regularity.15 As such, these are prima facie evidence of the facts stated therein.16 And based on such dates, there is no question that the petition was filed with the Court of Appeals beyond the fifteen (15) day period. On this ground alone, the instant petition should be denied as the SEC En Banc’s decision had already attained finality and the SEC’s findings of fact, when supported by substantial evidence, is final.17

Nevertheless, to set the matters at rest, we shall delve into the other issues posed by petitioner.

Petitioner’s arguments, substantially, are as follows: (1) jurisdiction is vested with the regular courts as the present case is not one of the instances provided in P.D. 902-A; (2) respondent RCP is not entitled to use the generic name "refractories"; (3) there is no confusing similarity between their corporate names; and (4) there is no basis for the award of attorney’s fees.18

Petitioner’s argument on the SEC’s jurisdiction over the case is utterly myopic. The jurisdiction of the SEC is not merely confined to the adjudicative functions provided in Section 5 of P.D. 902-A, as amended.19 By express mandate, it has absolute jurisdiction, supervision and control over all corporations.20 It also exercises regulatory and administrative powers to implement and enforce the Corporation Code,21 one of which is Section 18, which provides:

"SEC. 18. Corporate name. -- No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name."

It is the SEC’s duty to prevent confusion in the use of corporate names not only for the protection of the corporations involved but more so for the protection of the public, and it has authority to de-register at all times and under all circumstances corporate names which in its estimation are likely to generate confusion.22 Clearly therefore, the present case falls within the ambit of the SEC’s regulatory powers.23

Likewise untenable is petitioner’s argument that there is no confusing or deceptive similarity between petitioner and respondent RCP’s corporate names. Section 18 of the Corporation Code expressly prohibits the use of a corporate name which is "identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws". The policy behind the foregoing prohibition is to avoid fraud upon the public that will have occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporation.24

Pursuant thereto, the Revised Guidelines in the Approval of Corporate and Partnership Names25 specifically requires that: (1) a corporate name shall not be identical, misleading or confusingly similar to one already registered by another corporation with the Commission;26 and (2) if the proposed name is similar to the name of a registered firm, the proposed name must contain at least one distinctive word different from the name of the company already registered.27

As held in Philips Export B.V. vs. Court of Appeals,28 to fall within the prohibition of the law, two requisites must be proven, to wit:

(1) that the complainant corporation acquired a prior right over the use of such corporate name;

and

(2) the proposed name is either: (a) identical, or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law.

As regards the first requisite, it has been held that the right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption.29 In this case, respondent RCP was incorporated on October 13, 1976 and since then has been using the corporate name "Refractories Corp. of the Philippines". Meanwhile, petitioner was incorporated on August 23, 1979 originally under the name "Synclaire Manufacturing Corporation". It only started using the name "Industrial Refractories Corp. of the Philippines" when it amended its Articles of Incorporation on August 23, 1985, or nine (9) years after respondent RCP started using its name. Thus, being the prior registrant, respondent RCP has acquired the right to use the word "Refractories" as part of its corporate name.

Anent the second requisite, in determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person using ordinary care and discrimination and the Court must look to the record as well as the names themselves.30 Petitioner’s corporate name is "Industrial Refractories Corp. of the Phils.", while respondent’s is "Refractories Corp. of the Phils." Obviously, both names contain the identical words "Refractories", "Corporation" and "Philippines". The only word that distinguishes petitioner from respondent RCP is the word "Industrial" which merely identifies a corporation’s general field of activities or operations. We need not linger on these two corporate names to conclude that they are patently similar that even with reasonable care and observation, confusion might arise.31 It must be noted that both cater to the same clientele, i.e.¸ the steel industry. In fact, the SEC found that there were instances when

different steel companies were actually confused between the two, especially since they also have similar product packaging.32 Such findings are accorded not only great respect but even finality, and are binding upon this Court, unless it is shown that it had arbitrarily disregarded or misapprehended evidence before it to such an extent as to compel a contrary conclusion had such evidence been properly appreciated. 33 And even without such proof of actual confusion between the two corporate names, it suffices that confusion is probable or likely to occur.34

Refractory materials are described as follows:

"Refractories are structural materials used at high temperatures to [sic] industrial furnaces. They are supplied mainly in the form of brick of standard sizes and of special shapes. Refractories also include refractory cements, bonding mortars, plastic firebrick, castables, ramming mixtures, and other bulk materials such as dead-burned grain magneside, chrome or ground ganister and special clay."35

While the word "refractories" is a generic term, its usage is not widespread and is limited merely to the industry/trade in which it is used, and its continuous use by respondent RCP for a considerable period has made the term so closely identified with it. 36 Moreover, as held in the case of Ang Kaanib sa Iglesia ng Dios kay Kristo Hesus, H.S.K. sa Bansang Pilipinas, Inc. vs. Iglesia ng Dios kay Cristo Jesus, Haligi at Suhay ng Katotohanan, petitioner’s appropriation of respondent's corporate name cannot find justification under the generic word rule. 37 A contrary ruling would encourage other corporations to adopt verbatim and register an existing and protected corporate name, to the detriment of the public.38

Finally, we find the award of P50,000.00 as attorney's fees to be fair and reasonable. Article 2208 of the Civil Code allows the award of such fees when its claimant is compelled to litigate with third persons or to incur expenses to protect its just and valid claim. In this case, despite its undertaking to change its corporate name in case another firm has acquired a prior right to use such name,39 it refused to do so, thus compelling respondent to undergo litigation and incur expenses to protect its corporate name.

WHEREFORE, the instant petition for review on certiorari is hereby DENIED for lack of merit.

Costs against petitioner.


Manila

SECOND DIVISION

G.R. No. 127181 September 4, 2001

LAND BANK OF THE PHILIPPINES, petitioner, vs.THE COURT OF APPEALS, ECO MANAGEMENT CORPORATION and EMMANUEL C. OÑATE, respondents.

QUISUMBING, J.:

This petition for review on certiorari seeks to reverse and set aside the decision1 promulgated on June 17, 1996 in CA-GR No. CV-43239 of public respondent and its resolution2 dated November 29, 1996 denying petitioner’s motion for reconsideration.3

The facts of this case as found by the Court of Appeals and which we find supported by the records are as follows:

On various dates in September, October, and November, 1980, appellant Land Bank of the Philippines (LBP) extended a series of credit accommodations to appellee ECO, using the trust funds of the Philippine Virginia Tobacco Administration (PVTA) in the aggregate amount of P26,109,000.00. The proceeds of the credit accommodations were received on behalf of ECO by appellee Oñate.

On the respective maturity dates of the loans, ECO failed to pay the same. Oral and written demands were made, but ECO was unable to pay. ECO claims that the company was in financial difficulty for it was unable to collect its investments with companies which were affected by the financial crisis brought about by the Dewey Dee scandal.

x x x

On October 20, 1981, ECO proposed and submitted to LBP a "Plan of Payment" whereby the former would set up a financing company which would absorb the loan obligations. It was proposed that LBP would participate in the scheme through the conversion of P9,000,000.00 which was part of the total loan, into equity.

On March 4, 1982, LBP informed ECO of the action taken by the former’s Trust Committee concerning the "Plan of Payment" which reads in part, as follows:

x x x

Please be informed that the Bank’s Trust Committee has deliberated on the plan of payment during its meetings on November 6, 1981 and February 23, 1982. The Committee arrived at a decision that you may proceed with your Plan of Payment provided Land Bank shall not participate in the undertaking in any manner whatsoever.

In view thereof, may we advise you to make necessary revision in the proposed Plan of Payment and submit the same to us as soon as possible. (Records, p. 428)

On May 5, 1982, ECO submitted to LBP a "Revised Plan of Payment" deleting the latter’s participation in the proposed financing company. The Trust Committee deliberated on the "Revised Plan of Payment" and resolved to reject it. LBP then sent a letter to the PVTA for the latter’s comments. The letter stated that if LBP did not hear from PVTA within five (5) days from the latter’s receipt of the letter, such silence would be construed to be an approval of LBP’s intention to file suit against ECO and its corporate officers. PVTA did not respond to the letter.

On June 28, 1982, Landbank filed a complaint for Collection of Sum of Money against ECO and Emmanuel C. Oñate before the Regional Trial Court of Manila, Branch 50.

After trial on the merits, a judgment was rendered in favor of LBP; however, appellee Oñate was absolved from personal liability for insufficiency of evidence.

Dissatisfied, both parties filed their respective Motions for Reconsideration. LBP claimed that there was an error in computation in the amounts to be paid. LBP also questioned the dismissal of the case with regard to Oñate.

On the other hand, ECO questioned its being held liable for the amount of the loan. Upon order of the court, both parties submitted Supplemental Motions for Reconsideration and their respective Oppositions to each other’s Motions.

On February 3, 1993, the trial court rendered an Amended Decision, the dispositive portion of which reads as follows:

ACCORDINGLY, the Decision, dated December 3, 1990, is hereby modified to read as follows:

WHEREFORE, judgment is rendered ordering defendant Eco Management Corporation to pay plaintiff Land Bank of the Philippines:

A. The sum of P26,109,000.00 representing the total amount of the ten (10) loan accommodations plus 16% interest per annum computed from the dates of their respective maturities until fully paid, broken down as follows:

1. the principal amount of P4,000,000.00 with interest at 16% computed from September 18, 1981;

2. the principal amount of P5,000,000.00 with interest at 16% computed from September 21, 1981;

3. the principal amount of P1,000,000.00 with interest rate at 16% computed from September 28, 1981;

4. the principal amount of P1,000,000.00 with interest at 15% computed from October 5, 1981;

5. the principal amount of P2,000,000.00 with interest rate at of 16% computed from October 8, 1981;

6. the principal amount of P2,000,000.00 with interest rate at of 16% from October 23, 1981;

7. the principal amount of P814,000.00 with interest rate at of 16% computed from November 1, 1981;

8. the principal amount of P2,295,000.00 with interest rate at of 16% computed from November 6, 1981;

9. the principal amount of P3,000,000.00 with interest rate at of 16% computed from November 7, 1981;

10. the principal amount of P5,000,000.00 with interest rate at 16% computed from November 9, 1981;

B. The sum of P260,000.00 as attorney’s fees; and

C. The costs of the suit.

The case as against defendant Emmanuel Oñate is dismissed for insufficiency of evidence.

SO ORDERED. (Records, p. 608)4

The Court of Appeals affirmed in toto the amended decision of the trial court.5

On June 9, 1996, petitioner filed a motion for reconsideration, which was denied in a resolution dated November 29, 1996. Hence, this present petition, assigning the following errors allegedly committed by the Court of Appeals:

A

THE COURT OF APPEALS GRAVELY ERRED IN NOT RULING THAT BASED ON THE FACTS AS ESTABLISHED BY EVIDENCE, THERE EXISTS A SUBSTANTIAL AND JUSTIFIABLE GROUND UPON WHICH THE LEGAL NOTION OF THE CORPORATE FICTION OF RESPONDENT ECO MANAGEMENT CORPORATION MAY BE PIERCED.

B

THE COURT OF APPEALS GRAVELY ERRED IN NOT A[T]TACHING LIABILITY TO RESPONDENT EMMANUEL C. OÑATE JOINTLY AND SEVERALLY WITH RESPONDENT ECO MANAGEMENT CORPORATION FOR THE PRINCIPAL SUM OF P26 M PLUS INTEREST THEREON.

C

THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE RULING OF THE LOWER COURT THE SAME NOT BEING SUPPORTED BY THE EVIDENCE AND APPLICABLE LAWS AND JURISPRUDENCE.6

The primary issues for resolution here are (1) whether or not the corporate veil of ECO Management Corporation should be pierced; and (2) whether or not Emmanuel C. Oñate should be held jointly and severally liable with ECO Management Corporation for the loans incurred from Land Bank.

Petitioner contends that the personalities of Emmanuel Oñate and of ECO Management Corporation should be treated as one, for the particular purpose of holding respondent Oñate liable for the loans incurred by corporate respondent ECO from Land Bank. According to petitioner, the said corporation was formed ostensibly to allow Oñate to acquire loans from Land Bank which he used for his personal advantage.

Petitioner submits the following arguments to support its stand: (1) Respondent Oñate owns the majority of the interest holdings in respondent corporation, specifically during the crucial time when appellees applied for and obtained the loan from LANDBANK, sometime in September to November,

1980. (2) The acronym ECO stands for the initials of Emmanuel C. Oñate, which is the logical, sensible and concrete explanation for the name ECO, in the absence of evidence to the contrary. (3) Respondent Oñate has always referred to himself as the debtor, not merely as an officer or a representative of respondent corporation. (4) Respondent Oñate personally paid P1 Million taken from trust accounts in his name. (5) Respondent Oñate made a personal offering to pay his personal obligation. (6) Respondent Oñate controlled respondent corporation by simultaneously holding two (2) corporate positions, viz., as Chairman and as treasurer, beginning from the time of respondent corporation’s incorporation and continuously thereafter without benefit of election. (7) Respondent corporation had not held any meeting of the stockholders or of the Board of Directors, as shown by the fact that no proceeding of such corporate activities was filed with or borne by the record of the Securities and Exchange Commission (SEC). The only corporate records respondent corporation filed with the SEC were the following: Articles of Incorporation, Treasurer’s Affidavit, Undertaking to Change Corporate Name, Statement of Assets and Liabilities.7

Private respondents, in turn, contend that Oñate’s only participation in the transaction between petitioner and respondent ECO was his execution of the loan agreements and promissory notes as Chairman of the corporation’s Board of Directors. There was nothing in the loan agreement nor in the promissory notes which would indicate that Oñate was binding himself jointly and severally with ECO. Respondents likewise deny that ECO stands for Emmanuel C. Oñate. Respondents also note that Oñate is no longer a majority stockholder of ECO and that the payment by a third person of the debt of another is allowed under the Civil Code. They also alleged that there was no fraud and/or bad faith in the transactions between them and Land Bank. Hence, private respondents conclude, there is no legal ground to pierce the veil of respondent corporation’s personality.8

At the outset, we find the matters raised by petitioner in his argumentation are mainly questions of fact which are not proper in a petition of this nature.9 Petitioner is basically questioning the evaluation made by the Court of Appeals of the evidence submitted at the trial. The Court of Appeals had found that petitioner’s evidence was not sufficient to justify the piercing of ECO’s corporate personality.10 Petitioner contended otherwise. It is basic that where what is being questioned is the sufficiency of evidence, it is a question of fact.11 Nevertheless, even if we regard these matters as tendering an issue of law, we still find no reason to reverse the findings of the Court of Appeals.

A corporation, upon coming into existence, is invested by law with a personality separate and distinct from those persons composing it as well as from any other legal entity to which it may be related.12 By this attribute, a stockholder may not, generally, be made to answer for acts or liabilities of the said corporation, and vice versa.13This separate and distinct personality is, however, merely a fiction created by law for convenience and to promote the ends of justice.14 For this reason, it may not be used or invoked for ends subversive to the policy and purpose behind its creation15 or which could not have been intended by law to which it owes its being.16 This is particularly true when the fiction is used to defeat public convenience, justify wrong, protect fraud, defend crime,17 confuse legitimate legal or judicial issues,18 perpetrate deception or otherwise circumvent the law.19 This is likewise true where the corporate entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity.20 In all these cases, the notion of corporate entity will be pierced or disregarded with reference to the particular transaction involved.21

The burden is on petitioner to prove that the corporation and its stockholders are, in fact, using the personality of the corporation as a means to perpetrate fraud and/or escape a liability and responsibility demanded by law. In order to disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established.22 In the absence of any malice or bad faith, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities.23

The mere fact that Oñate owned the majority of the shares of ECO is not a ground to conclude that Oñate and ECO is one and the same. Mere ownership by a single stockholder of all or nearly all of the capital stock of a corporation is not by itself sufficient reason for disregarding the fiction of separate corporate personalities.24Neither is the fact that the name "ECO" represents the first three letters of Oñate’s name sufficient reason to pierce the veil. Even if it did, it does not mean that the said corporation is merely a dummy of Oñate. A corporation may assume any name provided it is lawful. There is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its shareholders.

That respondent corporation in this case was being used as a mere alter ego of Oñate to obtain the loans had not been shown. Bad faith or fraud on the part of ECO and Oñate was not also shown. As the Court of Appeals observed, if shareholders of ECO meant to defraud petitioner, then they could have just easily absconded instead of going out of their way to propose "Plans of Payment."25 Likewise, Oñate volunteered to pay a portion of the corporation’s debt.26 This offer demonstrated good faith on his part to ease the debt of the corporation of which he was a part. It is understandable that a shareholder would want to help his corporation and in the process, assure that his stakes in the said corporation are secured. In this case, it was established that the P1 Million did not come solely from Oñate. It was taken from a trust account which was owned by Oñate and other investors.27 It was likewise proved that the P1 Million was a loan granted by Oñate and his co-depositors to alleviate the plight of ECO.28 This circumstance should not be construed as an admission that he was really the debtor and not ECO.

In sum, we agree with the Court of Appeals’ conclusion that the evidence presented by the petitioner does not suffice to hold respondent Oñate personally liable for the debt of co-respondent ECO. No reversible error could be attributed to respondent court’s decision and resolution which petitioner assails.

WHEREFORE, the petition is DENIED for lack of merit. The decision and resolution of the Court of Appeals in CA-G.R. CV No. 43239 are AFFIRMED. Costs against petitioner.

SO ORDERED.


Manila

SECOND DIVISION

G.R. No. 131394 March 28, 2005

JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES, petitioners, vs.COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, DOLORES ONRUBIA, ELENITA NOLASCO, JUAN O. NOLASCO III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE SCHOOL, INC., respondents.

D E C I S I O N

TINGA, J.:

Presented in the case at bar is the apparently straight-forward but complicated question: What should be the basis of quorum for a stockholders’ meeting—the outstanding capital stock as indicated in the articles of incorporation or that contained in the company’s stock and transfer book?

Petitioners seek to nullify the Court of Appeals’ Decision in CA–G.R. SP No. 414731 promulgated on 18 August 1997, affirming the SEC Order dated 20 June 1996, and the Resolution2 of the Court of Appeals dated 31 October 1997 which denied petitioners’ motion for reconsideration.

The antecedents are not disputed.

In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven hundred (700) founders’ shares and seventy-six (76) common shares as its initial capital stock subscription reflected in the articles of incorporation. However, private respondents and their predecessors who were in control of PMMSI registered the company’s stock and transfer book for the first time in 1978, recording thirty-three (33) common shares as the only issued and outstanding shares of PMMSI. Sometime in 1979, a special stockholders’ meeting was called and held on the basis of what was considered as a quorum of twenty-seven (27) common shares, representing more than two-thirds (2/3) of the common shares issued and outstanding.

In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the Securities and Exchange Commission (SEC) for the registration of their property rights over one hundred (120) founders’ shares and twelve (12) common shares owned by their father. The SEC hearing officer held that the heirs of Acayan were entitled to the claimed shares and called for a special stockholders’ meeting to elect a new set of officers.3 The SEC En Banc affirmed the decision. As a result, the shares of Acayan were recorded in the stock and transfer book.

On 06 May 1992, a special stockholders’ meeting was held to elect a new set of directors. Private respondents thereafter filed a petition with the SEC questioning the validity of the 06 May 1992 stockholders’ meeting, alleging that the quorum for the said meeting should not be based on the 165 issued and outstanding shares as per the stock and transfer book, but on the initial subscribed capital stock of seven hundred seventy-six (776) shares, as reflected in the 1952 Articles of Incorporation. The petition was dismissed.4 Appeal was made to the SEC En Banc, which granted said appeal, holding that the shares of the deceased incorporators should be duly represented by their respective administrators or heirs concerned. The SEC directed the parties to call for a stockholders meeting on the basis of the stockholdings reflected in the articles of incorporation for the purpose of electing a new set of officers for the corporation.5

Petitioners, who are PMMSI stockholders, filed a petition for review with the Court of Appeals.6 Rebecca Acayan, Jayne O. Abuid, Willie O. Abuid and Renato Cervantes, stockholders and directors of PMMSI, earlier filed another petition for review of the same SEC En Banc’s orders. The petitions were thereafter consolidated.7 The consolidated petitions essentially raised the following issues, viz: (a) whether the basis the outstanding capital stock and accordingly also for determining the quorum at stockholders’ meetings it should be the 1978 stock and transfer book or if it should be the 1952 articles of

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incorporation; and (b) whether the Court of Appeals "gravely erred in applying the Espejo Decision to the benefit of respondents."8 The "Espejo Decision" is the decision of the SEC en banc in SEC Case No. 2289 which ordered the recording of the shares of Jose Acayan in the stock and transfer book.

The Court of Appeals held that for purposes of transacting business, the quorum should be based on the outstanding capital stock as found in the articles of incorporation.9 As to the second issue, the Court of Appeals held that the ruling in the Acayan case would ipso facto benefit the private respondents, since to require a separate judicial declaration to recognize the shares of the original incorporators would entail unnecessary delay and expense. Besides, the Court of Appeals added, the incorporators have already proved their stockholdings through the provisions of the articles of incorporation.10

In the instant petition, petitioners claim that the 1992 stockholders’ meeting was valid and legal. They submit that reliance on the 1952 articles of incorporation for determining the quorum negates the existence and validity of the stock and transfer book which private respondents themselves prepared. In addition, they posit that private respondents cannot avail of the benefits secured by the heirs of Acayan, as private respondents must show and prove entitlement to the founders and common shares in a separate and independent action/proceeding.

In private respondents’ Memorandum11 dated 08 March 2000, they point out that the instant petition raises the same facts and issues as those raised in G.R. No. 13131512, which was denied by the First Division of this Court on 18 January 1999 for failure to show that the Court of Appeals committed any reversible error. They add that as a logical consequence, the instant petition should be dismissed on the ground of res judicata. Furthermore, private respondents claim that in view of the applicability of the rule on res judicata, petitioners’ counsel should be cited for contempt for violating the rule against forum-shopping.13

For their part, petitioners claim that the principle of res judicata does not apply to the instant case. They argue that the instant petition is separate and distinct from G.R. No. 131315, there being no identity of parties, and more importantly, the parties in the two petitions have their own distinct rights and interests in relation to the subject matter in litigation. For the same reasons, they claim that counsel for petitioners cannot be found guilty of forum-shopping.14

In their Manifestation and Motion15 dated 22 September 2004, private respondents moved for the dismissal of the instant petition in view of the dismissal of G.R. No. 131315. Attached to the said manifestation is a copy of the Entry of Judgment16 issued by the First Division dated 01 December 1999.

The petition must be denied, not on res judicata, but on the ground that like the petition in G.R. No. 131315 it fails to impute reversible error to the challenged Court of Appeals’ Decision.

Res judicata does not apply inthe case at bar.

Res judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or matter settled by judgment.17 The doctrine of res judicata provides that a final judgment, on











the merits rendered by a court of competent jurisdiction is conclusive as to the rights of the parties and their privies and constitutes an absolute bar to subsequent actions involving the same claim, demand, or cause of action.18 The elements of res judicata are (a) identity of parties or at least such as representing the same interest in both actions; (b) identity of rights asserted and relief prayed for, the relief being founded on the same facts; and (c) the identity in the two (2) particulars is such that any judgment which may be rendered in the other action will, regardless of which party is successful, amount to res judicata in the action under consideration.19

There is no dispute as to the identity of subject matter since the crucial point in both cases is the propriety of including the still unproven shares of respondents for purposes of determining the quorum. Petitioners, however, deny that there is identity of parties and causes of actions between the two petitions.

The test often used in determining whether causes of action are identical is to ascertain whether the same facts or evidence would support and establish the former and present causes of action.20 More significantly, there is identity of causes of action when the judgment sought will be inconsistent with the prior judgment.21 In both petitions, petitioners assert that the Court of Appeals’ Decision effectively negates the existence and validity of the stock and transfer book, as well as automatically grants private respondents’ shares of stocks which they do not own, or the ownership of which remains to be unproved. Petitioners in the two petitions rely on the entries in the stock and transfer book as the proper basis for computing the quorum, and consequently determine the degree of control one has over the company. Essentially, the affirmance of the SEC Order had the effect of diminishing their control and interests in the company, as it allowed the participation of the individual private respondents in the election of officers of the corporation.

Absolute identity of parties is not a condition sine qua non for res judicata to apply—a shared identity of interest is sufficient to invoke the coverage of the principle.22 However, there is no identity of parties between the two cases. The parties in the two petitions have their own rights and interests in relation to the subject matter in litigation. As stated by petitioners in their Reply to Respondents’ Memorandum,23 there are no two separate actions filed, but rather, two separate petitions for review on certiorari filed by two distinct parties with the Court and represented by their own counsels, arising from an adverse consolidated decision promulgated by the Court of Appeals in one action or proceeding.24 As such, res judicata is not present in the instant case.

Likewise, there is no basis for declaring petitioners or their counsel guilty of violating the rules against forum-shopping. In the Verification/Certification25 portion of the petition, petitioners clearly stated that there was then a pending motion for reconsideration of the 18 August 1997 Decision of the Court of Appeals in the consolidated cases (CA-G.R. SP No. 41473 and CA-G.R. SP No. 41403) filed by the Abuids, as well as a motion for clarification. Moreover, the records indicate that petitioners filed their Manifestation26 dated 20 January 1998, informing the Court of their receipt of the petition in G.R. No. 131315 in compliance with their duty to inform the Court of the pendency of another similar petition. The Court finds that petitioners substantially complied with the rules against forum-shopping.

The Decision of the Court ofAppeals must be upheld.










The petition in this case involves the same facts and substantially the same issues and arguments as those in G.R. No. 131315 which the First Division has long denied with finality. The First Division found the petition before it inadequate in failing to raise any reversible error on the part of the Court of Appeals. We reach a similar conclusion as regards the present petition.

The crucial issue in this case is whether it is the company’s stock and transfer book, or its 1952 Articles of Incorporation, which determines stockholders’ shareholdings, and provides the basis for computing the quorum.

We agree with the Court of Appeals.

The articles of incorporation has been described as one that defines the charter of the corporation and the contractual relationships between the State and the corporation, the stockholders and the State, and between the corporation and its stockholders.27 When PMMSI was incorporated, the prevailing law was Act No. 1459, otherwise known as "The Corporation Law." Section 6 thereof states:

Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes by filing with the Securities and Exchange Commission articles of incorporation duly executed and acknowledged before a notary public, setting forth:

. . . .

(7) If it be a stock corporation, the amount of its capital stock, in lawful money of the Philippines, and the number of shares into which it is divided, and if such stock be in whole or in part without par value then such fact shall be stated; Provided, however, That as to stock without par value the articles of incorporation need only state the number of shares into which said capital stock is divided.

(8) If it be a stock corporation, the amount of capital stock or number of shares of no-par stock actually subscribed, the amount or number of shares of no-par stock subscribed by each and the sum paid by each on his subscription. . . .28

A review of PMMSI’s articles of incorporation29 shows that the corporation complied with the requirements laid down by Act No. 1459. It provides in part:

7. That the capital stock of the said corporation is NINETY THOUSAND PESOS (P90,000.00) divided into two classes, namely:

FOUNDERS’ STOCK - 1,000 shares at P20 par value- P 20,000.00

COMMON STOCK- 700 shares at P 100 par value – P 70,000.00

TOTAL ---------------------1,700 shares----------------------------P 90,000.00




. . . .

8. That the amount of the entire capital stock which has been actually subscribed is TWENTY ONE THOUSAND SIX HUNDRED PESOS (P21,600.00) and the following persons have subscribed for the number of shares and amount of capital stock set out after their respective names:

SUBSCRIBER SUBSCRIBED AMOUNT SUBSCRIBED

No. of Shares Par Value

Crispulo J. Onrubia 120 Founders P 2,400.00

Juan H. Acayan 120 " 2, 400.00

Martin P. Sagarbarria 100 " 2, 000.00

Mauricio G. Gallaga 50 " 1, 000.00

Luis Renteria 50 " 1, 000.00

Faustina M. de Onrubia 140 " 2, 800.00

Mrs. Ramon Araneta 40 " 800.00

Carlos M. Onrubia 80 " 1,600.00

700 P 14,000.00

SUBSCRIBER SUBSCRIBED

No. of Shares

AMOUNT SUBSCRIBED

Par Value

Crispulo J. Onrubia 12 Common P 1,200.00

Juan H. Acayan 12 " 1,200.00

Martin P. Sagarbarria 8 " 800.00

Mauricio G. Gallaga 8 " 800.00

Luis Renteria 8 " 800.00

Faustina M. de Onrubia 12 " 1,200.00

Mrs. Ramon Araneta 8 " 800.00

Carlos M. Onrubia 8 " 800.00

76 P7,600.0030

There is no gainsaying that the contents of the articles of incorporation are binding, not only on the corporation, but also on its shareholders. In the instant case, the articles of incorporation indicate that at the time of incorporation, the incorporators were bona fide stockholders of seven hundred (700) founders’ shares and seventy-six (76) common shares. Hence, at that time, the corporation had 776 issued and outstanding shares.

On the other hand, a stock and transfer book is the book which records the names and addresses of all stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been made, and the date of payment thereof; a statement of every alienation, sale or transfer of stock made, the date thereof and by and to whom made; and such other entries as may be prescribed by law.31 A stock and transfer book is necessary as a measure of precaution, expediency and convenience since it provides the only certain and accurate method of establishing the various corporate acts and transactions and of showing the ownership of stock and like matters.32 However, a stock and transfer book, like other corporate books and records, is not in any sense a public record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be written therein.33 In fact, it is generally held that the records and minutes of a corporation are not conclusive even against the corporation but are prima facie evidence only,34 and may be impeached or even contradicted by other competent evidence.35 Thus, parol evidence may be admitted to supply omissions in the records or explain ambiguities, or to contradict such records.36

In 1980, Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the Philippines" supplanted Act No. 1459. BP Blg. 68 provides:

Sec. 24. Election of directors or trustees.—At all elections of directors or trustees, there must be present, either in person or by representative authorized to act by written proxy, the owners of a majority of the outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. . . .

Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or majority of the members in the case of non-stock corporation.

Outstanding capital stock, on the other hand, is defined by the Code as:

Sec. 137. Outstanding capital stock defined.— The term "outstanding capital stock" as used in this code, means the total shares of stock issued to subscribers or stockholders whether or not fully or partially paid (as long as there is binding subscription agreement) except treasury shares.

Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether it be founders’ shares or common shares.37 In the instant case, two figures are being pitted against each other— those contained in the articles of









incorporation, and those listed in the stock and transfer book.

To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer book, and completely disregarding the issued and outstanding shares as indicated in the articles of incorporation would work injustice to the owners and/or successors in interest of the said shares. This case is one instance where resort to documents other than the stock and transfer books is necessary. The stock and transfer book of PMMSI cannot be used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been subscribed, more so when the articles of incorporation show a significantly larger amount of shares issued and outstanding as compared to that listed in the stock and transfer book. As aptly stated by the SEC in its Order dated 15 July 1996:38

It is to be explained, that if at the onset of incorporation a corporation has 771 shares subscribed, the Stock and Transfer Book should likewise reflect 771 shares. Any sale, disposition or even reacquisition of the company of its own shares, in which it becomes treasury shares, would not affect the total number of shares in the Stock and Transfer Book. All that will change are the entries as to the owners of the shares but not as to the amount of shares already subscribed.

This is precisely the reason why the Stock and Transfer Book was not given probative value. Did the shares, which were not recorded in the Stock and Transfer Book, but were recorded in the Articles of Iincorporation just vanish into thin air? . . . .39

As shown above, at the time the corporation was set-up, there were already seven hundred seventy-six (776) issued and outstanding shares as reflected in the articles of incorporation. No proof was adduced as to any transaction effected on these shares from the time PMMSI was incorporated up to the time the instant petition was filed, except for the thirty-three (33) shares which were recorded in the stock and transfer book in 1978, and the additional one hundred thirty-two (132) in 1982. But obviously, the shares so ordered recorded in the stock and transfer book are among the shares reflected in the articles of incorporation as the shares subscribed to by the incorporators named therein.

One who is actually a stockholder cannot be denied his right to vote by the corporation merely because the corporate officers failed to keep its records accurately.40 A corporation’s records are not the only evidence of the ownership of stock in a corporation.41 In an American case,42 persons claiming shareholders status in a professional corporation were listed as stockholders in the amendment to the articles of incorporation. On that basis, they were in all respects treated as shareholders. In fact, the acts and conduct of the parties may even constitute sufficient evidence of one’s status as a shareholder or member.43 In the instant case, no less than the articles of incorporation declare the incorporators to have in their name the founders and several common shares. Thus, to disregard the contents of the articles of incorporation would be to pretend that the basic document which legally triggered the creation of the corporation does not exist and accordingly to allow great injustice to be caused to the incorporators and their heirs.

Petitioners argue that the Court of Appeals "gravely erred in applying the Espejo decision to the benefit of respondents." The Court believes that the more precise statement of the issue is whether in its assailed Decision, the Court of Appeals can declare private respondents as the heirs of the incorporators, and consequently register the founders







shares in their name. However, this issue as recast is not actually determinative of the present controversy as explained below.

Petitioners claim that the Decision of the Court of Appeals unilaterally divested them of their shares in PMMSI as recorded in the stock and transfer book and instantly created inexistent shares in favor of private respondents. We do not agree.

The assailed Decision merely declared that a separate judicial declaration to recognize the shares of the original incorporators would entail unnecessary delay and expense on the part of the litigants, considering that the incorporators had already proved ownership of such shares as shown in the articles of incorporation.44 There was no declaration of who the individual owners of these shares were on the date of the promulgation of the Decision. As properly stated by the SEC in its Order dated 20 June 1996, to which the appellate court’s Decision should be related, "if at all, the ownership of these shares should only be subjected to the proper judicial (probate) or extrajudicial proceedings in order to determine the respective shares of the legal heirs of the deceased incorporators."45

WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs against petitioners.

SO ORDERED.


Manila



FIRST DIVISION

G.R. No. 153468 August 17, 2006

PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN, JUDITH TAN, ERNESTO TANCHI JR., EDWIN NGO, VIRGINIA KHOO, SABINO PADILLA JR., EDUARDO P. LIZARES and GRACE CHRISTIAN HIGH SCHOOL, Petitioners, vs.PAUL SYCIP and MERRITTO LIM, Respondents.

D E C I S I O N

PANGANIBAN, CJ.:

For stock corporations, the "quorum" referred to in Section 52 of the Corporation Code is based on the number of outstanding voting stocks. For nonstock corporations, only those who are actual, living members with voting rights shall be counted in determining the existence of a quorum during members’ meetings. Dead members shall not be counted.

The Case

The present Petition for Review on Certiorari [1] under Rule 45 of the Rules of Court seeks the reversal of the January 23 2 and May 7, 2002, 3 Resolutions of the Court of Appeals (CA) in CA-GR SP No. 68202. The first assailed Resolution dismissed the appeal filed by petitioners with the CA. Allegedly, without the proper authorization of the other petitioners, the Verification and Certification of Non-Forum Shopping were signed by only one of them -- Atty. Sabino Padilla Jr. The second Resolution denied reconsideration.

The Facts

Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational corporation with fifteen (15) regular members, who also constitute the board of trustees. [4] During the annual members’ meeting held on April 6, 1998, there were only eleven (11) [5] living member-trustees, as four (4) had already died. Out of the eleven, seven (7) 6 attended the meeting through their respective proxies. The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued that there was no quorum. 7 In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to replace the four deceased member-trustees.

When the controversy reached the Securities and Exchange Commission (SEC), petitioners maintained that the deceased member-trustees should not be counted in the computation of the quorum because, upon their death, members automatically lost all their rights (including the right to vote) and interests in the corporation.

SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void for lack of quorum. She held that the basis for determining the quorum in a meeting of

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members should be their number as specified in the articles of incorporation, not simply the number of living members. 8 She explained that the qualifying phrase "entitled to vote" in Section 24 9 of the Corporation Code, which provided the basis for determining a quorum for the election of directors or trustees, should be read together with Section 89. 10

The hearing officer also opined that Article III (2) 11 of the By-Laws of GCHS, insofar as it prescribed the mode of filling vacancies in the board of trustees, must be interpreted in conjunction with Section 29 12 of the Corporation Code. The SEC en banc denied the appeal of petitioners and affirmed the Decision of the hearing officer in toto. 13 It found to be untenable their contention that the word "members," as used in Section 52 14 of the Corporation Code, referred only to the living members of a nonstock corporation. 15

As earlier stated, the CA dismissed the appeal of petitioners, because the Verification and Certification of Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No Special Power of Attorney had been attached to show his authority to sign for the rest of the petitioners.

Hence, this Petition. 16

Issues

Petitioners state the issues as follows:

"Petitioners principally pray for the resolution of the legal question of whether or not in NON-STOCK corporations, dead members should still be counted in determination of quorum for purposed of conducting the Annual Members’ Meeting.

"Petitioners have maintained before the courts below that the DEAD members should no longer be counted in computing quorum primarily on the ground that members’ rights are ‘personal and non-transferable’ as provided in Sections 90 and 91 of the Corporation Code of the Philippines.

"The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that did not even involve a non-stock corporation as petitioner GCHS.

"The Honorable Court of Appeals on the other hand simply refused to resolve this question and instead dismissed the petition for review on a technicality – the failure to timely submit an SPA from the petitioners authorizing their co-petitioner Padilla, their counsel and also a petitioner before the Court of Appeals, to sign the petition on behalf of the rest of the petitioners.

"Petitioners humbly submit that the action of both the SEC and the Court of Appeals are not in accord with law particularly the pronouncements of this Honorable Court in Escorpizo v. University of Baguio (306 SCRA 497), Robern Development Corporation v. Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360 SCRA 183). Due course should have been given the petition below and the merits of the case decided in petitioners’ favor." 17

In sum, the issues may be stated simply in this wise: 1) whether the CA erred in denying the Petition below, on the basis of a defective Verification and Certification; and 2)











whether dead members should still be counted in the determination of the quorum, for purposes of conducting the annual members’ meeting.

The Court’s Ruling

The present Petition is partly meritorious.

Procedural Issue:

Verification and Certification of Non-Forum Shopping

The Petition before the CA was initially flawed, because the Verification and Certification of Non-Forum Shopping were signed by only one, not by all, of the petitioners; further, it failed to show proof that the signatory was authorized to sign on behalf of all of them. Subsequently, however, petitioners submitted a Special Power of Attorney, attesting that Atty. Padilla was authorized to file the action on their behalf. 18

In the interest of substantial justice, this initial procedural lapse may be excused. 19 There appears to be no intention to circumvent the need for proper verification and certification, which are aimed at assuring the truthfulness and correctness of the allegations in the Petition for Review and at discouraging forum shopping. 20 More important, the substantial merits of petitioners’ case and the purely legal question involved in the Petition should be considered special circumstances 21 or compelling reasons that justify an exception to the strict requirements of the verification and the certification of non-forum shopping. 22

Main Issue:

Basis for Quorum

Generally, stockholders’ or members’ meetings are called for the purpose of electing directors or trustees 23 and transacting some other business calling for or requiring the action or consent of the shareholders or members, 24 such as the amendment of the articles of incorporation and bylaws, sale or disposition of all or substantially all corporate assets, consolidation and merger and the like, or any other business that may properly come before the meeting.

Under the Corporation Code, stockholders or members periodically elect the board of directors or trustees, who are charged with the management of the corporation. 25 The board, in turn, periodically elects officers to carry out management functions on a day-to-day basis. As owners, though, the stockholders or members have residual powers over fundamental and major corporate changes.

While stockholders and members (in some instances) are entitled to receive profits, the management and direction of the corporation are lodged with their representatives and agents -- the board of directors or trustees. 26 In other words, acts of management pertain to the board; and those of ownership, to the stockholders or members. In the latter case, the board cannot act alone, but must seek approval of the stockholders or members. 27

Conformably with the foregoing principles, one of the most important rights of a qualified shareholder or member is the right











to vote -- either personally or by proxy -- for the directors or trustees who are to manage the corporate affairs. 28 The right to choose the persons who will direct, manage and operate the corporation is significant, because it is the main way in which a stockholder can have a voice in the management of corporate affairs, or in which a member in a nonstock corporation can have a say on how the purposes and goals of the corporation may be achieved. 29 Once the directors or trustees are elected, the stockholders or members relinquish corporate powers to the board in accordance with law.

In the absence of an express charter or statutory provision to the contrary, the general rule is that every member of a nonstock corporation, and every legal owner of shares in a stock corporation, has a right to be present and to vote in all corporate meetings. Conversely, those who are not stockholders or members have no right to vote. 30 Voting may be expressed personally, or through proxies who vote in their representative capacities. 31 Generally, the right to be present and to vote in a meeting is determined by the time in which the meeting is held.32

Section 52 of the Corporation Code states:

"Section 52. Quorum in Meetings. – Unless otherwise provided for in this Code or in the by-laws, a quorum shall consist of the stockholders representing a majority of the outstanding capital stock or a majority of the members in the case of non-stock corporations."

In stock corporations, the presence of a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined by the Code thus:

"SECTION 137. Outstanding capital stock defined. – The term ‘outstanding capital stock’ as used in this Code, means the total shares of stock issued under binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares." (Underscoring supplied)

The Right to Vote in

Stock Corporations

The right to vote is inherent in and incidental to the ownership of corporate stocks. 33 It is settled that unissued stocks may not be voted or considered in determining whether a quorum is present in a stockholders’ meeting, or whether a requisite proportion of the stock of the corporation is voted to adopt a certain measure or act. Only stock actually issued and outstanding may be voted. 34 Under Section 6 of the Corporation Code, each share of stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared delinquent 35 under Section 67 of the Code.

Neither the stockholders nor the corporation can vote or represent shares that have never passed to the ownership of stockholders; or, having so passed, have again been purchased by the corporation. 36 These shares are not to be taken into consideration in determining majorities. When the law speaks of a given proportion of the stock, it must be construed to mean the shares that have passed from the corporation, and that may be voted. 37











Section 6 of the Corporation Code, in part, provides:

"Section 6. Classification of shares. – The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation: Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this Code: Provided, further, that there shall always be a class or series of shares which have complete voting rights.

x x x x x x x x x

"Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation;

2. Adoption and amendment of by-laws;

3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporation property;

4. Incurring, creating or increasing bonded indebtedness;

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other corporations;

7. Investment of corporate funds in another corporation or business in accordance with this Code; and

8. Dissolution of the corporation.

"Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights."

Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the intention of the lawmakers was to base the quorum mentioned in Section 52 on the number of outstanding voting stocks. 38

The Right to Vote in

Nonstock Corporations

In nonstock corporations, the voting rights attach to membership. 39 Members vote as persons, in accordance with the law and the bylaws of the corporation. Each member



shall be entitled to one vote unless so limited, broadened, or denied in the articles of incorporation or bylaws. 40 We hold that when the principle for determining the quorum for stock corporations is applied by analogy to nonstock corporations, only those who are actual members with voting rights should be counted.

Under Section 52 of the Corporation Code, the majority of the members representing the actual number of voting rights, not the number or numerical constant that may originally be specified in the articles of incorporation, constitutes the quorum. 41

The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses the phrase "majority vote of the members"; likewise Section 48 of the Corporation Code refers to 50 percent of 94 (the number of registered members of the association mentioned therein) plus one. The best evidence of who are the present members of the corporation is the "membership book"; in the case of stock corporations, it is the stock and transfer book. 43

Section 25 of the Code specifically provides that a majority of the directors or trustees, as fixed in the articles of incorporation, shall constitute a quorum for the transaction of corporate business (unless the articles of incorporation or the bylaws provide for a greater majority). If the intention of the lawmakers was to base the quorum in the meetings of stockholders or members on their absolute number as fixed in the articles of incorporation, it would have expressly specified so. Otherwise, the only logical conclusion is that the legislature did not have that intention.

Effect of the Death

of a Member or Shareholder

Having thus determined that the quorum in a members’ meeting is to be reckoned as the actual number of members of the corporation, the next question to resolve is what happens in the event of the death of one of them.

In stock corporations, shareholders may generally transfer their shares. Thus, on the death of a shareholder, the executor or administrator duly appointed by the Court is vested with the legal title to the stock and entitled to vote it. Until a settlement and division of the estate is effected, the stocks of the decedent are held by the administrator or executor. 44

On the other hand, membership in and all rights arising from a nonstock corporation are personal and non-transferable, unless the articles of incorporation or the bylaws of the corporation provide otherwise. 45 In other words, the determination of whether or not "dead members" are entitled to exercise their voting rights (through their executor or administrator), depends on those articles of incorporation or bylaws.

Under the By-Laws of GCHS, membership in the corporation shall, among others, be terminated by the death of the member. 46 Section 91 of the Corporation Code further provides that termination extinguishes all the rights of a member of the corporation, unless otherwise provided in the articles of incorporation or the bylaws.

Applying Section 91 to the present case, we hold that dead members who are dropped








from the membership roster in the manner and for the cause provided for in the By-Laws of GCHS are not to be counted in determining the requisite vote in corporate matters or the requisite quorum for the annual members’ meeting. With 11 remaining members, the quorum in the present case should be 6. Therefore, there being a quorum, the annual members’ meeting, conducted with six 47 members present, was valid.

Vacancy in the

Board of Trustees

As regards the filling of vacancies in the board of trustees, Section 29 of the Corporation Code provides:

"SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring in the board of directors or trustees other than by removal by the stockholders or members or by expiration of term, may be filled by the vote of at least a majority of the remaining directors or trustees, if still constituting a quorum; otherwise, said vacancies must be filled by the stockholders in a regular or special meeting called for that purpose. A director or trustee so elected to fill a vacancy shall be elected only for the unexpired term of his predecessor in office."

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining still constitute a quorum. The phrase "may be filled" in Section 29 shows that the filling of vacancies in the board by the remaining directors or trustees constituting a quorum is merely permissive, not mandatory. 48 Corporations, therefore, may choose how vacancies in their respective boards may be filled up -- either by the remaining directors constituting a quorum, or by the stockholders or members in a regular or special meeting called for the purpose. 49

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its board of directors; that is, by a majority vote of the remaining members of the board. 50

While a majority of the remaining corporate members were present, however, the "election" of the four trustees cannot be legally upheld for the obvious reason that it was held in an annual meeting of the members, not of the board of trustees. We are not unmindful of the fact that the members of GCHS themselves also constitute the trustees, but we cannot ignore the GCHS bylaw provision, which specifically prescribes that vacancies in the board must be filled up by the remaining trustees. In other words, these remaining member-trustees must sit as a board in order to validly elect the new ones.

Indeed, there is a well-defined distinction between a corporate act to be done by the board and that by the constituent members of the corporation. The board of trustees must act, not individually or separately, but as a body in a lawful meeting. On the other hand, in their annual meeting, the members may be represented by their respective proxies, as in the contested annual members’ meeting of GCHS.

WHEREFORE, the Petition is partly GRANTED. The assailed Resolutions of the Court of Appeals are hereby REVERSED AND SET ASIDE. The remaining members of the board of trustees of Grace Christian High School (GCHS) may convene and fill up the vacancies





in the board, in accordance with this Decision.


Manila

SECOND DIVISION

G.R. No. 96161 February 21, 1992

PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC.,petitioners, vs.COURT OF APPEALS, SECURITIES & EXCHANGE COMMISSION and STANDARD PHILIPS CORPORATION,respondents.

Emeterio V. Soliven & Associates for petitioners.

Narciso A. Manantan for private respondent.

MELENCIO-HERRERA, J.:

Petitioners challenge the Decision of the Court of Appeals, dated 31 July 1990, in CA-GR Sp. No. 20067, upholding the Order of the Securities and Exchange Commission, dated 2 January 1990, in SEC-AC No. 202, dismissing petitioners' prayer for the cancellation or removal of the word "PHILIPS" from private respondent's corporate name.

Petitioner Philips Export B.V. (PEBV), a foreign corporation organized under the laws of the Netherlands, although not engaged in business here, is the registered owner of the trademarks PHILIPS and PHILIPS SHIELD EMBLEM under Certificates of Registration Nos. R-1641 and R-1674, respectively issued by the Philippine Patents Office (presently known as the Bureau of Patents, Trademarks and Technology Transfer). Petitioners Philips Electrical Lamps, Inc. (Philips Electrical, for brevity) and Philips Industrial Developments, Inc. (Philips Industrial, for short), authorized users of the trademarks PHILIPS and PHILIPS SHIELD EMBLEM, were incorporated on 29 August 1956 and 25 May 1956, respectively. All petitioner corporations belong to the PHILIPS Group of Companies.

Respondent Standard Philips Corporation (Standard Philips), on the other hand, was issued a Certificate of Registration by respondent Commission on 19 May 1982.

On 24 September 1984, Petitioners filed a letter complaint with the Securities & Exchange Commission (SEC) asking for the cancellation of the word "PHILIPS" from Private Respondent's corporate name in view of the prior registration with the Bureau of Patents of the trademark "PHILIPS" and the logo "PHILIPS SHIELD EMBLEM" in the name of Petitioner, PEBV, and the previous registration of Petitioners Philips Electrical and Philips

Industrial with the SEC.

As a result of Private Respondent's refusal to amend its Articles of Incorporation, Petitioners filed with the SEC, on 6 February 1985, a Petition (SEC Case No. 2743) praying for the issuance of a Writ of Preliminary Injunction, alleging, among others, that Private Respondent's use of the word PHILIPS amounts to an infringement and clear violation of Petitioners' exclusive right to use the same considering that both parties engage in the same business.

In its Answer, dated 7 March 1985, Private Respondent countered that Petitioner PEBV has no legal capacity to sue; that its use of its corporate name is not at all similar to Petitioners' trademark PHILIPS when considered in its entirety; and that its products consisting of chain rollers, belts, bearings and cutting saw are grossly different from Petitioners' electrical products.

After conducting hearings with respect to the prayer for Injunction; the SEC Hearing Officer, on 27 September 1985, ruled against the issuance of such Writ.

On 30 January 1987, the same Hearing Officer dismissed the Petition for lack of merit. In so ruling, the latter declared that inasmuch as the SEC found no sufficient ground for the granting of injunctive relief on the basis of the testimonial and documentary evidence presented, it cannot order the removal or cancellation of the word "PHILIPS" from Private Respondent's corporate name on the basis of the same evidence adopted in toto during trial on the merits. Besides, Section 18 of the Corporation Code (infra) is applicable only when the corporate names in question are identical. Here, there is no confusing similarity between Petitioners' and Private Respondent's corporate names as those of the Petitioners contain at least two words different from that of the Respondent. Petitioners' Motion for Reconsideration was likewise denied on 17 June 1987.

On appeal, the SEC en banc affirmed the dismissal declaring that the corporate names of Petitioners and Private Respondent hardly breed confusion inasmuch as each contains at least two different words and, therefore, rules out any possibility of confusing one for the other.

On 30 January 1990, Petitioners sought an extension of time to file a Petition for Review on Certiorari before this Court, which Petition was later referred to the Court of Appeals in a Resolution dated 12 February 1990.

In deciding to dismiss the petition on 31 July 1990, the Court ofAppeals 1 swept aside Petitioners' claim that following the ruling in Converse Rubber Corporation v. Universal Converse Rubber Products, Inc., et al, (G. R. No. L-27906, January 8, 1987, 147 SCRA 154), the word PHILIPS cannot be used as part of Private Respondent's corporate name as the same constitutes a dominant part of Petitioners' corporate names. In so holding, the Appellate Court observed that the Converse case is not four-square with the present case inasmuch as the contending parties in Converse are engaged in a similar business, that is, the manufacture of rubber shoes. Upholding the SEC, the Appellate Court concluded that "private respondents' products consisting of chain rollers, belts, bearings and cutting saw are unrelated and non-competing with petitioners' products i.e. electrical lamps such that consumers would not in any probability mistake one as the source or origin of the product of the other."

The Appellate Court denied Petitioners' Motion for Reconsideration on 20 November 1990, hence, this Petition which was given due course on 22 April 1991, after which the parties were required to submit their memoranda, the latest of which was received on 2 July 1991. In December 1991, the SEC was also required to elevate its records for the perusal of this Court, the same not having been apparently before respondent Court of Appeals.

We find basis for petitioners' plea.

As early as Western Equipment and Supply Co. v. Reyes, 51 Phil. 115 (1927), the Court declared that a corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field (Red Line Transportation Co. vs. Rural Transit Co., September 8, 1934, 20 Phil 549).

A name is peculiarly important as necessary to the very existence of a corporation (American Steel Foundries vs. Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs. Lebanon Valley R. Co., 30 Pa 42; First National Bank vs. Huntington Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of its attributes, an element of its existence, and essential to its identity (6 Fletcher [Perm Ed], pp. 3-4). The general rule as to corporations is that each corporation must have a name by which it is to sue and be sued and do all legal acts. The name of a corporation in this respect designates the corporation in the same manner as the name of an individual designates the person (Cincinnati Cooperage Co. vs. Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs. Starbird. 10 NH 123); and the right to use its corporate name is as much a part of the corporate franchise as any other privilege granted (Federal Secur. Co. vs. Federal Secur. Corp., 129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese Beneficial Association, 18 RI 165, 26 A 36).

A corporation acquires its name by choice and need not select a name identical with or similar to one already appropriated by a senior corporation while an individual's name is thrust upon him (See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of California, 56 F 2d 973, 977). A corporation can no more use a corporate name in violation of the rights of others than an individual can use his name legally acquired so as to mislead the public and injure another (Armington vs. Palmer, 21 RI 109. 42 A 308).

Our own Corporation Code, in its Section 18, expressly provides that:

No corporate name may be allowed by the Securities and Exchange Commission if the proposed name is identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing law.Where a change in a corporate name is approved, the commission shall issue an amended certificate of incorporation under the amended name. (Emphasis supplied)

The statutory prohibition cannot be any clearer. To come within its scope, two requisites must be proven, namely:

(1) that the complainant corporation acquired a prior right over the use of such corporate name; and

(2) the proposed name is either:

(a) identical; or

(b) deceptively or confusingly similar

to that of any existing corporation or to any other name already protected by law; or

(c) patently deceptive, confusing or contrary to existing law.

The right to the exclusive use of a corporate name with freedom from infringement by similarity is determined by priority of adoption (1 Thompson, p. 80 citing Munn v. Americana Co., 82 N. Eq. 63, 88 Atl. 30; San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac. 921). In this regard, there is no doubt with respect to Petitioners' prior adoption of' the name ''PHILIPS" as part of its corporate name. Petitioners Philips Electrical and Philips Industrial were incorporated on 29 August 1956 and 25 May 1956, respectively, while Respondent Standard Philips was issued a Certificate of Registration on 12 April 1982, twenty-six (26) years later (Rollo, p. 16). Petitioner PEBV has also used the trademark "PHILIPS" on electrical lamps of all types and their accessories since 30 September 1922, as evidenced by Certificate of Registration No. 1651.

The second requisite no less exists in this case. In determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person, using ordinary care and discrimination. In so doing, the Court must look to the record as well as the names themselves (Ohio Nat. Life Ins. Co. v. Ohio Life Ins. Co., 210 NE 2d 298). While the corporate names of Petitioners and Private Respondent are not identical, a reading of Petitioner's corporate names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS, INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably leads one to conclude that "PHILIPS" is, indeed, the dominant word in that all the companies affiliated or associated with the principal corporation, PEBV, are known in the Philippines and abroad as the PHILIPS Group of Companies.

Respondents maintain, however, that Petitioners did not present an iota of proof of actual confusion or deception of the public much less a single purchaser of their product who has been deceived or confused or showed any likelihood of confusion. It is settled, however, that proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur (6 Fletcher [Perm Ed], pp. 107-108, enumerating a long line of cases).

It may be that Private Respondent's products also consist of chain rollers, belts, bearing and the like, while petitioners deal principally with electrical products. It is significant to note, however, that even the Director of Patents had denied Private Respondent's application for registration of the trademarks "Standard Philips & Device" for chain, rollers, belts, bearings and cutting saw. That office held that PEBV, "had shipped to its subsidiaries in the Philippines equipment, machines and their parts which fall under international class where "chains, rollers, belts, bearings and cutting saw," the goods in connection with which Respondent is seeking to register 'STANDARD PHILIPS' . . . also

belong" ( Inter Partes Case No. 2010, June 17, 1988, SEC Rollo).

Furthermore, the records show that among Private Respondent's primary purposes in its Articles of Incorporation (Annex D, Petition p. 37, Rollo) are the following:

To buy, sell, barter, trade, manufacture, import, export, or otherwise acquire, dispose of, and deal in and deal with any kind of goods, wares, and merchandise such as but not limited to plastics, carbon products, office stationery and supplies, hardware parts, electrical wiring devices, electrical component parts, and/or complement of industrial, agricultural or commercial machineries, constructive supplies, electrical supplies and other merchandise which are or may become articles of commerce except food, drugs and cosmetics and to carry on such business as manufacturer, distributor, dealer, indentor, factor, manufacturer's representative capacity for domestic or foreign companies. (emphasis ours)

For its part, Philips Electrical also includes, among its primary purposes, the following:

To develop manufacture and deal in electrical products, including electronic, mechanical and other similar products . . . (p. 30, Record of SEC Case No. 2743)

Given Private Respondent's aforesaid underlined primary purpose, nothing could prevent it from dealing in the same line of business of electrical devices, products or supplies which fall under its primary purposes. Besides, there is showing that Private Respondent not only manufactured and sold ballasts for fluorescent lamps with their corporate name printed thereon but also advertised the same as, among others, Standard Philips (TSN, before the SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 16-19, July 25, 1985). As aptly pointed out by Petitioners, [p]rivate respondent's choice of "PHILIPS" as part of its corporate name [STANDARD PHILIPS CORPORATION] . . . tends to show said respondent's intention to ride on the popularity and established goodwill of said petitioner's business throughout the world" (Rollo, p. 137). The subsequent appropriator of the name or one confusingly similar thereto usually seeks an unfair advantage, a free ride of another's goodwill (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d 488).

In allowing Private Respondent the continued use of its corporate name, the SEC maintains that the corporate names of Petitioners PHILIPS ELECTRICAL LAMPS. INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC. contain at least two words different from that of the corporate name of respondent STANDARD PHILIPS CORPORATION, which words will readily identify Private Respondent from Petitioners and vice-versa.

True, under the Guidelines in the Approval of Corporate and Partnership Names formulated by the SEC, the proposed name "should not be similar to one already used by another corporation or partnership. If the proposed name contains a word already used as part of the firm name or style of a registered company; the proposed name must contain two other words different from the company already registered" (Emphasis ours). It is then pointed out that Petitioners Philips Electrical and Philips Industrial have two words different from that of Private Respondent's name.

What is lost sight of, however, is that PHILIPS is a trademark or trade name which was

registered as far back as 1922. Petitioners, therefore, have the exclusive right to its use which must be free from any infringement by similarity. A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and tradenames (18 C.J.S. 574). Such principle proceeds upon the theory that it is a fraud on the corporation which has acquired a right to that name and perhaps carried on its business thereunder, that another should attempt to use the same name, or the same name with a slight variation in such a way as to induce persons to deal with it in the belief that they are dealing with the corporation which has given a reputation to the name (6 Fletcher [Perm Ed], pp. 39-40, citingBorden Ice Cream Co. v. Borden's Condensed Milk Co., 210 F 510). Notably, too, Private Respondent's name actually contains only a single word, that is, "STANDARD", different from that of Petitioners inasmuch as the inclusion of the term "Corporation" or "Corp." merely serves the Purpose of distinguishing the corporation from partnerships and other business organizations.

The fact that there are other companies engaged in other lines of business using the word "PHILIPS" as part of their corporate names is no defense and does not warrant the use by Private Respondent of such word which constitutes an essential feature of Petitioners' corporate name previously adopted and registered and-having acquired the status of a well-known mark in the Philippines and internationally as well (Bureau of Patents Decision No. 88-35 [TM], June 17, 1988, SEC Records).

In support of its application for the registration of its Articles of Incorporation with the SEC, Private Respondent had submitted an undertaking "manifesting its willingness to change its corporate name in the event another person, firm or entity has acquired a prior right to the use of the said firm name or one deceptively or confusingly similar to it." Private respondent must now be held to its undertaking.

As a general rule, parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonbusiness or non-profit organization if misleading and likely to injure it in the exercise in its corporate functions, regardless of intent, may be prevented by the corporation having the prior right, by a suit for injunction against the new corporation to prevent the use of the name (American Gold Star Mothers, Inc. v. National Gold Star Mothers, Inc., 89 App DC 269, 191 F 2d 488, 27 ALR 2d 948).

WHEREFORE, the Decision of the Court of Appeals dated 31 July 1990, and its Resolution dated 20 November 1990, are SET ASIDE and a new one entered ENJOINING private respondent from using "PHILIPS" as a feature of its corporate name, and ORDERING the Securities and Exchange Commission to amend private respondent's Articles of Incorporation by deleting the word PHILIPS from the corporate name of private respondent.

No costs.

SO ORDERED.

Republic of the Philippines

SUPREME COURT

Manila

SECOND DIVISION

G.R. No. 165382 August 17, 2006

UNION BANK OF THE PHILIPPINES, Petitioner, vs.SECURITIES AND EXCHANGE COMMISSION, MABASA AND COMPANY, INC., and SHERIFF NORBERTO MAGSAJO, JR. of the Office of the Ex-Officio Sheriff REGIONAL TRIAL COURT OF MAKATI CITY, Respondents.

D E C I S I O N

PUNO, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court, seeking to set aside and reverse the August 13, 2004 Decision[1] and September 27, 2004 Resolution[2] of the Court of Appeals (CA) which upheld the Order[3] and Writ of Execution,[4] both dated July 8, 2003, issued by public respondent Securities and Exchange Commission (SEC) in SEC-AC No. 685.

First, we unfurl the facts.

In 1970, private respondent Mabasa & Company, Inc. (Mabasa) owned and held certificates of stock representing 4,532 shares in International Corporate Bank (ICB). Private respondent Mabasa also acquired from Vicente Tan certificates of stock representing 3,098 ICB shares. Private respondent repeatedly requested ICB to allow it to inspect ICB's corporate books and to record the transfer of the 3,098 shares it acquired from Tan. ICB, however,





failed to act on private respondent's requests.

On March 31, 1993, private respondent filed with the Prosecution and Enforcement Department (PED) of public respondent SEC an action to compel ICB to allow it to inspect ICB's corporate books and to record the transfer of the 3,098 shares it acquired from Tan. The case was docketed as PED Case No. 93-1360. On December 15, 1993, the PED dismissed the case without prejudice to the filing of another complaint with the Securities Investigation and Clearing Department (SICD) of public respondent SEC where jurisdiction properly pertained.

Meanwhile, ICB merged with petitioner Union Bank of the Philippines (UBP), with the latter as the surviving corporation. Under the terms of the merger, petitioner assumed all the liabilities and obligations of ICB so that any accrued claims or pending actions or proceedings against ICB may be prosecuted against petitioner.

Accordingly, private respondent Mabasa filed a Petition5 with the SICD against petitioner UBP, praying: (a) that it be allowed to inspect petitioner's corporate books; (b) for petitioner to record the transfer to private respondent of the 3,098 shares it acquired from Tan; (c) to replace or reissue private respondent's shares and the dividends due thereon; and (d) if replacement or reissuance is not possible, to pay the fair market value thereof plus damages. The case was docketed as SEC Case No. 05-96-5336.

In its Decision6 dated June 28, 1999, the SICD ruled in favor of private respondent Mabasa, viz:

WHEREFORE, in view of the foregoing premises, JUDGMENT is hereby rendered in favor of petitioner and against respondent directing respondent:

(1) To allow petitioner to inspect its corporate books;

(2) To record the transfer of the 3,098 shares petitioner acquired from Vicente Tan;

(3) To replace or to reissue petitioner's 4,532 ICB shares and 3,098 shares, or a total of 7,630 ICB shares, with the corresponding UBP shares at the ratio of 25 UBP shares to 1 ICB share, in accordance with paragraph 22 of the Plan of Merger between UBP and ICB, or a total of 190,750 UBP shares, plus all



dividends thereon, if any;

(4) In the event that the replacement or reissuance of 7,630 ICB shares or 190,750 UBP shares and all dividends arising therefrom is no longer possible, to pay petitioner their fair market value reckoned from the date of the filing of this petition;

(5) To deter those with similar propensity, to pay petitioner the amount of FIFTY THOUSAND PESOS (P50,000.00) as exemplary damages; and,

(6) To pay petitioner the amount of five hundred thousand pesos (P500,000.00) as attorney's fees, plus a further sum of TWO THOUSAND PESOS (P2,000.00) for every court appearance.7

Petitioner UBP filed a Motion for Reconsideration8 of the SICD's decision, to no avail.9 On September 6, 1999, petitioner filed an appeal with the SEC en banc,10 docketed as SEC-AC No. 685.

Meantime, Republic Act No. 8799, otherwise known as the Securities Regulation Code, was approved by then President Joseph E. Estrada on July 19, 2000. The law transferred the SEC's original and exclusive jurisdiction over intra-corporate cases to the courts of general jurisdiction or the appropriate Regional Trial Court (RTC) except for "pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of [the] Code."11

On June 15, 2001, the SEC en banc affirmed the decision of the SICD with respect to the 4,532 shares but reversed it with respect to the 3,098 shares acquired from Tan, viz:

Insofar as these 4,532 shares are concerned, we rule in favor of the petitioner-appellee. Respondent-appellant had no right to sell petitioner-appellee's shares on the afore-cited grounds. Accordingly, we affirm the decision of the hearing officer insofar as these shares are concerned.

x x x

Accordingly, as regards the 3,098 shares acquired from Vicente Tan, we rule in favor of the respondent-appellant and against the petitioner-appellee. Thus, the transfer of shares being not registered in the corporate books is valid only as regards the parties to the transfer and therefore, petitioner-appellee's right






of action is against Vicente Tan, from whom the shares were acquired and who subsequently assigned the same to innocent parties who were unaware of the earlier conveyance and whose ownership of the shares were duly reflected in the corporate books.

WHEREFORE, the petition is hereby DISMISSED for lack of merit.

SO ORDERED.12 (emphases supplied)

Thereafter, two separate appeals were brought to the CA. Petitioner UBP's Petition for Review13 under Rule 43 of the Rules of Court was docketed as CA-G.R. No. 70896. It questioned the decision of the SEC en banc with respect to the 4,532 shares and the awards of exemplary damages and attorney's fees. Private respondent Mabasa's appeal, on the other hand, was docketed as CA-G.R. No. 70866 and pertained to the 3,098 shares it acquired from Tan.14

On September 13, 2002, the CA rendered its decision15 in CA-G.R. No. 70896, the dispositive portion of which states:

WHEREFORE, premises considered, the present appeal is hereby DISMISSED and the decision appealed from in SEC AC No. 685 is hereby AFFIRMED with MODIFICATION in that the award of attorney's fees is hereby reduced from P500,000.00 to P250,000.00.

With costs against the petitioner.

SO ORDERED.[16]

Petitioner's motion for reconsideration was denied.17 The decision became final and executory and was recorded in the book of entries of judgment.18

On May 6, 2003, private respondent Mabasa filed a Motion for Partial Execution with public respondent SEC,19 viz:

WHEREFORE, in view of the foregoing, it is respectfully prayed that the decision in this case be partially executed and that a writ of execution be issued by this Honorable Commission ordering respondent:

1. To allow petitioner to inspect respondent's corporate books;









2. To replace or re-issue petitioner's 4,532 ICB or International Corporate Bank shares with the corresponding UBP or Union Bank of the Philippines shares at the ratio of 25 shares to 1 ICB share, in accordance with paragraph 22 of the Plan of Merger between UBP and ICB or a total of 113,300 UBP shares, plus dividends thereon, if any;

3. In the event that the replacement or reissuance of 4,532 ICB shares or 113,300 UBP shares and all dividends arising therefrom is no longer possible, to pay petitioner their fair market value reckoned from the date of the filing of this petition or P34.50 per UBP share;

4. To pay petitioner the amount of FIFTY THOUSAND PESOS (P50,000.00) as exemplary damages.

Other reliefs just and equitable under the premises are likewise prayed for.20

Petitioner UBP filed an Opposition (To Petitioner's Motion for Partial Execution)21 and a Supplemental Opposition (to Motion for Partial Execution).22 It contended, among others, that under Section 5.2 of the Securities Regulation Code and Sections 1, 3 and 6 of its implementing guidelines, the SEC has lost its jurisdiction to further act on the instant case.

On July 8, 2003, the SEC en banc issued its assailed order23 in favor of private respondent, viz:

WHEREFORE, premises considered, the MOTION FOR WRIT OF PARTIAL EXECUTION filed by petitioner Mabasa and Company, Inc. is hereby GRANTED. Accordingly, let a WRIT OF EXECUTION be ISSUED for the enforcement and complete satisfaction of the SEC AC No. 685 decision dated June 15, 2001.

SO ORDERED.24

The writ of execution directed the sheriff of the RTC of Makati City to implement the decision of the SEC en banc dated June 15, 2001 in SEC-AC No. 685.25 Pursuant to Section 5.1(h) of R.A. No. 8799, the SEC requested the RTC of Makati City, through Executive Judge Hon. Sixto Marella, Jr., for the designation of a sheriff to enforce the writ.26

Petitioner filed a Manifestation and Urgent Motion to Defer Implementation of Writ of Execution27 with public respondent SEC. It likewise filed a









Petition for Certiorari with Very Urgent Prayer for Issuance of Temporary Restraining Order and/or Preliminary Injunction28 with the CA, assailing the SEC's Order and Writ of Execution dated July 8, 2003 for having been issued without jurisdiction.

The CA dismissed the petition for lack of merit.29 Petitioner filed a Motion for Reconsideration30 but was denied.31

Hence, this Petition for Review on Certiorari which raises the following issues, viz:

1. Whether or not the Hon. Court of Appeals interpreted the law correctly in ruling that the term "resolve" includes "execution" under Sec. 5.3 (sic) of the Securities Regulation Code;

2. Whether or not the Hon. Court of Appeals interpreted the law correctly in ruling that the SEC still has jurisdiction to order execution of its decisions within or after the lapse of one (1) year from the enactment of the Securities Regulation Code; [and]

3. Whether or not the Hon. Court of Appeals interpreted the law correctly in ruling that the SEC can enlist the aid of a Sheriff from the Regional Trial Court of Makati City to execute its decision.32

The instant case falls under the category of intra-corporate cases over which public respondent SEC retained jurisdiction pursuant to the penultimate sentence of Section 5.2 of R.A. No. 8799, viz:

5.2. The Commission's jurisdiction over all cases enumerated under Section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over these cases. The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payments/rehabilitation cases filed as of 30 June 2000 until finally disposed. (emphasis supplied)

The issue to be resolved is whether the SEC, after its decision in a case belonging to the above category of intra-corporate cases has become final






and executory, retains the power to execute its subject decision.

Petitioner UBP posits the theory that the SEC retained jurisdiction over pending intra-corporate cases submitted for final resolution when R.A. No. 8799 took effect but, once decided, the SEC loses jurisdiction over said cases and the same are transferred to the RTC which shall execute the decision. Citing the rule in statutory construction that when the words of the law are clear, there is no room for interpretation, the SEC allegedly retained jurisdiction only over "pending" intra-corporate cases that have been submitted for resolution and not those that it had already "decided" for purposes of execution. It contends that the term "to resolve" is not the same as "to execute" and there is nothing to suggest that the former should include the latter. Further, the excerpt of congressional deliberations33 cited in the assailed CA decision allegedly does not support the ruling that the SEC has jurisdiction to order the execution of its decisions within or after the lapse of one (1) year from the effectivity of R.A. No. 8799. Petitioner avers that the rationale for the retention of the SEC's jurisdiction over pending cases submitted for final resolution for purposes of deciding them on the merits is the SEC's familiarity with said cases. With respect to decided cases, however, there is no need for familiarity as execution is simply the ministerial function of implementing the dispositive portion of the decision. If the RTC encounters doubts in executing the decision of the SEC, it may refer to the body of the decision for guidance. Finally, since the SEC has no power to execute its decisions, its enlistment of the aid of the sheriff under Section 5.1(h) of R.A. No. 8799 to execute its decision is null and void.

We find no merit in the petition.

Jurisdiction is the authority to hear and determine a cause or the right to act in a case. The general rule is that where there is jurisdiction of the person and subject matter, the resolution of all questions arising in the case is but an exercise of that jurisdiction.34 The grant to a tribunal or agency of adjudicatory power, or the authority to hear and adjudge cases, should normally and logically be deemed to include the grant of authority to enforce or execute the judgments it renders, unless the law otherwise provides.35 This is so because the authority to decide cases is inutile unless accompanied by the authority to see to it that what has been decided is carried out.36

We do not find any good reason to depart from the foregoing general principles. Section 5.2 of R.A. No. 8799 does not qualify the SEC's jurisdiction when it mandates that the SEC "shall retain jurisdiction over





pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code." It is worthy to note that prior to the effectivity of R.A. No. 8799, the SEC had been exercising the power to execute its decisions over all intra-corporate cases in the exercise of its jurisdiction under Section 537 of Presidential Decree No. 902-A.38

Petitioner's contention that the SEC does not have jurisdiction to execute because once decided, the case ceases to be a "pending" case and becomes a "decided" case deserves scant attention. In the first place, we have repeatedly held that a case in which an execution has been issued is considered as still "pending" so that all proceedings on the execution are proceedings in the suit.[39] Even assuming that a "decided" case pending execution can no longer be considered as "pending," it is settled that the particular words, clauses and phrases in a law should not be studied as detached and isolated expressions, but the whole and every part thereof must be considered in fixing the meaning of any of its parts and in order to produce a harmonious whole.40 In this case, the word "pending" defines the phrase "cases submitted for final resolution" at the time the law took effect. Simply put, the reckoning point to determine whether a case is retained with the SEC for being a "pending case submitted for final resolution" is R.A. No. 8799's date of effectivity. Otherwise, it would be revolting to the common sense to direct the SEC to resolve said cases within one year from the enactment of the Code. Having retained its jurisdiction over the instant case pursuant to Section 5.2 of R.A. No. 8799, the SEC must be deemed to have the power to execute its subject decision. A long standing doctrine is that the tribunal which rendered the decision or award has a general supervisory control over the process of its execution, and this includes the power to determine every question of fact and law which may be involved in the execution.[41]

Petitioner's contention that the word "resolve" does not include "execute" is likewise futile. A fair reading of the law will show that the SEC was merely directed to render its decisions in the retained intra-corporate cases within 1 year from the enactment of the Code. The word "should" is "[t]he past tense of shall, ordinarily implying duty or obligation, although usually no more than an obligation of propriety or expediency, or a moral obligation, thereby distinguishing it from 'ought.'"42 Said directive cannot be stretched to mean that public respondent SEC's jurisdiction over the retained intra-corporate cases has been limited to decision-making. We quote with approval the







decision of the CA in this regard, viz:

[S]ince jurisdiction over said category of cases has been retained by the SEC, the 1-year period from the enactment of the law within which the cases should be resolved was more of a directive to the SEC to hasten the resolution of the cases. A contrary holding results in absurdity, for, assuming that the cases were not resolved after the 1-year period and the effect was that the SEC would lose jurisdiction over the cases, there would then be no court or body that could resolve the cases since jurisdiction over them was not transferred to the RTC.43

This construction is consistent with the legislative intent in the enactment of R.A. No. 8799. The excerpt of congressional deliberations cited in the assailed CA decision reveals the unmistakable intent for said category of intra-corporate cases to remain with the SEC.44 Another excerpt of the deliberations of the Bicameral Conference Committee on the Securities Act of 2000 confirms the intent for the SEC to finish the pending cases involving intra-corporate disputes already submitted for final resolution.45 This must be deemed as including the power to execute as "execution is the fruit and end of the suit, and is very aptly called the life of the law."46

We further take light from the presumption that undesirable consequences were never intended by a legislative measure and courts are not to give words a meaning which would lead to absurd or unreasonable consequences.47 As correctly argued by private respondent Mabasa and public respondent SEC, through the Office of the Solicitor General, petitioner's interpretation that the SEC retains jurisdiction over the category of intra-corporate cases under Section 5.2 of R.A. No. 8799 for the purpose of deciding the same on the merits but, once decided, transfers said jurisdiction to the RTC for execution would only result in needless delays. Indeed, we have emphasized that splitting of jurisdiction is obnoxious to the orderly administration of justice.48

Since the power of the SEC to execute its decisions in intra-corporate cases over which it retained jurisdiction pursuant to Section 5.2 of R.A. No. 8799 is clear, petitioner's objection against public respondent SEC's enlistment of the aid of a sheriff to execute its final and executory decision in the instant case has no leg to stand on.

IN VIEW WHEREOF, the petition is DENIED. The August 13, 2004 Decision and September 27, 2004 Resolution of the Court of Appeals upholding the Order and Writ of execution dated July 8, 2003 issued by the







Securities and Exchange Commission in SEC-AC No. 685 are AFFIRMED.

Cost against petitioner.

SO ORDERED.


Manila

SECOND DIVISION

G.R. No. 150959 August 4, 2006

UNITED PARAGON MINING CORPORATION, Petitioner, vs.COURT OF APPEALS, former 12th DIVISION, ATTY. MURLY P. MENDEZ and CESARIO [1] F. ERMITA, Respondents.

D E C I S I O N

GARCIA, J.:

Assailed and sought to be set aside in this petition for review under Rule 45 of the Rules of Court is the Decision 2 dated July 24, 2001 of the Court of Appeals (CA), as reiterated in its Resolution 3 of November 7, 2001, dismissing the petition for certiorari with prayer for a temporary restraining order and preliminary injunction thereat filed by the herein petitioner in CA-G.R. SP No. 44450, entitled United Paragon Mining Corporation, represented by Feliciano M. Daniel v. Atty. Murly P. Mendez, in his capacity as Accredited Voluntary Arbitrator, Region V, and Cesario F. Ermita.

The facts:

Prior to the instant controversy, private respondent Cesario F. Ermita (Cesario, for brevity) was a regular employee working as a foreman of petitioner United Paragon Mining Corporation (UPMC, hereafter).

On January 18, 1996, Cesario received a termination letter bearing date January 16, 1996 and signed by UPMC’s Personnel Superintendent, Feliciano M. Daniel, informing Cesario that his employment as foreman is terminated effective thirty days after his receipt of the letter. As stated in



the letter, the termination was on account of Cesario’s violation of company rules against infliction of bodily injuries on a co-employee, it being alleged therein that Cesario inflicted bodily injuries on a co-employee, a certain Jerry Romero, as well as for unlawfully possessing a deadly weapon, a bolo, again in violation of company rules.

As a result of the termination, the matter was brought to the grievance machinery as mandated under the Collective Bargaining Agreement existing at that time between UPMC and the United Paragon Supervisors Union. Having failed to reach a settlement thereat, the parties agreed to submit the dispute to voluntary arbitration. Accordingly, the complaint for illegal dismissal was referred to Voluntary Arbitrator Atty. Murly P. Mendez of the National Conciliation and Mediation Board, Regional Branch No. V, Legaspi City, whereat the same was docketed as VA Case No. RB5-657-04-002-96.

On February 28, 1997, Voluntary Arbitrator Mendez rendered a decision 4 in Cesario’s favor, stating that although the procedural requirements in the termination of an employee had been complied with, the termination of Cesario was unjustified because it was arrived at through gross misapprehension of facts. Explains the Voluntary Arbitrator:

An analysis of the tenor of the termination letter would seem to indicate that Ceasario Ermita was separated from service simply because his explanation was not acceptable to the company. Stated more bluntly, Ermita was terminated not because there was a definite finding of fact relative to his supposed culpability, but because his answer did not find favor with management.

xxx xxx xxx

The evidence on record partakes of the uncorroborated statement of Jerry Romero claiming that he was assaulted by [Cesario]. This claim has been disputed and is denied by [Cesario] in the statement executed by him on January 2, 1996 as well as in his written explanation (Annex 6, Respondent's Position Paper).

On this point, it can be argued that since this is a case of one's word against another, the best that could be said of management's evidence is that it has achieved a level at an equi-poise with that of the Constitution. The spirit of prevailing jurisprudence as well as a liberal interpretation of the new Constitutional provision on labor, would mandate that where a doubt exists, the same should be resolved in favor of labor. The position of [Cesario] appears to have been strengthened by the document jointly signed by [him] and Jerry Romero, the supposed victim of the assault charged.

This amicable settlement would serve to negate the charge of physical injury against [Cesario] as a basis for termination, it appearing that even [his] supposed victim, Jerry Romero, who has been made to appear as a complainant in the proceedings which resulted in the termination letter, has admitted in this amicable settlement (Annex A, Complainant's Position Paper) that "hindi naming sinasadya yon at itong ginawa naming sulat na ito ay siya ang magpapatunay na ayos kaming dalawa at walang problema sa isa't isa."

This admission, that comes no less from the supposed accuser of [Cesario], clearly establishes the fact that whatever may have happened between them on New Year's eve was something that neither of them willfully and voluntarily did. Since it has been established that the supposed scuffle between [Cesario] and Romero was "hindi sinasadya," then it would necessarily follow that there could not have been a willful and voluntary assault by [Cesario] upon Romero. This situation is further rendered more puzzling by the fact that the suspected assailant was himself the bearer of the tell-tale marks of injury.


xxx xxx xxx

It has been established to the satisfaction of this Arbitrator that the bolo seen that night was used to chop wood to be burnt in the bonfire. This statement by people who happened to be unbiased and disinterested remains uncontested and undisputed.

Further, the preponderance of evidence shows that it was not [Cesario] who used said bolo, but his son.

xxx xxx xxx

On these points, it is the finding of this Arbitrator, and it is so ruled, that Ceasario Ermita was unjustifiably terminated. 5 (Words in brackets supplied).

On the basis of the above, the Voluntary Arbitrator, in his aforementioned decision of February 28, 1997, ordered Cesario’s reinstatement, to wit:

WHEREFORE, judgment is hereby issued ordering respondent United Paragon Mining Corporation to immediately reinstate Ceasario F. Ermita to his former position prior to the termination without loss of seniority nor interruption of service, and to pay said Ceasario F. Ermita his back wages, including such other fringe benefits as he would have been entitled to, from the date of his termination effective February 17, 1996 up to the time of actual reinstatement. Attorney's fees are hereby granted equivalent to 10 per cent of such monetary award as the complainant is entitled to.

For lack of merit, all other claims for damages are hereby dismissed.

SO ORDERED.

In time, UPMC moved for a reconsideration of the decision insofar as it ordered Cesario’s reinstatement which UPMC sought to avert by offering separation pay instead. UPMC cites the following against the decreed reinstatement: 1) Cesario’s position has already been filled up; and 2) reinstatement is no longer appropriate in view of the supposed strained relations between Cesario and UPMC.

In his Order 6 of April 22, 1997, the Voluntary Arbitrator denied the desired reconsideration stressing that UPMC’s management misapprehended the facts when it caused Cesario’s termination, which cannot support the claim of the existence of strained relations between him and the corporation.

Unsatisfied, UPMC, thru its Personnel Superintendent Feliciano M. Daniel, elevated the case to the CA on a Petition for Certiorari with Prayer for Temporary Restraining Order and Injunction, thereat docketed as CA-G.R. SP No. 44450, asserting that the Voluntary Arbitrator committed grave abuse of discretion, erroneous interpretation of the law and denial of substantial justice.

In the herein assailed Decision 7 dated July 24, 2001, the CA, without going into the merits of the petition, dismissed the same on the following grounds:

1) The petition for certiorari was not the proper remedy in order to seek review or nullify decisions or final orders issued by the Labor Arbiter;




2) The verification in the petition is ineffective and insufficient because it was merely signed by the company's Personnel Superintendent without alleging or showing that he is authorized for the said purpose and that the verification was based on knowledge and information;

3) The petitioner's ground of grave abuse of discretion, erroneous interpretation of the law and denial of justice are actually dwelling on the appreciation of facts, which cannot be entertained in a petition for certiorari.

With its motion for reconsideration having been denied by the CA in its Resolution of November 7, 2001, 8 petitioner UPMC is now with this Court via the present recourse, submitting for our consideration the following questions:

I

WHETHER OR NOT THE COURT OF APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING THAT THE PROPER REMEDY SHOULD HAVE BEEN A PETITION FOR REVIEW ON CERTIORARI AND NOT A PETITION FOR CERTIORARI;

II

WHETHER OR NOT THE PUBLIC RESPONDENT COURT OF APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING THAT THE VERIFICATION PORTION OF THE PETITION WAS INEFFECTIVE AND INSUFFICIENT IN THE ABSENCE OF ALLEGATION OR SHOWING THAT FELICIANO DANIEL, AS PERSONNEL SUPERINTENDENT WAS DULY AUTHORIZED TO FILE THE PETITION;

III

WHETHER OR NOT THE PUBLIC RESPONDENT COURT OF APPEALS ERRED IN DISMISSING THE PETITION AFTER FINDING THAT THE PETITION LACKS MERIT BECAUSE IT DWELLED ON THE APPRECIATION OF FACTS WHICH IS NOT PROPER IN PETITION FOR CERTIORARI.

The recourse must have to be DENIED, no reversible error having been committed by the CA in its challenged decision.

We start with the basic concept that a corporation, like petitioner UPMC, has no power except those expressly conferred on it by the Corporation Code and those that are implied or incidental to its existence. In turn, a corporation exercises said powers through its board of directors and/or its duly authorized officers and agents. It has thus been observed that the power of a corporation to sue and be sued in any court is lodged with its board of directors that exercises its corporate powers. In turn, physical acts of the corporation, like the signing of documents, can be performed only by natural persons duly authorized for the purpose by the corporate by-laws or by a specific act of the board of directors. 9

It is petitioner’s posture that there is no necessity for a board resolution authorizing its Personnel Superintendent to file in its behalf the certiorari petition in CA-G.R. SP No. 44450 because said petition arose out of the labor dispute filed against it and its Personnel Superintendent, Feliciano M. Daniel. It is argued that in Cesario’s complaint for illegal dismissal, Daniel was made a co-respondent of the corporation. Upon this premise, UPMC argues that Daniel has all the right to answer the complaint and to appeal an unfavorable judgment therein, which he actually did, in his capacity as the corporation’s Personnel Superintendent and as its representative. Plodding on,



petitioner contends that were the CA to insist that Daniel could not represent the corporation, it follows that the proceedings before the Voluntary Arbitrator could only be binding as against Daniel because the company then could not have been duly represented in said proceedings.

Throughout the proceedings before the Voluntary Arbitrator, that is, from the filing of the position papers up to the filing of the motion for reconsideration, UPMC was duly represented by its counsel, Atty. Archimedes O. Yanto. True it is that Cesario’s complaint for illegal dismissal was filed against the corporation and Daniel. It appears obvious to us, however, that Daniel was merely a nominal party in that proceedings, as in fact he was impleaded thereat in his capacity as UPMC’s Personnel Superintendent who signed the termination letter. For sure, Cesario’s complaint contains no allegation whatsoever for specific claim or charge against Daniel in whatever capacity. As it is, Daniel was not in anyway affected by the outcome of the illegal dismissal case because only the corporation was made liable therein to Cesario. Being not a real party-in-interest, Daniel has no right to file the petition in CA-G.R. SP No. 44450 in behalf of the corporation without any authority from its board of directors. It is basic in law that a corporation has a legal personality entirely separate and distinct from that of its officers and the latter cannot act for and on its behalf without being so authorized by its governing board.

In Premium Marble Resources, Inc. v. Court of Appeals, 10 we made it clear that in the absence of an authority from the board of directors, no person, not even the officers of the corporation, can validly bind the latter:

We agree with the finding of public respondent Court of Appeals, that "in the absence of any board resolution from its board of directors the [sic] authority to act for and in behalf of the corporation, the present action must necessary fail. The power of the corporation to sue and be sued in any court is lodged with the board of directors that exercises its corporate powers. Thus, the issue of authority and the invalidity of plaintiff-appellant’s subscription which is still pending, is a matter that is also addressed, considering the premises, to the sound judgment of the Securities and Exchange Commission."

Given the reality that the petition in CA-G.R. SP No. 44450 was filed by Daniel in behalf of and in representation of petitioner UPMC without an enabling resolution of the latter’s board of directors, that petition was fatally defective, inclusive of the verification and the certification of non-forum shopping executed by Daniel himself.

True, ample jurisprudence exists to the effect that subsequent and substantial compliance of a petitioner may call for the relaxation of the rules of procedure in the interest of justice. 11 But to merit the Court's liberal consideration, petitioner must show reasonable cause justifying non-compliance with the rules and must convince the Court that the outright dismissal of the petition would defeat the administration of justice. 12 Here, petitioner has not adequately explained its failure to have the certification against forum shopping signed by its duly authorized officer. Instead, it merely persisted in its thesis that it was not necessary to show proof that its Personnel Superintendent was duly authorized to file that petition and to sign the verification thereof and the certification against forumshopping despite the absence of the necessary board authorization, thereby repeating in the process its basic submission that CA-G.R. SP No. 44450 is merely a continuation of the proceedings before the Voluntary Arbitrator and that its Personnel Superintendent was impleaded as one of the respondents in Cesario’s complaint for illegal dismissal.

With the view we take of this case, we deem it unnecessary to address petitioner’s other grievances.

WHEREFORE, the instant petition is DENIED and the assailed CA decision and resolution are AFFIRMED.





SO ORDERED.


Manila

SECOND DIVISION

G.R. No. 149237 June 11, 2006

CHINA BANKING CORPORATION, petitioner, vs.DYNE-SEM ELECTRONICS CORPORATION, respondent.

D E C I S I O N

CORONA, J.:

On June 19 and 26, 1985, Dynetics, Inc. (Dynetics) and Elpidio O. Lim borrowed a total of P8,939,000 from petitioner China Banking Corporation. The loan was evidenced by six promissory notes.1

The borrowers failed to pay when the obligations became due. Petitioner consequently instituted a complaint for sum of money2 on June 25, 1987 against them. The complaint sought payment of the unpaid promissory notes plus interest and penalties.

Summons was not served on Dynetics, however, because it had already closed down. Lim, on the other hand, filed his answer on December 15, 1987 denying that "he promised to pay [the obligations] jointly and severally to [petitioner]."3

On January 7, 1988, the case was scheduled for pre-trial with respect to Lim. The case




against Dynetics was archived.

On September 23, 1988, an amended complaint4 was filed by petitioner impleading respondent Dyne-Sem Electronics Corporation (Dyne-Sem) and its stockholders Vicente Chuidian, Antonio Garcia and Jacob Ratinoff. According to petitioner, respondent was formed and organized to be Dynetics’ alter ego as established by the following circumstances:

· Dynetics, Inc. and respondent are both engaged in the same line of business of manufacturing, producing, assembling, processing, importing, exporting, buying, distributing, marketing and testing integrated circuits and semiconductor devices;

· [t]he principal office and factory site of Dynetics, Inc. located at Avocado Road, FTI Complex, Taguig, Metro Manila, were used by respondent as its principal office and factory site;

· [r]espondent acquired some of the machineries and equipment of Dynetics, Inc. from banks which acquired the same through foreclosure;

· [r]espondent retained some of the officers of Dynetics, Inc.5

xxx xxx xxx

On December 28, 1988, respondent filed its answer, alleging that:

5.1 [t]he incorporators as well as present stockholders of [respondent] are totally different from those of Dynetics, Inc., and not one of them has ever been a stockholder or officer of the latter;

5.2 [n]ot one of the directors of [respondent] is, or has ever been, a director, officer, or stockholder of Dynetics, Inc.;

5.3 [t]he various facilities, machineries and equipment being used by [respondent] in its business operations were legitimately and validly acquired, under arms-length transactions, from various corporations which had become absolute owners thereof at the time of said transactions; these were not just "taken over" nor "acquired from Dynetics" by [respondent], contrary to what plaintiff falsely and maliciously alleges;

5.4 [respondent] acquired most of its present machineries and equipment as second-hand items to keep costs down;

5.5 [t]he present plant site is under lease from Food Terminal, Inc., a government-controlled corporation, and is located inside the FTI Complex in Taguig, Metro Manila, where a number of other firms organized in 1986 and also engaged in the same or similar business have likewise established their factories; practical convenience, and nothing else, was behind [respondent’s] choice of plant site;

5.6 [respondent] operates its own bonded warehouse under authority from the Bureau of Customs which has the sole and absolute prerogative to authorize and



assign customs bonded warehouses; again, practical convenience played its role here since the warehouse in question was virtually lying idle and unused when said Bureau decided to assign it to [respondent] in June 1986.6

On February 28, 1989, the trial court issued an order archiving the case as to Chuidian, Garcia and Ratinoff since summons had remained unserved.

After hearing, the court a quo rendered a decision on December 27, 1991 which read:

xxx [T]he Court rules that Dyne-Sem Electronics Corporation is not an alter ego of Dynetics, Inc. Thus, Dyne-Sem Electronics Corporation is not liable under the promissory notes.

xxx xxx xxx

WHEREFORE, judgment is hereby rendered ordering Dynetics, Inc. and Elpidio O. Lim, jointly and severally, to pay plaintiff.

xxx xxx xxx

Anent the complaint against Dyne-Sem and the latter’s counterclaim, both are hereby dismissed, without costs.

SO ORDERED.7

From this adverse decision, petitioner appealed to the Court of Appeals8 but the appellate court dismissed the appeal and affirmed the trial court’s decision.9 It found that respondent was indeed not an alter ego of Dynetics. The two corporations had different articles of incorporation. Contrary to petitioner’s claim, no merger or absorption took place between the two. What transpired was a mere sale of the assets of Dynetics to respondent. The appellate court denied petitioner’s motion for reconsideration.10

Hence, this petition for review11 with the following assigned errors:

VI.

Issues

What is the quantum of evidence needed for the trial court to determine if the veil of corporat[e] fiction should be pierced?

[W]hether or not the Regional Trial Court of Manila Branch 15 in its Decision dated December 27, 1991 and the Court of Appeals in its Decision dated February 28, 2001 and Resolution dated July 27, 2001, which affirmed en toto [Branch 15, Manila Regional Trial Court’s decision,] have ruled in accordance with law and/or applicable [jurisprudence] to the extent that the Doctrine of Piercing the Veil of Corporat[e] Fiction is not applicable in the case at bar?12









The question of whether one corporation is merely an alter ego of another is purely one of fact. So is the question of whether a corporation is a paper company, a sham or subterfuge or whether petitioner adduced the requisite quantum of evidence warranting the piercing of the veil of respondent’s corporate entity. This Court is not a trier of facts. Findings of fact of the Court of Appeals, affirming those of the trial court, are final and conclusive. The jurisdiction of this Court in a petition for review on certiorari is limited to reviewing only errors of law, not of fact, unless it is shown, inter alia, that: (a) the conclusion is grounded entirely on speculations, surmises and conjectures; (b) the inference is manifestly mistaken, absurd and impossible; (c) there is grave abuse of discretion; (d) the judgment is based on a misapplication of facts; (e) the findings of fact of the trial court and the appellate court are contradicted by the evidence on record and (f) the Court of Appeals went beyond the issues of the case and its findings are contrary to the admissions of both parties.13

We have reviewed the records and found that the factual findings of the trial and appellate courts and consequently their conclusions were supported by the evidence on record.

The general rule is that a corporation has a personality separate and distinct from that of its stockholders and other corporations to which it may be connected.14 This is a fiction created by law for convenience and to prevent injustice.15

Nevertheless, being a mere fiction of law, peculiar situations or valid grounds may exist to warrant the disregard of its independent being and the piercing of the corporate veil.16 In Martinez v. Court of Appeals,17 we held:

The veil of separate corporate personality may be lifted when such personality is used to defeat public convenience, justify wrong, protect fraud or defend crime; or used as a shield to confuse the legitimate issues; or when the corporation is merely an adjunct, a business conduit or an alter ego of another corporation 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; or when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary to achieve equity or for the protection of the creditors. In such cases, the corporation will be considered as a mere association of persons. The liability will directly attach to the stockholders or to the other corporation.

To disregard the separate juridical personality of a corporation, the wrongdoing must be proven clearly and convincingly.18

In this case, petitioner failed to prove that Dyne-Sem was organized and controlled, and its affairs conducted, in a manner that made it merely an instrumentality, agency, conduit or adjunct of Dynetics, or that it was established to defraud Dynetics’ creditors, including petitioner.

The similarity of business of the two corporations did not warrant a conclusion that respondent was but a conduit of Dynetics. As we held in Umali v. Court of Appeals,19 "the mere fact that the businesses of two or more corporations are interrelated is not a justification for disregarding their separate personalities, absent sufficient showing that the








corporate entity was purposely used as a shield to defraud creditors and third persons of their rights."

Likewise, respondent’s acquisition of some of the machineries and equipment of Dynetics was not proof that respondent was formed to defraud petitioner. As the Court of Appeals found, no merger20 took place between Dynetics and respondent Dyne-Sem. What took place was a sale of the assets21 of the former to the latter. Merger is legally distinct from a sale of assets.22Thus, where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor.

Petitioner itself admits that respondent acquired the machineries and equipment not directly from Dynetics but from the various corporations which successfully bidded for them in an auction sale. The contracts of sale executed between the winning bidders and respondent showed that the assets were sold for considerable amounts.23 The Court of Appeals thus correctly ruled that the assets were not "diverted" to respondent as an alter ego of Dynetics.24 The machineries and equipment were transferred and disposed of by the winning bidders in their capacity as owners. The sales were therefore valid and the transfers of the properties to respondent legal and not in any way in contravention of petitioner’s rights as Dynetics’ creditor.

Finally, it may be true that respondent later hired Dynetics’ former Vice-President Luvinia Maglaya and Assistant Corporate Counsel Virgilio Gesmundo. From this, however, we cannot conclude that respondent was an alter ego of Dynetics. In fact, even the overlapping of incorporators and stockholders of two or more corporations will not necessarily lead to such inference and justify the piercing of the veil of corporate fiction.25 Much more has to be proven.

Premises considered, no factual and legal basis exists to hold respondent Dyne-Sem liable for the obligations of Dynetics to petitioner.

WHEREFORE, the petition is hereby DENIED.The assailed Court of Appeals’ decision and resolution in CA-G.R. CV No. 40672 are hereby AFFIRMED.


SO ORDERED.








Manila

THIRD DIVISION

G.R. No. 170782 June 22, 2009

SIAIN ENTERPRISES, INC., Petitioner, vs.CUPERTINO REALTY CORP. and EDWIN R. CATACUTAN, Respondents.

D E C I S I O N

NACHURA, J.:

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the decision of the Court of Appeals in CA-G.R. CV No. 714241 which affirmed the decision of the Regional Trial Court, Branch 29, Iloilo City in Civil Case No. 23244.2

On April 10, 1995, petitioner Siain Enterprises, Inc. obtained a loan of P37,000,000.00 from respondent Cupertino Realty Corporation (Cupertino) covered by a promissory note signed by both petitioner’s and Cupertino’s respective presidents, Cua Le Leng and Wilfredo Lua. The promissory note authorizes Cupertino, as the creditor, to place in escrow the loan proceeds of P37,000,000.00



with Metropolitan Bank & Trust Company to pay off petitioner’s loan obligation with Development Bank of the Philippines (DBP). To secure the loan, petitioner, on the same date, executed a real estate mortgage over two (2) parcels of land and other immovables, such as equipment and machineries.

Two (2) days thereafter, or on April 12, 1995, the parties executed an amendment to promissory note which provided for a seventeen percent (17%) interest per annum on the P37,000,000.00 loan.3 The amendment to promissory note was likewise signed by Cua Le Leng and Wilfredo Lua on behalf of petitioner and Cupertino, respectively.

On August 16, 1995, Cua Le Leng signed a second promissory note in favor of Cupertino for P160,000,000.00. Cua Le Leng signed the second promissory note as maker, on behalf of petitioner, and as co-maker, liable to Cupertino in her personal capacity. This second promissory note provides:

PROMISSORY NOTE

AMOUNT DATE: AUGUST 16, 1995

ONE HUNDRED SIXTY MILLION PESOS(PHP 160,000,000.00)

FOR VALUE RECEIVED, after one (1) year from this date on or August 16, 1996, WE, SIAIN ENTERPRISES INC. with Metro Manila office address at 306 J.P. Rizal St., Mandaluyong City, represented herein by its duly authorized President, Ms. LELENG CUA, (a copy of her authority is hereto attached as Annex "A") and Ms. LELENG CUA in her personal capacity, a resident of ILOILO CITY, jointly and severally, unconditionally promise to pay CUPERTINO REALTY CORPORATION, or order, an existing corporation duly organized under Philippine laws, the amount/sum of ONE HUNDRED SIXTY MILLION PESOS (PHP 160,000,000.00), Philippine Currency, without further need of any demand, at the office of CUPERTINO REALTY CORPORATION;

The amount/sum of ONE HUNDRED SIXTY MILLION PESOS (PHP 160,000,000.00) shall earn a compounding interest of 30% per annum which interest shall be payable to CUPERTINO REALTY CORPORATION at its above given address ON THE FIRST DAY OF EVERY MONTH WITHOUT THE NEED OF DEMAND.

In case We fail to pay the principal amount of this note at maturity or in the event of bankruptcy or insolvency, receivership, levy of execution, garnishment or attachment or in case of conviction for a criminal offense carrying with it the penalty of civil interdiction or in any of the cases covered by Article 1198 of the Civil Code of the Philippines, then the entire principal of this note and other interests and penalties due thereon shall, at the option of CUPERTINO REALTY CORPORATION, immediately become due and payable and We jointly and severally agree to pay additionally a penalty at the rate of THREE PERCENT (3%) per month on the total amount/sum due until fully paid. Furthermore, We jointly and severally agree to pay an additional sum equivalent to 20% of the total amount due but in no case less than PHP 100,000.00 as and for attorney’s fees in addition to expenses and costs of suit.

We hereby authorize and empower CUPERTINO REALTY CORPORATION at its option at any time, without notice, to apply to the payment of this note and or any other particular obligation or obligations of all or any one of us to CUPERTINO REALTY CORPORATION, as it may select, irrespective of the dates of maturity, whether or not said obligations are then due, any and all moneys, checks, securities and things of value which are now or which may hereafter be in its hand


on deposit or otherwise to the credit of, or belonging to, both or any one of us, and CUPERTINO REALTY CORPORATION is hereby authorized to sell at public or private sale such checks, securities, or things of value for the purpose of applying the proceeds thereof to such payments of this note.

We hereby expressly consent to any extension and/or renewals hereof in whole or in part and/or partial payment on account which may be requested by and granted to us or any one of us for the payment of this note as long as the remaining unpaid balance shall earn an interest of THREE percent (3%) a month until fully paid. Such renewals or extensions shall, in no case, be understood as a novation of this note or any provision thereof and We will thereby continue to be liable for the payment of this note.

We submit to the jurisdiction of the Courts of the City of Manila or of the place of execution of this note, at the option of CUPERTINO REALTY CORPORATION without divesting any other court of the its jurisdiction, for any legal action which may arise out of this note. In case of judical execution of this obligation, or any part of it, we hereby waive all our rights under the provisions of Rule 39, section 12 of the Rules of Court.

We, who are justly indebted to CUPERTINO REALTY CORPORATION, agree to execute respectively a real estate mortgage and a pledge or a chattel mortgage covering securities to serve as collaterals for this loan and to execute likewise an irrevocable proxy to allow representatives of the creditor to be able to monitor acts of management so as to prevent any premature call of this loan. We further undertake to execute any other kind of document which CUPERTINO REALTY CORPORATION may solely believe is necessary in order to effect any security over any collateral.

For this purpose, Ms. LELENG CUA, upon the foregoing promissory note, has this 16th day of Aug 1995, pledged her shares of stocks in SIAIN ENTERPRISES, INC., worth PHP 1,800,000.00 which she hereby confesses as representing 80% of the total outstanding shares of the said company.

In default of payment of said note or any part thereof at maturity, Ms. LELENG CUA hereby authorizes CUPERTINO REALTY CORPORATION or its assigns, to dispose of said security or any part thereof at public sale. The proceeds of such sale or sales shall, after payment of all expenses and commissions attending said sale or sales, be applied to this promissory note and the balance, if any, after payment of this promissory note and interest thereon, shall be returned to the undersigned, her heirs, successors and administrators; it shall be optional for the owner of the promissory note to bid for and purchase the securities or any part thereof.

SIAIN ENTERPRISES, INC.

(signed)LELENG CUA

In her personal capacityCO-MAKER

By:

(signed)LELENG CUAMAKER

WITNESSES:

(signed)EDGARDO LUA

(signed)ROSE MARIE RAGODON4

Parenthetically, on even date, the parties executed an amendment of real estate mortgage, providing in pertinent part:

WHEREAS, on 10 April 1995, the [petitioner] executed, signed and delivered a Real Estate Mortgage to and in favor of [Cupertino] on certain real estate properties to secure the payment to [Cupertino] of a loan in the amount of THIRTY SEVEN MILLION PESOS (P37,000,000.00) Philippine Currency, granted by [Cupertino] was ratified (sic) on 10 April 1995 before Constancio Mangoba, Jr., Notary Public in Makati City, as Doc. No. 242; in Page No. 50; Book No., XVI; Series of 1995, and duly recorded in the Office of the Register of Deeds for the said City of Iloilo;

WHEREAS, the [petitioner] has increased its loan payable to [Cupertino] which now amounts to ONE HUNDRED NINETY SEVEN MILLION PESOS (197,000,000.00); and

WHEREAS, the [petitioner] and [Cupertino] intend to amend the said Real Estate Mortgage in order to reflect the current total loan secured by the said Real Estate Mortgage;

NOW, THEREFORE, for and in consideration of the foregoing premises, the parties hereto have agreed and by these presents do hereby agree to amend said Real Estate Mortgage dated 10 April 1995 mentioned above by substituting the total amount of the loan secured by said Real Estate Mortgage from P37,000,000.00 toP197,000,000.00.

It is hereby expressly understood that with the foregoing amendment, all other terms and conditions of said Real Estate Mortgage dated 10 April 1995 are hereby confirmed, ratified and continued to be in full force and effect, and that this agreement be made an integral part of said Real Estate Mortgage.5

Curiously however, and contrary to the tenor of the foregoing loan documents, petitioner, on March 11, 1996, through counsel, wrote Cupertino and demanded the release of the P160,000,000.00 loan increase covered by the amendment of real estate mortgage.6 In the demand letter, petitioner’s counsel stated that despite repeated verbal demands, Cupertino had yet to release the P160,000,000.00 loan. On May 17, 1996, petitioner demanded anew from Cupertino the release of the P160,000,000.00 loan.7

In complete refutation, Cupertino, likewise through counsel, responded and denied that it had yet to release theP160,000,000.00 loan. Cupertino maintained that petitioner had long obtained the proceeds of the aforesaid loan. Cupertino declared petitioner’s demand as made to "abscond from a just and valid obligation," a mere afterthought, following Cupertino’s letter demanding payment of the P37,000,000.00 loan covered by the first promissory note which became overdue on March 5, 1996.

Not surprisingly, Cupertino instituted extrajudicial foreclosure proceedings over the properties subject of the amended real estate mortgage. The auction sale was scheduled on October 11, 1996 with respondent Notary Public Edwin R. Catacutan commissioned to conduct the same. This prompted petitioner to file a complaint with a prayer for a restraining order to enjoin Notary Public Catacutan from proceeding with the public auction.





The following are the parties’ conflicting claims, summarized by the RTC, and quoted verbatim by the CA in its decision:

"The verified complaint alleges that [petitioner] is engaged in the manufacturing and retailing/wholesaling business. On the other hand, Cupertino is engaged in the realty business. That on April 10, 1995, [petitioner] executed a Real Estate Mortgage over its real properties covered by Transfer Certificates of title Nos. T-75109 and T-73481 ("the mortgage properties") of the Register of Deeds of Iloilo in favor of Cupertino to secure the former’s loan obligation to the latter in the amount of Php37,000,000.00. That it has been the agreement between [petitioner] and Cupertino that the aforesaid loan will be non-interest bearing. Accordingly, the parties saw to it that the promissory note (evidencing their loan agreement) did not provide any stipulation with respect to interest. On several occasions thereafter, [petitioner] made partial payments to Cupertino in respect of the aforesaid loan obligation by the former to the latter in the total amount of Php7,985,039.08, thereby leaving a balance of Php29,014,960.92. On August 16, 1995, [petitioner] and Cupertino executed an amendment of Real Estate Mortgage (Annex "C") increasing the total loan covered by the aforesaid REM from Php37,000,000.00 to P197,000,000.00. This amendment to REM was executed preparatory to the promised release by Cupertino of additional loan proceeds to [petitioner] in the total amount of Php160,000,000.00. However, despite the execution of the said amendment to REM and its subsequent registration with the Register of Deeds of Iloilo City and notwithstanding the clear agreement between [petitioner] and Cupertino and the latter will release and deliver to the former the aforesaid additional loan proceeds of P160,000,000.00 after the signing of pertinent documents and the registration of the amendment of REM, Cupertino failed and refused to release the said additional amount for no apparent reason at all, contrary to its repeated promises which [petitioner] continuously relied on. On account of Cupertino’s unfulfilled promises, [petitioner] repeatedly demanded from Cupertino the release and/or delivery of the said Php160,000,000.00 to the former. However, Cupertino still failed and refused and continuously fails and refuses to release and/or deliver the Php160,000,000.00 to [petitioner]. When [petitioner] tendered payment of the amount of Php29,014,960.92 which is the remaining balance of the Php37,000,000.00 loan subject of the REM, in order to discharge the same, Cupertino unreasonably and unjustifiably refused acceptance thereof on the ground that the previous payment amounting to Php7,985,039.08, was applied by Cupertino to alleged interests and not to principal amount, despite the fact that, as earlier stated, the aforesaid loan by agreement of the parties, is non-interest bearing. Worst, unknown to [petitioner], Cupertino was already making arrangements with [respondent] Notary Public for the extrajudicial sale of the mortgage properties even as [petitioner] is more than willing to pay the Php29,014,960.92 which is the remaining balance of the Php37,000,000.00 loan and notwithstanding Cupertino’s unjustified refusal and failure to deliver to [petitioner] the amount of Php160,000,000.00. In fact, a notarial sale of the mortgaged properties is already scheduled on 04 October 1996 by [respondent] Notary Public at his office located at Rm. 100, Iloilo Casa Plaza, Gen Luna St., Iloilo City. In view of the foregoing, Cupertino has no legal right to foreclose the mortgaged properties. In any event, Cupertino cannot extrajudicially cause the foreclosure by notarial sale of the mortgage properties by [respondent] Notary Public as there is nothing in the REM (dated 10 April 1995) or in the amendment thereto that grants Cupertino the said right.

x x x x

"[Respondents] finally filed an answer to the complaint, alleging that the loan have (sic) an interest of 17% per annum: that no payment was ever made by [petitioner], that [petitioner] has already received the amount of the loan prior to the execution of the promissory note and amendment of Real Estate Mortgage, xxx.

"[Petitioner] filed a supplemental complaint alleging subsequent acts made by defendants causing the subsequent auction sale and registering the Certificates of Auction Sale praying that said auction

sale be declared null and void and ordering the Register of Deeds to cancel the registration and annotation of the Certificate of Notarial Sale."

Thereafter, the Pre-Trial conference was set. Both parties submitted their respective Brief and the following facts were admitted, viz:

1. Execution of the mortgage dated April 10, 1995;

2. Amendment of Real Estate Mortgage dated August 16, 1995;

3. Execution of an Extra-Judicial Foreclosure by the [Cupertino];

4. Existence of two (2) promissory notes;

5. Existence but not the contents of the demand letter March 11, 1996 addressed to Mr. Wilfredo Lua and receipt of the same by [Cupertino]; and

6. Notice of Extra-Judicial Foreclosure Sale."

For failing to arrive at an amicable settlement, trial on the merits ensued. The parties presented oral and documentary evidence to support their claims and contentions. [Petitioner] insisted that she never received the proceeds of Php160,000,000.00, thus, the foreclosure of the subject properties is null and void. [Cupertino] on the other hand claimed otherwise.8

After trial, the RTC rendered a decision dismissing petitioner’s complaint and ordering it to pay CupertinoP100,000.00 each for actual and exemplary damages, and P500,000.00 as attorney’s fees. The RTC recalled and set aside its previous order declaring the notarial foreclosure of the mortgaged properties as null and void. On appeal, the CA, as previously adverted to, affirmed the RTC’s ruling.

In dismissing petitioner’s complaint and finding for Cupertino, both the lower courts upheld the validity of the amended real estate mortgage. The RTC found, as did the CA, that although the amended real estate mortgage fell within the exceptions to the parol evidence rule under Section 9, Rule 130 of the Rules of Court, petitioner still failed to overcome and debunk Cupertino’s evidence that the amended real estate mortgage had a consideration, and petitioner did receive the amount of P160,000,000.00 representing its incurred obligation to Cupertino. Both courts ruled that as between petitioner’s bare denial and negative evidence of non-receipt of theP160,000,000.00, and Cupertino’s affirmative evidence on the existence of the consideration, the latter must be given more weight and value. In all, the lower courts gave credence to Cupertino’s evidence that theP160,000,000.00 proceeds were the total amount received by petitioner and its affiliate companies over the years from Wilfredo Lua, Cupertino’s president. In this regard, the lower courts applied the doctrine of "piercing the veil of corporate fiction" to preclude petitioner from disavowing receipt of the P160,000,000.00 and paying its obligation under the amended real estate mortgage.

Undaunted, petitioner filed this appeal insisting on the nullity of the amended real estate mortgage. Petitioner is adamant that the amended real estate mortgage is void as it did not receive the agreed consideration therefor i.e.P160,000,000.00. Petitioner avers that the amended real estate mortgage does not accurately reflect the agreement between the parties as, at the time it signed the document, it actually had yet to receive the amount ofP160,000,000.00. Lastly, petitioner asseverates that the lower courts erroneously applied the doctrine of "piercing the veil of corporate


fiction" when both gave credence to Cupertino’s evidence showing that petitioner’s affiliates were the previous recipients of part of the P160,000,000.00 indebtedness of petitioner to Cupertino.

We are in complete accord with the lower courts’ rulings.

Well-entrenched in jurisprudence is the rule that factual findings of the trial court, especially when affirmed by the appellate court, are accorded the highest degree of respect and are considered conclusive between the parties.9A review of such findings by this Court is not warranted except upon a showing of highly meritorious circumstances, such as: (1) when the findings of a trial court are grounded entirely on speculation, surmises or conjectures; (2) when a lower court’s inference from its factual findings is manifestly mistaken, absurd or impossible; (3) when there is grave abuse of discretion in the appreciation of facts; (4) when the findings of the appellate court go beyond the issues of the case, or fail to notice certain relevant facts which, if properly considered, will justify a different conclusion; (5) when there is a misappreciation of facts; (6) when the findings of fact are conclusions without mention of the specific evidence on which they are based, are premised on the absence of evidence, or are contradicted by evidence on record.10 None of these exceptions necessitating a reversal of the assailed decision obtains in this instance.

Conversely, we cannot subscribe to petitioner’s faulty reasoning.

First. All the loan documents, on their face, unequivocally declare petitioner’s indebtedness to Cupertino:

1. Promissory Note dated April 10, 1995, prefaced with a "[f]or value received," and the escrow arrangement for the release of the P37,000,000.00 obligation in favor of DBP, another creditor of petitioner.

2. Mortgage likewise dated April 10, 1995 executed by petitioner to secure its P37,000,000.00 loan obligation with Cupertino.

3. Amendment to Promissory Note for P37,000,000.00 dated April 12, 1995 which tentatively sets the interest rate at seventeen percent (17%) per annum.

4. Promissory Note dated August 16, 1995, likewise prefaced with "[f]or value received," and unconditionally promising to pay Cupertino P160,000,000.00 with a stipulation on compounding interest at thirty percent (30%) per annum. The Promissory Note requires, among others, the execution of a real estate mortgage to serve as collateral therefor. In case of default in payment, petitioner, specifically, through its president, Cua Le Leng, authorizes Cupertino to "dispose of said security or any part thereof at [a] public sale."

5. Amendment of Real Estate Mortgage also dated August 16, 1995 with a recital that the mortgagor, herein petitioner, has increased its loan payable to the mortgagee, Cupertino, from P37,000,000.00 toP197,000,000.00. In connection with the increase in loan obligation, the parties confirmed and ratified the Real Estate Mortgage dated April 10, 1995.

Unmistakably, from the foregoing chain of transactions, a presumption has arisen that the loan documents were supported by a consideration.

Rule 131, Section 3 of the Rules of Court specifies that a disputable presumption is satisfactory if uncontradicted and not overcome by other evidence. Corollary thereto, paragraphs (r) and (s) thereof and Section 24 of the Negotiable Instruments Law read:



SEC. 3. Disputable presumptions.— The following presumptions are satisfactory if uncontradicted, but may be contradicted and overcome by other evidence:

x x x x

(r) That there was sufficient consideration for a contract;

(s) That a negotiable instrument was given or indorsed for a sufficient consideration;

x x x

SEC. 24. Presumption of consideration.— Every negotiable instrument is deemed prima facie to have been issued for a valuable consideration; and every person whose signature appears thereon to have become a party thereto for value.

Second. The foregoing notwithstanding, petitioner insists that the Amended Real Estate Mortgage was not supported by a consideration, asserting non-receipt of the P160,000,000.00 loan increase reflected in the Amended Real Estate Mortgage. However, petitioner’s bare-faced assertion does not even dent, much less, overcome the aforesaid presumptions on consideration for a contract. As deftly pointed out by the trial court:

x x x In this case, this Court finds that the [petitioner] has not been able to establish its claim of non-receipt by a preponderance of evidence. Rather, the Court is inclined to give more weight and credence to the affirmative and straightforward testimony of [Cupertino] explaining in plain and categorical words that the Php197,000,000.00 loan represented by the amended REM was the total sum of the debit memo, the checks, the real estate mortgage and the amended real estate mortgage, the pledges of jewelries, the trucks and the condominiums plus the interests that will be incurred which all in all amounted to Php197,000,000.00. It is a basic axiom in this jurisdiction that as between the plaintiff’s negative evidence of denial and the defendant’s affirmative evidence on the existence of the consideration, the latter must be given more weight and value. Moreover, [Cupertino’s] foregoing testimony on the existence of the consideration of the Php160,000,000.00 promissory note has never been refuted nor denied by the [petitioner], who while initially having manifested that it will present rebuttal evidence eventually failed to do so, despite all available opportunities accorded to it. By such failure to present rebutting evidence, [Cupertino’s] testimony on the existence of the consideration of the amended real estate mortgage does not only become impliedly admitted by the [petitioner], more significantly, to the mind of this Court, it is a clear indication that [petitioner] has no counter evidence to overcome and defeat the [Cupertino’s] evidence on the matter. Otherwise, there is no logic for [petitioner] to withhold it if available. Assuming that indeed it exists, it may be safely assumed that such evidence having been willfully suppressed is adverse if produced.

The presentation by [petitioner] of its cash Journal Receipt Book as proof that it did not receive the proceeds of the Php160,000,000.00 promissory note does not likewise persuade the Court. In the first place, the subject cash receipt journal only contained cash receipts for the year 1995. But as appearing from the various checks and debit memos issued by Wilfredo Lua and his wife, Vicky Lua and from the former’s unrebutted testimony in Court, the issuance of the checks, debit memos, pledges of jewelries, condominium units, trucks and the other components of the Php197,000,000.00 amended real estate mortgage had all taken place prior to the year 1995, hence, they could not have been recorded therein. What is more, the said cash receipt journal appears to be prepared solely at the behest of the [petitioner], hence, can be considered as emanating from a "poisonous tree" therefore self-serving and cannot be given any serious credibility.11


Significantly, petitioner asseverates that the parol evidence rule, which excludes other evidence, apart from the written agreement, to prove the terms agreed upon by the parties contained therein,12 is not applicable to the Amended Real Estate Mortgage. Both the trial and appellate courts agreed with petitioner and did not apply the parol evidence rule. Yet, despite the allowance to present evidence and prove the invalidity of the Amended Real Estate Mortgage, petitioner still failed to substantiate its claim of non-receipt of the proceeds of theP160,000,000.00 loan increase.

Moreover, petitioner was the plaintiff in the trial court, the party that brought suit against respondent. Accordingly, it had the burden of proof, the duty to present a preponderance of evidence to establish its claim.13 However, petitioner’s evidence consisted only of a barefaced denial of receipt and a vaguely drawn theory that in their previous loan transaction with respondent covered by the first promissory note, it did not receive the proceeds of the P37,000,000.00. Petitioner conveniently ignores that this particular promissory note secured by the real estate mortgage was under an escrow arrangement and taken out to pay its obligation to DBP. Thus, petitioner, quite obviously, would not be in possession of the proceeds of the loan. Contrary to petitioner’s contention, there is no precedent to explain its stance that respondent undertook to release the P160,000,000.00 loan only after it had first signed the Amended Real Estate Mortgage. 1avvphi1

Third. Petitioner bewails the lower courts’ application of the doctrine of "piercing the veil of corporate fiction."

As a general rule, a corporation will be deemed a separate legal entity until sufficient reason to the contrary appears.14 But the rule is not absolute. A corporation’s separate and distinct legal personality may be disregarded and the veil of corporate fiction pierced when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime.15

In this case, Cupertino presented overwhelming evidence that petitioner and its affiliate corporations had received the proceeds of the P160,000,000.00 loan increase which was then made the consideration for the Amended Real Estate Mortgage. We quote with favor the RTC’s and the CA’s disquisitions on this matter:

That the checks, debit memos and the pledges of the jewelries, condominium units and trucks were constituted not exclusively in the name of [petitioner] but also either in the name of Yuyek Manufacturing Corporation, Siain Transport, Inc., Cua Leleng and Alberto Lim is of no moment. For the facts established in the case at bar has convinced the Court of the propriety to apply the principle known as "piercing the veil of the corporate entity" by virtue of which, the juridical personalities of the various corporations involved are disregarded and the ensuing liability of the corporation to attach directly to its responsible officers and stockholders. x x x

x x x x

The conjunction of the identity of the [petitioner] corporation in relation to Siain Transport, Inc. (Siain Transport), Yuyek Manufacturing Corp. (Yuyek), as well as the individual personalities of Cua Leleng and Alberto Lim has been indubitably shown in the instant case by the following established considerations, to wit:

1. Siain and Yuyek have [a] common set of [incorporators], stockholders and board of directors;

2. They have the same internal bookkeeper and accountant in the person of Rosemarie Ragodon;





3. They have the same office address at 306 Jose Rizal St., Mandaluyong City;

4. They have the same majority stockholder and president in the person of Cua Le Leng; and

5. In relation to Siain Transport, Cua Le Leng had the unlimited authority by and on herself, without authority from the Board of Directors, to use the funds of Siain Trucking to pay the obligation incurred by the [petitioner] corporation.

Thus, it is crystal clear that [petitioner] corporation, Yuyek and Siain Transport are characterized by oneness of operations vested in the person of their common president, Cua Le Leng, and unity in the keeping and maintenance of their corporate books and records through their common accountant and bookkeeper, Rosemarie Ragodon. Consequently, these corporations are proven to be the mere alter-ego of their president Cua Leleng, and considering that Cua Leleng and Alberto Lim have been living together as common law spouses with three children, this Court believes that while Alberto Lim does not appear to be an officer of Siain and Yuyek, nonetheless, his receipt of certain checks and debit memos from Willie Lua and Victoria Lua was actually for the account of his common-law wife, Cua Leleng and her alter ego corporations. While this Court agrees with Siain that a corporation has a personality separate and distinct from its individual stockholders or members, this legal fiction cannot, however, be applied to its benefit in this case where to do so would result to injustice and evasion of a valid obligation, for well settled is the rule in this jurisdiction that the veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of justice, or for purposes that could not have been intended by the law that created it; or to justify wrong, or for evasion of an existing obligation. Resultantly, the obligation incurred and/or the transactions entered into either by Yuyek, or by Siain Trucking, or by Cua Leleng, or by Alberto Lim with Cupertino are deemed to be that of the [petitioner] itself.

The same principle equally applies to Cupertino. Thus, while it appears that the issuance of the checks and the debit memos as well as the pledges of the condominium units, the jewelries, and the trucks had occurred prior to March 2, 1995, the date when Cupertino was incorporated, the same does not affect the validity of the subject transactions because applying again the principle of piercing the corporate veil, the transactions entered into by Cupertino Realty Corporation, it being merely the alter ego of Wilfredo Lua, are deemed to be the latter’s personal transactions and vice-versa.16

x x x x

x x x Firstly. As can be viewed from the extant record of the instant case, Cua Leleng is the majority stockholder of the three (3) corporations namely, Yuyek Manufacturing Corporation, Siain Transport, Inc., and Siain Enterprises Inc., at the same time the President thereof. Second. Being the majority stockholder and the president, Cua Le leng has the unlimited power, control and authority without the approval from the board of directors to obtain for and in behalf of the [petitioner] corporation from [Cupertino] thereby mortgaging her jewelries, the condominiums of her common law husband, Alberto Lim, the trucks registered in the name of [petitioner] corporation’s sister company, Siain Transport Inc., the subject lots registered in the name of [petitioner] corporation and her oil mill property at Iloilo City. And, to apply the proceeds thereof in whatever way she wants, to the prejudice of the public.

As such, [petitioner] corporation is now estopped from denying the above apparent authorities of Cua Le Leng who holds herself to the public as possessing the power to do those acts, against any person who dealt in good faith as in the case of Cupertino.17



WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 71424 is AFFIRMED. Costs against the petitioner.

SO ORDERED.


Manila

THIRD DIVISION

G.R. No. 167434 February 19, 2007

SPOUSES RAMON M. NISCE and A. NATIVIDAD PARAS-NISCE, Petitioners, vs.EQUITABLE PCI BANK, INC., Respondent.

D E C I S I O N

CALLEJO, SR., J.:

On November 26, 2002, Equitable PCI Bank1 (Bank) as creditor-mortgagee filed a petition for extrajudicial foreclosure before the Office of the Clerk of Court as Ex-Officio Sheriff of the Regional Trial Court (RTC) of Makati City. It sought to foreclose the following real estate mortgage contracts executed by the spouses Ramon and Natividad Nisce over two parcels of land covered by Transfer Certificate of Title (TCT) Nos. S-83466 and S-83467 of the Registry of Deeds of Rizal: one dated

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February 26, 1974; two (2) sets of "Additional Real Estate Mortgage" dated September 27, 1978 and June 3, 1996; and an "Amendment to Real Estate Mortgage" dated February 28, 2000. The mortgage contracts were executed by the spouses Nisce to secure their obligation under Promissory Note Nos. 1042793 and BD-150369, including a Suretyship Agreement executed by Natividad. The obligation of the Nisce spouses totaled P34,087,725.76 broken down as follows:

Spouses Ramon & Natividad Nisce - - - - - P17,422,285.99

Natividad P. Nisce (surety) - - - - - - - - - - US$57,306.59

and - - - - - - - - - - - - P16,665,439.772

On December 2, 2002, the Ex-Officio Sheriff set the sale at public auction at 10:00 a.m. on January 14, 2003,3 or on January 30, 2003 in the event the public auction would not take place on the earlier setting.

On January 28, 2003, the Nisce spouses filed before the RTC of Makati City a complaint for "nullity of the Suretyship Agreement, damages and legal compensation" with prayer for injunctive relief against the Bank and the Ex-Officio Sheriff. They alleged the following: in a letter4 dated December 7, 2000 they had requested the bank (through their lawyer-son Atty. Rosanno P. Nisce) to setoff the peso equivalent of their obligation against their US dollar account with PCI Capital Asia Limited (Hong Kong), a subsidiary of the Bank, under Certificate Deposit No. 016125 and Account No. 090-0104 (Passbook No. 83-3041);6 the Bank accepted their offer and requested for an estimate of the balance of their account; they complied with the Bank’s request and in a letter dated February 11, 2002, informed it that the estimated balance of their account as of December 1991 (including the 11.875% per annum interest) was US$51,000.42,7 and that as of December 2002, Natividad’s US dollar deposit with it amounted to at least P9,000,000.00; they were surprised when they received a letter from the Bank demanding payment of their loan account, and later a petition for extrajudicial foreclosure.

The spouses Nisce also pointed out that the petition for foreclosure filed by the Bank included the alleged obligation of Natividad as surety for the loan of Vista Norte Trading Corporation, a company owned and managed by their son Dino Giovanni P. Nisce (P16,665,439.77 and US$57,306.59). They insisted, however, that the suretyship agreement was null and void for the following reasons:

(a) x x x [I]t was executed without the knowledge and consent of plaintiff Ramon M. Nisce, who is by law the administrator of the conjugal partnership;

(b) The suretyship agreement did not redound to the benefit of the conjugal partnership and therefore did not bind the same;

(c) Assuming, arguendo, that the suretyship contract was valid and binding, any obligation arising therefrom is not covered by plaintiffs’ real estate mortgages which were constituted to secure the payment of certain specific obligations only.8

The spouses Nisce likewise alleged that since they and the Bank were creditors and debtors with respect to each other, their obligations should have been offset by legal compensation to the extent of their account with the Bank.

To support their plea for a writ of preliminary and prohibitory injunction, the spouses Nisce alleged that the amount for which their property was being sold at public auction (P34,087,725.76) was








grossly excessive; the US dollar deposit of Natividad with PCI Capital Asia Ltd. (Hong Kong), and the obligation covered by the suretyship agreement had not been deducted. They insisted that their property rights would be violated if the sale at public auction would push through. Thus, the spouses Nisce prayed that they be granted the following reliefs:

(1) that upon the filing of this Complaint and/or after due notice and summary hearing, the Honorable Court immediately issue a temporary restraining order (TRO) restraining defendants, their representatives and/or deputies, and other persons acting for and on their behalf from proceeding with the extrajudicial foreclosure sale of plaintiffs’ mortgaged properties on 30 January 2003 or on any other dates subsequent thereto;

(2) that after due notice and hearing and posting of the appropriate bond, the Honorable Court convert the TRO to a writ of preliminary prohibitory injunction;

(3) that after trial on the merits, the Honorable Court render judgment –

(a) making the preliminary injunction final and permanent;

(b) ordering defendant Bank to set off the present peso value of Mrs. Nisce’s US dollar time deposit, inclusive of stipulated interest, against plaintiffs’ loan obligations with defendant Bank;

(c) declaring the Deed of Suretyship dated 25 May 1998 null and valid and without any binding effect as to plaintiff spouses, and ordering defendant Bank to exclude the amounts covered by said suretyship contract from plaintiffs’ obligations with defendant Bank;

(d) ordering defendant Bank to pay plaintiffs the following sums:

(i) at least P3,000,000.00 as moral damages;

(ii) at least P1,500,000.00 as exemplary damages; and

(iii) at least P500,000.00 as attorney’s fees and for other expenses of litigation.

Plaintiffs further pray for costs of suit and such other reliefs as may be deemed just and equitable.9

On same day, the Bank filed an "Amended Petition" with the Office of the Executive Judge for extrajudicial foreclosure of the Real Estate Mortgage to satisfy the spouses’ loan account of P30,533,552.24, exclusive of interests, penalties and other charges; and the amounts of P16,665,439.77 and US$57,306.59 covered by the suretyship agreement executed by Natividad Nisce.10

In the meantime, the parties agreed to have the sale at public auction reset to January 30, 2003.

In its Answer to the complaint, the Bank alleged that the spouses had no cause of action for legal compensation since PCI Capital was a different corporation with a separate and distinct personality; if at all, offsetting may occur only with respect to the spouses’ US$500.00 deposit account in its Paseo de Roxas branch.



In the meantime, the Ex-Officio Sheriff set the sale at public auction at 10:00 a.m. on March 5 and 27, 2003.11 The spouses Nisce then filed a Supplemental Complaint with plea for a temporary restraining order to enjoin the sale at public auction.12 Thereafter, the RTC conducted hearings on the plaintiffs’ plea for a temporary restraining order, and the parties adduced testimonial and documentary evidence on their respective arguments.

The Case for the Spouses Nisce

Natividad frequently traveled abroad and needed a facility with easy access to foreign exchange. She inquired from E.P. Nery, the Bank Manager for PCI Bank Paseo de Roxas Branch, about opening an account. He assured her that she would be able to access it from anywhere in the world. She and Nery also agreed that any balance of account remaining at maturity date would be rolled over until further instructions, or until she terminated the facility.13 Convinced, Natividad deposited US$20,500.00 on July 19, 1984, and was issued Passbook No. 83-3041.14 Upon her request, the bank transferred the US$20,000.00 to PCI Capital Asia Ltd. in Hong Kong via cable order.15

On July 11, 1996, the spouses Nisce secured a P20,000,000.00 loan from the Bank under Promissory Note No. BD-150369.16 The maturity date of the loan was July 11, 2001, payable in monthly installments at 16.731% interest per annum. To secure the payment of the loan account, they executed an Amendment to the Real Estate Mortgage over the properties17 located in Makati City covered by TCT Nos. S-83466 and S-83467.18 They later secured another loan of P13,089,936.90 on March 1, 2000 (to mature on March 1, 2005) payable quarterly at 13.9869% interest per annum; this loan agreement is evidenced by Promissory Note (PN) No. 104279319 and covered by a Real Estate Mortgage20 executed on February 28, 2000. They made a partial payment ofP13,866,666.50 on the principal of their loan account covered by PN No. BD-150369, and P5,348,239.82 on the interests.21 These payments are evidenced by receipts and checks.22 However, there were payments totalingP4,600,000.00 received by the Bank but were not covered by checks or receipts.23 As of September 2000, the balance of their loan account under PN No. BD-150369 was only P4,333,333.46.24 They also made partial payment on their loan account under PN No. 1042793 which, as of May 30, 2001, amounted to P2,218,793.61.25

On July 20, 1984, PCI Capital issued Certificate of Deposit No. CD-01612;26 proof of receipt of the US$20,000.00 transferred to it by PCI Bank Paseo de Roxas Branch as requested by Natividad. The deposit account was to earn interest at the rate of 11.875% per annum, and would mature on October 22, 1984, thereafter to be payable at the office of the depositary in Hong Kong upon presentation of the Certificate of Deposit.

In June 1991, two sons of the Nisce spouses were stranded in Hong Kong. Natividad called the Bank and requested for a partial release of her dollar deposit to her sons. However, she was informed that according to its computer records, no such dollar account existed. Sometime in November 1991, she submitted her US dollar passbook with a xerox copy of the Certificate of Deposit for the PCIB to determine the whereabouts of the account.27 She reiterated her request to the Bank on January 27, 199228 and September 11, 2000.29

In the meantime, in 1994, the Equitable Banking Corporation and the PCIB were merged under the corporate name Equitable PCI Bank.

In a letter dated December 7, 2000, Natividad confirmed to the Bank, through Ms. Shellane R. Casaysayan, her offer to settle their loan account by offsetting the peso equivalent of her dollar account with PCI Capital under Account No. 090-0104.30 Their son, Atty. Rosanno Nisce, later wrote the Bank, declaring that the estimated balance of the US dollar account with PCI Capital as of December 1991 was US$51,000.42.31 Atty. Nisce corroborated this in his testimony, and stated that






















Ms. Casaysayan had declared that she would refer the matter to her superiors.32 A certain Rene Esteven also told him that another offer to setoff his parents’ account had been accepted, and he was assured that its implementation was being processed.33 On cross examination, Atty. Nisce declared that there was no response to his request for setoff,34 and that Esteven assured him that the Bank would look for the records of his mother’s US dollar savings deposit.35 He was later told that the Bank had accepted the offer to setoff the account.36

The Case for the Bank

The Bank adduced evidence that, as of January 31, 2003, the balance of the spouses’ account under the two promissory notes, including interest and penalties, was P30,533,552.24.37 It had agreed to restructure their loans on March 31, 1998, but they nevertheless failed to pay despite repeated demands.38 The spouses had also been furnished with a statement of their account as of June 2001. Thus, under the terms of the Real Estate Mortgage and Promissory Notes, it had the right to the remedy of foreclosure. It insisted that there is no showing in its records that the spouses had delivered checks amounting to P4,600,000.00.39

According to the Bank, Natividad’s US$20,000.00 deposit with the PCIB Paseo de Roxas branch was transferred to PCI Capital via cable order,40 and that it later issued Certificate of Deposit No. 01612 (Non-transferrable).41 In a letter dated May 9, 2001, it informed Natividad that it had acted merely as a conduit in facilitating the transfer of the funds, and that her deposit was made with PCI Capital and not with PCIB. PCI Capital had a separate and distinct personality from the PCIB, and a claim against the former cannot be made against the latter. It was later advised that PCI Capital had already ceased operations.42

The spouses Nisce presented rebuttal documentary evidence to show that PCI Capital was registered in Hong Kong as a corporation under Registration No. 84555 on February 27, 198943 with an authorized capital stock of 50,000,000 (with par value of HKD1.00); the PCIB subscribed to 29,039,993 issued shares at the par value of HKD1.00 per share;44 on October 25, 2004, the corporate name of PCI Capital was changed to PCI Express Padala (HK) Ltd.;45 and the stockholdings of PCIB remained at 29,039,999 shares.46

On March 24, 2003, the RTC issued an Order47 granting the spouses Nisce’s plea for a writ of preliminary injunction on a bond of P10,000,000.00. The dispositive portion of the Order reads:

WHEREFORE, in order not to render the judgment ineffectual, upon filing by the plaintiffs and the approval thereof by the court of a bond in the amount of Php10,000,000.00, which shall answer for any damage should the court finally decide that plaintiffs are not entitled thereto, let a writ of preliminary injunction issue enjoining defendants Equitable-PCI Bank, Atty. Engracio M. Escasinas, Jr., and any person or entity acting for and in their behalf from proceeding with the extrajudicial foreclosure sale of TCT Nos. 437678 and 437679 registered in the names of the plaintiffs.48

After weighing the parties’ arguments along with their documentary evidence, the RTC declared that justice would be best served if a writ of preliminary injunction would be issued to preserve the status quo. It had yet to resolve the issue of setoff since only Natividad dealt with the Bank regarding her dollar account. It also had to resolve the issue of whether the Bank had failed to credit the amount of P4,600,000.00 to the spouses Nisce’s account under PN No. BD-150369, and their claim that the Bank had effectively accelerated the respective maturity dates of their loan.49 The spouses Nisce posted the requisite bond which was approved by the RTC. 1awphi1.net

The Bank opted not to file a motion for reconsideration of the order, and instead assailed the trial court’s order before the CA via petition for certiorari under Rule 65 of the Rules of Court. The Bank



















alleged that the RTC had acted without or in excess of its jurisdiction, or with grave abuse of its discretion amounting to lack or excess of jurisdiction when it issued the assailed order;50 the spouses Nisce had failed to prove the requisites for the issuance of a writ of preliminary injunction; respondents’ claim that their account with petitioner had been extinguished by legal compensation has no factual and legal basis. It further asserted that according to the evidence, Natividad made the US$20,000.00 deposit with PCI Capital before it merged with Equitable Bank – hence, the Bank was not the debtor of Natividad relative to the dollar account. The Bank cited the ruling of this Court in Escaño v. Heirs of Escaño and Navarro51 to support its arguments. It insisted that the spouses Nisce had failed to establish "irreparable injury" in case of denial of their plea for injunctive relief.

The spouses, for their part, pointed out that the Bank failed to file a motion for reconsideration of the trial court’s order, a condition sine qua non to the filing of a petition for certiorari under Rule 65 of the Rules of Court. Moreover, the error committed by the trial court is a mere error of judgment not correctible by certiorari; hence, the petition should have been dismissed outright by the CA. They reiterated their claim that they had made a partial payment of P4,600,000.00 on their loan account which petitioner failed to credit in their favor. The Bank had agreed to debit their US dollar savings deposit in the PCI Capital as payment of their loan account. They insisted that they had never deposited their US dollar account with PCI Capital but with the Bank, and that they had never defaulted on their loan account. Contrary to the Bank’s claim, they would have suffered irreparable injury had the trial court not enjoined the extrajudicial foreclosure of the real estate mortgage.

On December 22, 2004, the CA rendered judgment granting the petition and nullifying the assailed Order of the RTC.52 The appellate court declared that a petition for certiorari under Rule 65 of the Rules of Court may be filed despite the failure to file a motion for reconsideration, particularly in instances where the issue raised is one of law; where the error is patent; the assailed order is void, or the questions raised are the same as those already ruled upon by the lower court. According to the appellate court, the issue raised before it was purely one of law: whether the loan account of the spouses was extinguished by legal compensation. Thus, a motion for the reconsideration of the assailed order was not a prerequisite to a petition for certiorari under Rule 65.

The appellate court further declared that the trial court committed grave abuse of its discretion in issuing the assailed order, since no plausible reason was given by the spouses Nisce to justify the injunction of the extrajudicial foreclosure of the real estate mortgage. Given their admission that they had not settled the obligations secured by the mortgage, the Bank had a clear right to seek the remedy of foreclosure.

The CA further declared as devoid of factual basis the spouses Nisce’s argument that the Bank should have applied, by way of legal compensation, the peso equivalent of their time deposit with PCI Capital as partial settlement of their obligations. It held that for compensation to take place, the requirements set forth in Articles 1278 and 1279 of the Civil Code of the Philippines must be present; in this case, the parties are not mutually creditors and debtors of each other. It pointed out that the time deposit which the spouses Nisce sought to offset against their obligations to the Bank is maintained with PCI Capital. Even if PCI Capital is a subsidiary of the Bank, compensation cannot validly take place because the Bank and PCI Capital are two separate and distinct corporations. It pointed out the settled principle "that a corporation has a personality separate and distinct from its stockholders and from other corporations to which it may be connected."

The CA further declared that the alleged P4,600,000.00 payment on PN No. BD-150369 was not pleaded in the spouses’ complaint and supplemental complaint before the court a quo. What they alleged, aside from legal compensation, was that the mortgage is not liable for the obligation of Natividad Nisce as surety for the loans obtained by a trading firm owned and managed by their son. The CA further pointed out that the Bank precisely amended the petition for foreclosure sale by




deleting the claim for Natividad’s obligation as surety. The appellate court concluded that the injunctive writ was issued by the RTC without factual and legal basis.53

The spouses Nisce moved to have the decision reconsidered, but the appellate court denied the motion. They thus filed the instant petition for review on the following grounds:

5.1. THE HONORABLE COURT OF APPEALS ERRED IN TAKING COGNIZANCE OF THE PETITION FOR CERTIORARI DESPITE THE BANK’S FAILURE TO FILE A MOTION FOR RECONSIDERATION WITH THE TRIAL COURT.

5.2. THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR WHEN IT PREMATURELY RULED ON THE MERITS OF THE MAIN CASE.

5.3. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT RESPONDENT JUDGE HAD COMMITTED GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN ISSUING A TEMPORARY RESTRAINING ORDER AND A WRIT OF PRELIMINARY INJUNCTION IN FAVOR OF THE SPOUSES NISCE.54

Petitioners aver that the CA erred in not dismissing respondent Bank’s petition for certiorari outright because of the absence of a condition precedent: the filing of a motion for reconsideration of the assailed Order of the RTC before filing the petition for certiorari in the CA. They insist that respondent bank’s failure to file a motion for reconsideration of the assailed Order deprived the RTC of its option to resolve the issue of whether it erred in issuing the writ of preliminary injunction in their favor.

Petitioners insist that in resolving whether a petition for a writ of preliminary injunction should be granted, the trial court and the appellate court are not to resolve the merits of the main case. In this case, however, the CA resolved the bone of contention of the parties in the trial court: whether the loan account of petitioners with respondent bank had been extinguished by legal compensation against petitioner Natividad Nisce’s US dollar savings account with PCI Capital in Hong Kong. The CA reversed the assailed order of the trial court by resolving the main issue in the trial court on its merits, and declaring that the US dollar savings deposit of the petitioner Natividad Nisce with the PCI Capital cannot be used to offset the loan account of petitioners with respondent bank. In fine, according to petitioners, the CA preempted the ruling of the RTC on the main issue even before the parties could be given an opportunity to complete the presentation of their respective evidences. Petitioners point out that in the assailed Order, the RTC declared that to determine whether respondent had credited petitioners for the amount ofP4,600,000.00 under PN No. BD-150369 and whether respondent as mortgagee-creditor accelerated the maturities of the two (2) promissory notes executed by petitioner, there was a need for a full-blown trial and an exhaustive consideration of the evidence of the parties.

Petitioners further insist that a petition for a writ of certiorari is designed solely to correct errors of jurisdiction and not errors of judgment, such as errors in the findings and conclusions of the trial court. Petitioners maintain that the trial court’s erroneous findings and conclusions (according to respondent bank) are not the proper subjects for a petition for certiorari. Contrary to the findings of the CA, they did not admit in the trial court that they were in default in the payment of their loan obligations. They had always maintained that they had no outstanding obligation to respondent bank precisely because their loan account had been offset by the US dollar deposit of petitioner Natividad Nisce, and that they had made check payments of P4,600,000.00 which respondent bank had not credited in their favor. Likewise erroneous is the CA ruling that they would not suffer irreparable damage or injury if their properties would be sold at public auction following the extrajudicial foreclosure of the mortgage. Petitioners point out that their conjugal home stands on the subject



properties and would be lost if sold at public auction. Besides, petitioners aver, the injury to respondent bank resulting from the issuance of a writ of preliminary injunction is amply secured by the P10,000,000.00 injunction bond which they had posted.

For its part, respondent avers that, as held by the CA, the requirement of the filing of a motion for reconsideration of the assailed Order admits of exceptions, such as where the issue presented in the appellate court is the same issue presented and resolved by the trial court. It insists that petitioners failed to prove a clear legal right to injunctive relief; hence, the trial court committed grave abuse of discretion in issuing a writ of preliminary injunction.

Respondent maintains that the sole issue involved in the petition for certiorari of respondent in the CA was whether or not the trial court committed grave abuse of its discretion in issuing the writ of preliminary injunction. Necessarily, the CA would have to delve into the circumstances behind such issuance. In so doing, the CA had to consider and calibrate the testimonial and documentary evidence adduced by the parties. However, the RTC and the CA did not resolve with finality the threshold factual and legal issue of whether the loan account of petitioners had been paid in full before it filed its petition for extrajudicial foreclosure of the real estate mortgage.

The Ruling of the Court

The Petition in theCourt of AppealsNot Premature

The general rule is that before filing a petition for certiorari under Rule 65 of the Rules of Court, the petitioner is mandated to comply with a condition precedent: the filing of a motion for reconsideration of the assailed order, and the subsequent denial of the court a quo. It must be stressed that a petition for certiorari is an extraordinary remedy and should be filed only as a last resort. The filing of a motion for reconsideration is intended to afford the public respondent an opportunity to correct any actual error attributed to it by way of re-examination of the legal and factual issues.55 However, the rule is subject to the following recognized exceptions:

(a) where the order is a patent nullity, as where the court a quo has no jurisdiction; (b) where the questions raised in the certiorari proceeding have been duly raised and passed upon by the lower court, or are the same as those raised and passed upon in the lower court; (c) where there is an urgent necessity for the resolution of the question and any further delay would prejudice the interests of the Government or of the petitioner or the subject matter of the action is perishable; (d) where, under the circumstances, a motion for reconsideration would be useless; (e) where petitioner was deprived of due process and there is extreme urgency for relief; (f) where, in a criminal case, relief from an order of arrest is urgent and the granting of such relief by the trial court is improbable; (g) where the proceedings in the lower court are a nullity for lack of due process; (h) where the proceedings was ex parte or in which the petitioner had no opportunity to object; and (i) where the issue raised is one purely of law or public interest is involved.56

As will be shown later, the March 24, 2003 Order of the trial court granting petitioner’s plea for a writ of preliminary injunction was issued with grave abuse of discretion amounting to excess or lack of jurisdiction and thus a nullity. If the trial court issues a writ of preliminary injunction despite the absence of proof of a legal right and the injury sustained by the plaintiff, the writ is a nullity.57

Petitioners Are NotEntitled to a Writ of




Preliminary ProhibitoryInjunction

Section 3, Rule 58 of the Rules of Court provides that a preliminary injunction may be granted when the following have been established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining the commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts, either for a limited period or perpetually;

(b) That the commission, continuance or nonperformance of the act or acts complained of during the litigation would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering to be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action or proceeding, and tendering to render the judgment ineffectual.

The grant of a preliminary injunction in a case rests on the sound discretion of the court with the caveat that it should be made with great caution. The exercise of sound judicial discretion by the lower court should not be interfered with except in cases of manifest abuse. Injunction is a preservative remedy for the protection of the parties’ substantive rights and interests. The sole aim of a preliminary injunction is to preserve the status quo within the last actual status that preceded the pending controversy until the merits of the case can be heard fully. Moreover, a petition for a preliminary injunction is an equitable remedy, and one who comes to claim for equity must do so with clean hands. It is to be resorted to by a litigant to prevent or preserve a right or interest where there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard of compensation. A petition for a writ of preliminary injunction rests upon an alleged existence of an emergency or of a special reason for such a writ before the case can be regularly tried. By issuing a writ of preliminary injunction, the court can thereby prevent a threatened or continued irreparable injury to the plaintiff before a judgment can be rendered on the claim.58

The plaintiff praying for a writ of preliminary injunction must further establish that he or she has a present and unmistakable right to be protected; that the facts against which injunction is directed violate such right;59 and there is a special and paramount necessity for the writ to prevent serious damages. In the absence of proof of a legal right and the injury sustained by the plaintiff, an order for the issuance of a writ of preliminary injunction will be nullified. Thus, where the plaintiff’s right is doubtful or disputed, a preliminary injunction is not proper. The possibility of irreparable damage without proof of an actual existing right is not a ground for a preliminary injunction.60

However, to establish the essential requisites for a preliminary injunction, the evidence to be submitted by the plaintiff need not be conclusive and complete.61 The plaintiffs are only required to show that they have an ostensible right to the final relief prayed for in their complaint.62 A writ of preliminary injunction is generally based solely on initial or incomplete evidence.63 Such evidence need only be a sampling intended merely to give the court an evidence of justification for a preliminary injunction pending the decision on the merits of the case, and is not conclusive of the principal action which has yet to be decided.64

It bears stressing that findings of the trial court granting or denying a petition for a writ of preliminary injunction based on the evidence on record are merely provisional until after the trial on the merits of the case shall have been concluded.65









The trial court, in granting or dismissing an application for a writ of preliminary injunction based on the pleadings of the parties and their respective evidence must state in its order the findings and conclusions based on the evidence and the law. This is to enable the appellate court to determine whether the trial court committed grave abuse of its discretion amounting to excess or lack of jurisdiction in resolving, one way or the other, the plea for injunctive relief. The trial court’s exercise of its judicial discretion whether to grant or deny an application for a writ of preliminary injunction involves the assessment and evaluation of the evidence, and its findings of facts are ordinarily binding and conclusive on the appellate court and this Court.66

We agree with respondent’s contention that as creditor-mortgagee, it has the right under the real estate mortgage contract and the amendment thereto to foreclose extrajudicially, the real estate mortgage and sell the property at public auction, considering that petitioners had failed to pay their loans, plus interests and other incremental amounts as provided for in the deeds. Petitioners contend, however, that if respondent bank extrajudicially forecloses the real estate mortgage and has petitioners’ property sold at public auction for an amount in excess of the balance of their loan account, petitioner’s contractual and substantive rights under the real estate mortgage would be violated; in such a case, the extrajudicial foreclosure sale may be enjoined by a writ of preliminary injunction.

Respondent bank sought the extrajudicial foreclosure of the real estate mortgage and was to sell the property at public auction for P30,533,552.24. The amount is based on Promissory Notes No. 1042793 and BD-150369, interests, penalty charges, and attorney’s fees, as of January 31, 2003, exclusive of all interests, penalties, other charges, and foreclosure costs accruing thereafter.67 Petitioners asserted before the trial court that respondents sought the extrajudicial foreclosure of the mortgaged deed for an amount far in excess of what they owed, because the latter failed to credit P4,600,000.00 paid in checks but without any receipts having been issued therefor; and the P9,000,000.00 peso equivalent of the US$20,000.00 deposit of petitioner Natividad Nisce with PCIB under Passbook No. 83-3041 and Certificate of Deposit No. CD-01612 issued by PCI Capital on July 23, 1984. Petitioners maintain that the US$20,000.00 dollar deposit should be setoff against their account with respondent against their loan account, on their claim that respondent is their debtor insofar as said deposit is concerned.

It was the burden of petitioners, as plaintiffs below, to adduce preponderant evidence to prove their claim that respondent bank was the debtor of petitioner Natividad Nisce relative to her dollar deposit with PCIB, and later transferred to PCI Capital in Hong Kong, a subsidiary of respondent Bank. Petitioners, however, failed to discharge their burden.

Under Article 1278 of the New Civil Code, compensation shall take place when two persons, in their own right, are creditors and debtors of each other. In order that compensation may be proper, petitioners were burdened to establish the following:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;



(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the debtor.68

Compensation takes effect by operation of law when all the requisites mentioned in Article 1279 of the New Civil Code are present and extinguishes both debts to the concurrent amount even though the creditors and debtors are not aware of the compensation. Legal compensation operates even against the will of the interested parties and even without their consent.69 Such compensation takes place ipso jure; its effects arise on the very day on which all requisites concur.70

As its minimum, compensation presupposes two persons who, in their own right and as principals, are mutually indebted to each other respecting equally demandable and liquidated obligations over any of which no retention or controversy commenced and communicated in due time to the debtor exists. Compensation, be it legal or conventional, requires confluence in the parties of the characters of mutual debtors and creditors, although their rights as such creditors or their obligations as such debtors need not spring from one and the same contract or transaction.71

Article 1980 of the New Civil Code provides that fixed, savings and current deposits of money in banks and similar institutions shall be governed by the provisions concerning simple loans. Under Article 1953, of the same Code, a person who secures a loan of money or any other fungible thing acquires the ownership thereof, and is bound to pay the creditor an equal amount of the same kind and quality. The relationship of the depositors and the Bank or similar institution is that of creditor-debtor. Such deposit may be setoff against the obligation of the depositor with the bank or similar institution.

When petitioner Natividad Nisce deposited her US$20,500.00 with the PCIB on July 19, 1984, PCIB became the debtor of petitioner. However, when upon petitioner’s request, the amount of US$20,000.00 was transferred to PCI Capital (which forthwith issued Certificate of Deposit No. 01612), PCI Capital, in turn, became the debtor of Natividad Nisce. Indeed, a certificate of deposit is a written acknowledgment by a bank or borrower of the receipt of a sum of money or deposit which the Bank or borrower promises to pay to the depositor, to the order of the depositor; or to some other person; or to his order whereby the relation of debtor and creditor between the bank and the depositor is created.72 The issuance of a certificate of deposit in exchange for currency creates a debtor-creditor relationship.73

Admittedly, PCI Capital is a subsidiary of respondent Bank. Even then, PCI Capital [PCI Express Padala (HK) Ltd.] has an independent and separate juridical personality from that of the respondent Bank, its parent company; hence, any claim against the subsidiary is not a claim against the parent company and vice versa.74 The evidence on record shows that PCIB, which had been merged with Equitable Bank, owns almost all of the stocks of PCI Capital. However, the fact that a corporation owns all of the stocks of another corporation, taken alone, is not sufficient to justify their being treated as one entity. If used to perform legitimate functions, a subsidiary’s separate existence shall be respected, and the liability of the parent corporation, as well as the subsidiary shall be confined to those arising in their respective business.75 A corporation has a separate personality distinct from its stockholders and from other corporations to which it may be conducted. This separate and distinct personality of a corporation is a fiction created by law for convenience and to prevent injustice.

This Court, in Martinez v. Court of Appeals76 held that, being a mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit sparingly, the disregard of its independent being and the piercing of the corporate veil. The veil of separate corporate personality may be lifted when, inter alia, the corporation is merely an adjunct, a business conduit or an alter ego of another corporation 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; or when the corporation










is used as a cloak or cover for fraud or illegality; or to work injustice; or where necessary to achieve equity or for the protection of the creditors. In those cases where valid grounds exist for piercing the veil of corporate entity, the corporation will be considered as a mere association of persons. The liability will directly attach to them.77

The Court likewise declared in the same case that the test in determining the application of the instrumentality or alter ego doctrine is as follows:

1. Control, not mere majority or complete stock control, but complete dominion, not only of finances but of policy and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own;

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff’s legal rights; and

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complaint of.

The Court emphasized that the absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant’s relationship to that operation.78

Petitioners failed to adduce sufficient evidence to justify the piercing of the veil of corporate entity and render respondent Bank liable for the US$20,000.00 deposit of petitioner Natividad Nisce as debtor.

On hindsight, petitioners could have spared themselves the expenses and tribulation of a litigation had they just withdrawn their deposit from the PCI Capital and remitted the same to respondent. However, petitioner insisted on their contention of setoff.

On the P4,600,000.00 paid in checks allegedly remitted by petitioners to respondent in partial payment of their loan account, petitioners failed to adduce in evidence the checks to show that, indeed, the checks were drawn by petitioners and delivered to respondent, and that respondent was able to cash the checks. The only evidence adduced by petitioners is a piece of paper listing the serial numbers of the checks and the amount of each check:

PAYMENTS MADE & RECEIVED BY EBC BUT W/O RECEIPTS

1. Dec. 29, 1997 - EBC-0000039462 - P2,000,000.00

2. Jan. 22, 1998 - EBC-213016118C - 1,000,000.00

3. Feb. 24, 1998 - UB -0000074619 - 800,000.00

4. Mar. 23, 1998 - EBC-213016121C - 800,000.00



P4,600,000.00 79

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. The Decision of the Court of Appeals is AFFIRMED. Costs against petitioners.

SO ORDERED.


Manila

SECOND DIVISION

G.R. No. 172885 October 9, 2009

MANUEL LUIS S. SANCHEZ, Petitioner, vs.REPUBLIC OF THE PHILIPPINES, Represented by the Department of Education, Culture and Sports,Respondent.

D E C I S I O N

ABAD, J.:


This petition for review on certiorari assails the February 21, 2006 Decision1 of the Court of Appeals in CA-G.R. CV 83648 and its Resolution2 of May 29, 2006, which dismissed the petitioner’s appeal from the decision of Branch 71 of the Regional Trial Court (RTC) of Pasig City in Civil Case 66852.

The Facts and the Case

In 1980, during the regime of President Ferdinand E. Marcos, the government-owned Human Settlements Development Corporation (HSDC) built with public funds and on government land the St. Martin Technical Institute Complex at Barangay Ugong, Pasig City. This later on became known as the University of Life Complex.

In July 1980, First Lady Imelda R. Marcos and others organized the University of Life Foundation, Inc. (ULFI), a private non-stock, non-profit corporation devoted to non-formal education. On August 26, 1980 the government gave the management and operation of the Complex to ULFI but HSDC was to continue to construct facilities and acquire equipment for it. Although ULFI was to get all the incomes of the Complex, ULFI had to pay HSDC an annual fee of 14 percent of HSDC’s investments in it.

After the fall of the Marcos regime in 1986, the new government reorganized HSDC into the Strategic Investment Development Corporation (SIDCOR) under the supervision of the Office of the President. Realizing that ULFI never paid the 14 percent annual fee due to HSDC, now totaling about P316 million, on July 25, 1989 SIDCOR rescinded the HSDC-ULFI agreement. Ironically, in its place, SIDCOR entered into an Interim Management Agreement with ULFI, allowing it to continue managing and operating the Complex.

Meantime, in October 1989, the government transferred the ownership of ULFI’s properties to the Department of Education, Culture and Sports (DECS). Later in January 1990, Republic Act 6847 transferred full control and management of the Complex to DECS with effect two years from the law’s enactment. The DECS transferred its offices to the Complex in December 1990. On January 29, 1991, SIDCOR transferred all its rights in the Complex to the National Government which in turn transferred the same to the DECS.

On January 31, 1991 DECS and ULFI entered into a Management Agreement, granting ULFI the authority to manage and operate the Complex until the end of that year. During this period, ULFI was expressly mandated under the said Management Agreement to remit to the Bureau of the Treasury, through the DECS, all incomes from the Complex, net of allowable expenses.3 At the end of 1991, the DECS gave ULFI notice to immediately vacate the Complex. But ULFI declined, prompting the DECS to file an action for unlawful detainer against it in Civil Case 2959 of the Metropolitan Trial Court (MeTC) of Pasig City. After hearing, MeTC dismissed the action for lack of merit. On the DECS’s appeal to the RTC, the latter affirmed the order of dismissal.

On appeal of the DECS to the Court of Appeals by petition for review,4 however, the latter rendered judgment on January 17, 1995, reversing the MeTC and RTC decisions. The appeals court ordered ULFI to vacate the Complex and pay such reasonable rentals as the MeTC might fix. This Court dismissed ULFI’s recourse to it from the judgment of the Court of Appeals.5

On April 15, 1996 the MeTC fixed, after hearing, the rents that ULFI had to pay the DECS at P22,559,215.14 (due from February 1992 to January 1996) plus P6,325.00 per month until it shall have vacated the premises.6 The DECS succeeded in ejecting ULFI but the latter did not pay the amounts due from it.

http://www.lawphil.net/judjuris/juri2009/oct2009/gr_172885_2009.html#fnt6






On June 15, 1998 the DECS filed a complaint7 before the RTC of Pasig City in Civil Case 66852 for collection of the P22,559,215.14 in unremitted rents and damages against Henri Kahn, ULFI’s President, and petitioner Manuel Luis S. Sanchez, its Executive Vice-President, based on their personal liability under Section 31 of the Corporation Code. The latter two were Managing Director and Finance Director, respectively, of the corporation.8

The complaint alleged that Kahn and petitioner Sanchez, as key ULFI officers, were remiss in safekeeping ULFI’s corporate incomes and in accounting for them.9 They neither placed the incomes derived from the Complex in ULFI’s deposit account nor submitted the required financial statements detailing their transactions. The underlying theory of the case is that Kahn and Sanchez "operated ULFI as if it were their own property, handled the collections and spent the money as if it were their personal belonging."10 The DECS asked the RTC to order Kahn and Sanchez personally to pay it the P22,559,215.14 in rents due from ULFI with legal interest, exemplary damages of P1,000,000.00, attorney’s fees of P500,000.00, and costs.

In his answer, petitioner Sanchez alleged that, being a mere officer of ULFI, he cannot be made personally liable for its adjudged corporate liability. He took exception to the complaint, characterizing it as an attempt to pierce the corporate veil that cloaked ULFI.

Satisfied that the DECS fully established its case, on October 14, 2002, the RTC rendered judgment, ordering Kahn and petitioner Sanchez to pay the DECS, jointly and severally, P22,559,215.14 with legal interest from April 1, 1996 until they shall have fully paid the same, P500,000.00 in exemplary damages, and P200,000.00 in attorney’s fees, plus costs.11

Both Kahn and petitioner Sanchez appealed to the Court of Appeals. The latter court gave due course to Sanchez’s appeal but denied that of Kahn since it was filed out of time. On February 21, 2006 the Court of Appeals rendered judgment, wholly affirming the trial court’s decision,12 hence, this petition.

In a nutshell, Sanchez argues that he cannot be made personally liable for ULFI’s corporate obligations absent specific allegations in the complaint and evidence adduced during trial that would warrant a piercing of the corporate veil. He further argues that the DECS is barred by res judicata and forum shopping from collecting from him what it could not get by execution from ULFI under the judgment in the ejectment case. Finally, he claims that because ULFI suffered losses in operations during the period 1992 up to 1996, there could have been nothing left of the rentals it collected from the lessees of the Complex.

The DECS points out, on the other hand, that since Kahn and petitioner Sanchez were guilty of fraud and bad faith in managing the funds of ULFI, they can be made to personally answer for those funds and to pay its corporate obligations pursuant to Section 31 of the Corporation Code. They collected money from rents but did not, as was their duty, remit this to the DECS pursuant to the DECS-ULFI agreement.

The Issues

The case before this Court presents the following issues:

1. Whether or not petitioner Sanchez, a director and chief executive officer of ULFI, can be held liable in damages under Section 31 of the Corporation Code for gross neglect or bad faith in directing the corporation’s affairs; and







2. Whether or not the action in Civil Case 66852 is barred by res judicata and constitutes forum shopping by the DECS.

Rulings of the Court

Petitioner Sanchez points out that the Court of Appeals’ decision arbitrarily changed the DECS’s theory of the case from one based on his and Kahn’s alleged failure to deposit for the account of ULFI whatever rentals they have collected to another based on their alleged failure to remit to the DECS the incomes of the facilities they managed. But Sanchez is drawing insignificant distinctions from what the DECS claims and what the court below finds. Both essentially rest on Kahn and Sanchez’s failure to account for the rent incomes that they collected from lease of spaces in the facilities of the Complex beyond the one-year management authority that the DECS granted ULFI in 1991.

Petitioner Sanchez claims that there is no ground for the courts below to pierce the veil of corporate identity and hold him and Kahn, who were mere corporate officers, personally liable for ULFI’s obligations to the DECS. But this is not a case of piercing the veil of corporate fiction. The DECS brought its action against Sanchez and Kahn under Section 31 of the Corporation Code, which should not be confused with actions intended to pierce the corporate fiction.

Section 31 of the Corporation Code makes directors-officers of corporations jointly and severally liable even to third parties for their gross negligence or bad faith in directing the affairs of their corporations. Thus:

Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. (Emphasis supplied)

x x x x

The DECS does not have to invoke the doctrine of piercing the veil of corporate fiction. Section 31 above expressly lays down petitioner Sanchez and Kahn’s liability for damages arising from their gross negligence or bad faith in directing corporate affairs. The doctrine mentioned, on the other hand, is an equitable remedy resorted to only when the corporate fiction is used, among others, to defeat public convenience, justify wrong, protect fraud or defend a crime.13

Moreover, in a piercing case, the test is complete control or domination, not only of finances, but of policy and business practice in respect of the transaction attacked.14 This is not the case here. Section 31, under which this case was brought, makes a corporate director–who may or may not even be a stockholder or member–accountable for his management of the affairs of the corporation.

Bad faith implies breach of faith and willful failure to respond to plain and well understood obligation.15 It does not simply connote bad judgment or negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of wrong; it means breach of a known duty through some motive or interest or ill will.16 It partakes of the nature of fraud.17

Gross negligence, on the other hand, is the want of even slight care, acting or omitting to act in a situation where there is duty to act, not inadvertently but willfully and intentionally, with a conscious






indifference to consequences insofar as other persons may be affected.18 It evinces a thoughtless disregard of consequences without exerting any effort to avoid them;19 the want or absence of or failure to exercise slight care or diligence, or the entire absence of care.20

In resolving the issue of whether or not petitioner Sanchez, a director and chief executive officer of ULFI, can be held liable in damages under Section 31 of the Corporation Code for bad faith or gross neglect in directing the corporation’s affairs, the Court will consider only the Court of Appeals’ findings of facts. This Court’s jurisdiction in a petition for review on certiorari under Rule 45 is limited to reviewing only errors of law. It is bound by the findings of fact of the Court of Appeals.

The Court of Appeals found that from January 1992 to January 1996, after ULFI’s authority to manage the Complex expired and despite the ejectment suit that the DECS filed against it, petitioner Sanchez and Kahn still continued to lease spaces in those facilities to third persons. And they collected and kept all the rents although they knew that these primarily belonged to the DECS. ULFI had merely managed the facilities and collected earnings from them for the DECS. What is more, Sanchez and Kahn were aware that they had to submit written accounts of those rents and remit the net earnings from them to the Bureau of Treasury, through the DECS, at the end of the year. Yet, Sanchez and Kahn, acting in bad faith or with gross neglect did not turn over even one centavo of rent to the DECS nor render an accounting of their collections. Nor did they account for the money they collected by submitting to the Securities and Exchange Commission the required financial statements covering such collections.

Parenthetically, a witness for the defense, Evangeline Naniong, ULFI’s bookkeeper, testified that the revenues from the rents were deposited in the bank in the names of Sanchez and ULFI’s accountant. And so only they could withdraw and spend those revenues.21

Petitioner Sanchez of course claims that the funds they had collected proved inadequate even to meet expenses. But, as the appellate court held, he had been unable to substantiate such claims. As the officer charged with approving and implementing corporate disbursements, Sanchez had the duty to present documents showing how the incomes of the foundation were spent. But he failed to do so even after the DECS, which took custody of the records, asked Kahn to submit a list of the documents they needed for establishing their defenses so these may be made available to them.22 Under the circumstances, the indubitable conclusion is that petitioner Sanchez and Kahn acted with bad faith, if not with gross negligence, in failing to perform their duty to remit to DECS or keep in safe hands ULFI’s incomes from the leases. 1avvphi1

Section 31 lays down the "doctrine of corporate opportunity" and holds personally liable corporate directors found guilty of gross negligence or bad faith in directing the affairs of the corporation, which results in damage or injury to the corporation, its stockholders or members, and other persons. The ejectment suit that held only ULFI liable to the DECS for unpaid rents does not constitute res judicata to the issue of personal liabilities of Kahn and petitioner Sanchez under the circumstances to pay such obligations, given that the unaccounted funds would have settled the same.

Petitioner’s allegations of forum shopping must fail as well. The essence of forum shopping is the filing of multiple suits involving the same parties for the same cause of action, either simultaneously or successively, for the purpose of obtaining a favorable judgment.23 This is not the case with respect to the ejectment suit vis-à-vis the action for damages.

WHEREFORE, the Court DENIES the petition and AFFIRMS the February 21, 2006 Decision of the Court of Appeals in CA-G.R. CV 83648 and its Resolution of May 29, 2006.

SO ORDERED.








Manila

SECOND DIVISION

G.R. No. 184088 July 6, 2010

IGLESIA EVANGELICA METODISTA EN LAS ISLAS FILIPINAS (IEMELIF) (Corporation Sole), INC., REV. NESTOR PINEDA, REV. ROBERTO BACANI, BENJAMIN BORLONGAN, JR., DANILO SAUR, RICHARD PONTI, ALFREDO MATABANG and all the other members of the IEMELIF TONDO CONGREGATION of the IEMELIF CORPORATION SOLE, Petitioners, vs.BISHOP NATHANAEL LAZARO, REVERENDS HONORIO RIVERA, DANIEL MADUCDOC, FERDINAND MERCADO, ARCADIO CABILDO, DOMINGO GONZALES, ARTURO LAPUZ, ADORABLE MANGALINDAN, DANIEL VICTORIA and DAKILA CRUZ, and LAY LEADER LINGKOD MADUCDOC and CESAR DOMINGO, acting individually and as members of the Supreme Consistory of Elders and those claiming under the Corporation Aggregate, Respondents.

D E C I S I O N

ABAD, J.:

The present dispute resolves the issue of whether or not a corporation may change its character as a corporation sole into a corporation aggregate by mere amendment of its articles of incorporation without first going through the process of dissolution.

The Facts and the Case

In 1909, Bishop Nicolas Zamora established the petitioner Iglesia Evangelica Metodista En Las Islas Filipinas, Inc. (IEMELIF) as a corporation sole with Bishop Zamora acting as its "General Superintendent." Thirty-nine years later in 1948, the IEMELIF enacted and registered a by-laws that established a Supreme Consistory of Elders (the Consistory), made up of church ministers, who were to serve for four years. The by-laws empowered the Consistory to elect a General Superintendent, a General Secretary, a General Evangelist, and a Treasurer General who would manage the affairs of the organization. For all intents and purposes, the Consistory served as the IEMELIF’s board of directors.

Apparently, although the IEMELIF remained a corporation sole on paper (with all corporate powers theoretically lodged in the hands of one member, the General Superintendent), it had always acted like a corporation aggregate. The Consistory exercised IEMELIF’s decision-making powers without ever being challenged. Subsequently, during its 1973 General Conference, the general membership voted to put things right by changing IEMELIF’s organizational structure from a corporation sole to a corporation aggregate. On May 7, 1973 the Securities and Exchange Commission (SEC) approved the vote. For some reasons, however, the corporate papers of the IEMELIF remained unaltered as a corporation sole.

Only in 2001, about 28 years later, did the issue reemerge. In answer to a query from the IEMELIF, the SEC replied on April 3, 2001 that, although the SEC Commissioner did not in 1948 object to the conversion of the IEMELIF into a corporation aggregate, that conversion was not properly carried out and documented. The SEC said that the IEMELIF needed to amend its articles of incorporation for that purpose.1

Acting on this advice, the Consistory resolved to convert the IEMELIF to a corporation aggregate. Respondent Bishop Nathanael Lazaro, its General Superintendent, instructed all their congregations to take up the matter with their respective members for resolution. Subsequently, the general membership approved the conversion, prompting the IEMELIF to file amended articles of incorporation with the SEC. Bishop Lazaro filed an affidavit-certification in support of the conversion.2

Petitioners Reverend Nestor Pineda, et al., which belonged to a faction that did not support the conversion, filed a civil case for "Enforcement of Property Rights of Corporation Sole, Declaration of Nullity of Amended Articles of Incorporation from Corporation Sole to Corporation Aggregate with Application for Preliminary Injunction and/or Temporary Restraining Order" in IEMELIF’s name against respondent members of its Consistory before the Regional Trial Court (RTC) of Manila.3 Petitioners claim that a complete shift from IEMELIF’s status as a corporation sole to a corporation aggregate required, not just an amendment of the IEMELIF’s articles of incorporation, but a complete dissolution of the existing corporation sole followed by a re-incorporation.

Unimpressed, the RTC dismissed the action in its October 19, 2005 decision.4 It held that, while the Corporation Code on Religious Corporations (Chapter II, Title XIII) has no provision governing the amendment of the articles of incorporation of a corporation sole, its Section 109 provides that





religious corporations shall be governed additionally "by the provisions on non-stock corporations insofar as they may be applicable." The RTC thus held that Section 16 of the Code5 that governed amendments of the articles of incorporation of non-stock corporations applied to corporations sole as well. What IEMELIF needed to authorize the amendment was merely the vote or written assent of at least two-thirds of the IEMELIF membership.

Petitioners Pineda, et al. appealed the RTC decision to the Court of Appeals (CA).6 On October 31, 2007 the CA rendered a decision,7 affirming that of the RTC. Petitioners moved for reconsideration, but the CA denied it by its resolution of August 1, 2008,8 hence, the present petition for review before this Court.

The Issue Presented

The only issue presented in this case is whether or not the CA erred in affirming the RTC ruling that a corporation sole may be converted into a corporation aggregate by mere amendment of its articles of incorporation.


Petitioners Pineda, et al. insist that, since the Corporation Code does not have any provision that allows a corporation sole to convert into a corporation aggregate by mere amendment of its articles of incorporation, the conversion can take place only by first dissolving IEMELIF, the corporation sole, and afterwards by creating a new corporation in its place.

Religious corporations are governed by Sections 109 through 116 of the Corporation Code. In a 2009 case involving IEMELIF, the Court distinguished a corporation sole from a corporation aggregate.9 Citing Section 110 of the Corporation Code, the Court said that a corporation sole is "one formed by the chief archbishop, bishop, priest, minister, rabbi or other presiding elder of a religious denomination, sect, or church, for the purpose of administering or managing, as trustee, the affairs, properties and temporalities of such religious denomination, sect or church." A corporation aggregate formed for the same purpose, on the other hand, consists of two or more persons.

True, the Corporation Code provides no specific mechanism for amending the articles of incorporation of a corporation sole. But, as the RTC correctly held, Section 109 of the Corporation Code allows the application to religious corporations of the general provisions governing non-stock corporations.

For non-stock corporations, the power to amend its articles of incorporation lies in its members. The code requires two-thirds of their votes for the approval of such an amendment. So how will this requirement apply to a corporation sole that has technically but one member (the head of the religious organization) who holds in his hands its broad corporate powers over the properties, rights, and interests of his religious organization?

Although a non-stock corporation has a personality that is distinct from those of its members who established it, its articles of incorporation cannot be amended solely through the action of its board of trustees. The amendment needs the concurrence of at least two-thirds of its membership. If such approval mechanism is made to operate in a corporation sole, its one member in whom all the powers of the corporation technically belongs, needs to get the concurrence of two-thirds of its membership. The one member, here the General Superintendent, is but a trustee, according to Section 110 of the Corporation Code, of its membership. 1avvphi1






There is no point to dissolving the corporation sole of one member to enable the corporation aggregate to emerge from it. Whether it is a non-stock corporation or a corporation sole, the corporate being remains distinct from its members, whatever be their number. The increase in the number of its corporate membership does not change the complexion of its corporate responsibility to third parties. The one member, with the concurrence of two-thirds of the membership of the organization for whom he acts as trustee, can self-will the amendment. He can, with membership concurrence, increase the technical number of the members of the corporation from "sole" or one to the greater number authorized by its amended articles.

Here, the evidence shows that the IEMELIF’s General Superintendent, respondent Bishop Lazaro, who embodied the corporation sole, had obtained, not only the approval of the Consistory that drew up corporate policies, but also that of the required two-thirds vote of its membership. 1avvphi1

The amendment of the articles of incorporation, as correctly put by the CA, requires merely that a) the amendment is not contrary to any provision or requirement under the Corporation Code, and that b) it is for a legitimate purpose. Section 17 of the Corporation Code10 provides that amendment shall be disapproved if, among others, the prescribed form of the articles of incorporation or amendment to it is not observed, or if the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral, or contrary to government rules and regulations, or if the required percentage of ownership is not complied with. These impediments do not appear in the case of IEMELIF.

Besides, as the CA noted, the IEMELIF worked out the amendment of its articles of incorporation upon the initiative and advice of the SEC. The latter’s interpretation and application of the Corporation Code is entitled to respect and recognition, barring any divergence from applicable laws. Considering its experience and specialized capabilities in the area of corporation law, the SEC’s prior action on the IEMELIF issue should be accorded great weight.

WHEREFORE, the Court DENIES the petition and AFFIRMS the October 31, 2007 decision and August 1, 2008 resolution of the Court of Appeals in CA-G.R. SP 92640.

SO ORDERED.


Manila

FIRST DIVISION

G.R. No. 170284 March 16, 2007

BENITO ARATEA and PONCIANA CANONIGO, Petitioners, vs.ESMERALDO P. SUICO and COURT OF APPEALS, Cebu City, Respondents.

D E C I S I O N

GARCIA, J.:


This petition for review on certiorari under Rule 45 of the Rules of Court seeks the reversal and setting aside of the decision1 dated 5 May 2005 of the Court of Appeals (CA)-Cebu City, as reiterated in its resolution2 of 23 September 2005, in CA-G.R. CV No. 60174 which affirmed an earlier decision of the Regional Trial Court (RTC) of Cebu City, Branch 24, in an action for a sum of money and damages thereat instituted by the herein private respondent Esmeraldo P. Suico (Suico) against, among others, the herein petitioners Benito Aratea (Aratea) and Ponciana Canonigo (Canonigo).

The facts:

Petitioners Aratea and Canonigo are the controlling stockholders of Samar Mining Development Corporation (SAMDECO), a domestic corporation engaged in mining operations in San Isidro, Wright, Western Samar. On the other hand, private respondent Suico is a businessman engaged in export and general merchandise.

Sometime in 1989, Suico entered into a Memorandum of Agreement (MOA) with SAMDECO. Armed with the proper board resolution, Aratea and Canonigo signed the MOA as the duly authorized representatives of the corporation. Under the MOA, Suico would extend loans and cash advances to SAMDECO in exchange for the grant of the exclusive right to market fifty percent (50%) of the total coal extracted by SAMDECO from its mining sites in San Isidro, Wright, Western Samar.

Suico was enticed into the aforementioned financing scheme because Aratea and Canonigo assured him that the money he would lend to SAMDECO would easily be paid with five percent (5%) monthly interest as the coals in said sites is easier to gather because it is excavated from open-pit mines. Aratea and Canonigo also promised to Suico that the loan the latter would extend to SAMDECO could easily be paid from the profits of his fifty percent (50%) share of the coal produced. Also reserved in favor of Suico was the right of first priority to operate the mining facilities in the event SAMDECO becomes incapable of coping with the work demands. By way of further incentive, Suico was actually appointed SAMDECO’s Vice-President for Administration.

Pursuant to the same MOA, Suico started releasing loans and cash advances to SAMDECO, still through Aratea and Suico. SAMDECO started operations in its mining sites to gather the coal. As agreed in the MOA, fifty percent (50%) of the coals produced were offered by Suico to different buyers. However, SAMDECO, again through Aratea and Canonigo, prevented the full implementation of the marketing arrangement by not accepting the prices offered by Suico’s coal buyers even though such prices were competitive and fair enough, giving no other explanation for such refusal other than saying that the price was too low. Aratea and Canonigo did not also set any criterion or standard with which any price offer would be measured against. Because he failed to close any sale of his 50% share of the coal-produce and gain profits therefrom, Suico could not realize payment of the loans and advances he extended to SAMDECO.

SAMDECO, on the other hand, successfully disposed of its 50% share of the coal-produce. Even with said coal sales, however, SAMDECO absolutely made no payment of its loan obligations to Suico, despite demands.

Aratea and Canonigo eventually sold the mining rights and passed on the operations of SAMDECO to Southeast Pacific Marketing, Inc. (SPMI). They also sold their shares in SAMDECO to SPMI’s President, Arturo E. Dy without notice to, or consent of Suico, in violation of the MOA.

Hence, in the RTC of Cebu City, Suico filed a complaint for a Sum of Money and Damages against SAMDECO, Aratea, Canonigo, and Seiko Philippines, Inc. (SEIKO, which was later substituted by



SPMI and Arturo E. Dy). The complaint was docketed as Civil Case No. CEB-10618 and raffled to Branch 24 of the court.

On 5 January 1998, the trial court came out with its decision rendering judgment for Suico as follows:

WHEREFORE, finding that the plaintiff has meritorious cause of action against the defendants, this Court hereby orders all the defendants SAMDECO, SPMI, Dy, SEIKO, Benito Aratea, Ponciana Canonigo to solidarily pay the plaintiff the principal obligation of P3.5 million plus 5% interest per month reckoned from March 1989 until fully paid; while defendants Aratea & Canonigo should solidarily pay plaintiff the balance on the principal amounting toP978,440.00 plus 5% interest per month reckoned from March 1989 until fully paid. In addition all defendants are hereby ordered solidarily to pay plaintiff P2,000,000.00 million (sic) as moral damages, P500,000.00 as exemplary damages, P250,000.00 as attorney’s fees, and P100,000.00 as litigation expenses. All counterclaims and cross-claims are hereby dismissed.

SO ORDERED.

On 9 February 1998, SAMDECO, SPMI, Dy, and SEIKO filed their common notice of appeal, while Aratea and Canonigo filed theirs on 16 February 1998. All appeals were docketed in CA-Cebu City as CA-G.R. CV No. 60174.

After review of the records of the case, CA-Cebu City, in its decision of 5 May 2005, dismissed the appeal and affirmed the appealed decision of the trial court, to wit::

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us DISMISSING the appeal filed in this case and AFFIRMING the decision dated January 5, 1998 of the RTC of Cebu City, Branch 24 in Civil Case No. CEB-10618.

SO ORDERED.

Petitioners Aratea and Canonigo filed their common motion for reconsideration but the same was denied by the appellate court in its resolution of 23 September 2005. 1ªvvphi1.nét

Hence, this recourse by the two on the following assigned errors:

THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ERROR IN FINDING AGAINST THE DEFENDANTS-APPELLANTS BENITO ARATEA AND PONCIANA CANONIGO AND CONDEMNING THEM TO PAY JOINTLY AND SEVERALLY THE LOANS, CASH ADVANCES AND CAPITAL INFUSION MADE BY PLAINTIFF TO DEFENDANT-APPELLANT SAMDECO.

THE COURT OF APPEALS OVERLOOKED AND MISINTERPRETED SOME FACTS OR CIRCUMSTANCES AND COMMITTED SOME MISAPPREHENSION OF THE FACTS AND THE APPLICABLE LAW/S WHICH HAD ADVERSELY AFFECTED THE RESULT OF THE CASE.

We DENY.

The Court notes that petitioners Aratea and Canonigo do not assail the decisions of the two courts below insofar as their co-defendants in the court of origin, namely: SAMDECO; SPMI; Dy; and SEIKO, were held liable to Suico. As it were, petitioners take exception from both decisions only, insofar as they are held personally and solidarily liable with their co-defendants. They strongly assert

that "the records of this case clearly show that the loans, cash advances and capital infusion made by xxx Suico to SAMDECO are the sole and exclusive liability and/or responsibility of SAMDECO and/or its transferee/s."3 Relying heavily on the allegations in Suico’s complaint in Civil Case No. CEB-10618, whereunder they were referred to as mere representatives/agents of SAMDECO, petitioners seek to be declared free from any liability which their co-defendants in the suit may be adjudged liable for.

We must first stress that petitioners’ personal and solidary liability depends on whether the Court finds SAMDECO’s monetary obligations on account of the loans and cash advances made to it by Suico are due and demandable as borne by the evidence.

After carefully and thoroughly reviewing the records of the proceedings before the trial court, we find no cogent reason to depart from the factual findings of both the trial and appellate courts holding all defendants liable for said loans and cash advances.

However, in determining whether SAMDECO’s stockholders and/or representatives (petitioners Aratea and Canonigo) may be held solidarily liable with SAMDECO’s obligations, the Court must determine whether, upon the same facts found by the two courts below, there is basis to pierce the veil of corporate fiction and hold SAMDECO’s stockholders and/or officers personally and solidarily liable with the corporation.

Prudential Bank v. Alviar4 stated:

Well-settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders. Officers of a corporation are not personally liable for their acts as such officers unless it is shown that they have exceeded their authority. However, the legal fiction that a corporation has a personality separate and distinct from stockholders and members may be disregarded if it is used as a means to perpetuate 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.

SAMDECO must generally be treated as separate and distinct entity from petitioners Aratea and Canonigo unless there are facts and circumstances that would justify the Court to pierce the veil of corporate fiction and treat them as one and the same. From the facts, as found by the trial court and reechoed by the appellate court, the Court has no reason to doubt that Suico was very well aware that he was dealing with SAMDECO and that Aratea and Canonigo were mere authorized representatives acting for and in behalf of the corporation. In fact, Suico took note that Aratea and Canonigo were duly authorized by the corresponding board resolution. There were no indications whatsoever that Suico was misled to believe that the loans and cash advances were initially intended for the personal benefit of Aratea and/or Canonigo, and that the corporation was only used thereafter for the purpose of hiding behind the veil of corporate fiction to evade personal liability. The evidence sufficiently established that all loans and cash advances were used for the mining operations of SAMDECO, and there were neither allegations nor proofs to the contrary. Absent any proof of fraud or double dealing, therefore, the doctrine on piercing the veil of corporate entity would not apply.

Considering that the veil of corporate fiction cannot be pierced in this case but the evidence indisputably established that Suico released loans and cash advances in favor of SAMDECO, which loans and cash advances remain unpaid to the present, to Suico’s damage and prejudice, may Aratea and Canonigo, as SAMDECO’s controlling stockholders and/or representatives, be nonetheless held personally and solidarily liable with SAMDECO and its successors-in-interest for obligations the corporation incurred under the facts herein obtaining?



We rule in the affirmative.

In MAM Realty Development Corporation v. NLRC,5 the Court stated:

A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The general rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities. There are times, however, when solidary liabilities may be incurred but only when exceptional circumstances warrant such as in the following cases:

1. When directors and trustees or, in appropriate cases, the officers of a corporation:

(a) vote for or assent to patently unlawful acts of the corporation;

(b) act in bad faith or with gross negligence in directing the corporate affairs;

(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons;6

2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto;7

3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation;8 or

4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.9

In labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. (Emphasis supplied.)

Petitioners Aratea and Canonigo, despite having separate and distinct personalities from SAMDECO may be held personally liable for the loans and advances made by Suico to SAMDECO which they represent on account of their bad faith in carrying out the business of the corporation. In the words of the trial court:

As evidenced by the transcripts of the direct examination of [respondent Suico] (TSN, Arnejo, 10 August 1995, pp. 20-21), [petitioners] Canonigo, Aratea and SAMDECO prevented the full implementation of the marketing agreement concerning the coal produced from the mining site, specifically called the Arizona project, by not agreeing to the price of the coal offered by the buyers procured by [Suico] even though the prices offered were competitive and fair enough. [Petitioners] Canonigo, Aratea and SAMDECO made no explanation as to why they did not accept the offered price save to say that they were low. They also did not set any criterion or standard against which any offered price would be measured. By not acquiescing in to the proffered price, [respondent] Suico was not able to obtain his share of 50% of the profits from the sale of the coal produced by the mining site.

1awphi1.nét






On the other hand, the [petitioners] were able to sell coal produced in the mining site in question. Hence, this undoubtedly exhibits their bad faith, malice and wanton disregard of the [respondent’s] rights in not complying with their part of the covenant. While the [petitioners] were able to market their share of the coal, they precluded the [respondent] from marketing his. xxx.

Moreover, notwithstanding the unequivocal language of Title 4, paragraph 1, [petitioners] Canonigo and Aratea further violated the [respondent’s] rights when they without informing [respondent] sold their shares of SAMDECO to defendants Dy and SPMI thereby vesting on the latter the right to operate SAMDECO’s coal mining area as evidence by the Memorandum of Agreement labeled Exhibits "B". Title 4, paragraph 1 of Exhibit "A" expressly states that [respondent] Suico had the right of first priority in acquiring the coal area of SAMDECO. The most prudent action for [petitioners] would have been to first offer to sell SAMDECO to [respondent] as what was stipulated under the contract prior to entering into an agreement with defendants SPMI and Dy. xxx. (Words in brackets supplied.)

Petitioners Aratea and Canonigo acted in bad faith when they, as officers of SAMDECO, unreasonably prevented Suico from selling his part of the coal-produce of the mining site, in gross violation of their MOA. This resulted in Suico not being unable to realize profits from his 50% share of the coal-produce, from which Suico could obtain part of the payment for the loans and advances he made in favor of SAMDECO. Moreover, petitioners also acted in bad faith when they sold, transferred and assigned their proprietary rights over the mining area in favor of SPMI and Dy, thereby causing SAMDECO to grossly violate its MOA with Suico. Suico suffered grave injustice because he was prevented from acquiring the opportunity to obtain payment of his loans and cash advances, while petitioners Aratea and Canonigo profited from the sale of their shareholdings in SAMDECO in favor of SPMI and Dy. These facts duly established Aratea and Canonigo’s personal liability as officers/stockholders of SAMDECO and their solidary liability with SAMDECO for its obligations in favor of Suico for the loans and cash advances received by the corporation.

WHEREFORE, the instant petition is DENIED and the assailed CA decision and resolution are AFFIRMED in toto.

Costs against petitioners.

SO ORDERED.


Manila

THIRD DIVISION

G.R. No. 170585 October 6, 2008

DAVID C. LAO and JOSE C. LAO, petitioners, vs.DIONISIO C. LAO, respondents.

D E C I S I O N

REYES, R.T., J.:

IS the mere inclusion as shareholder in the General Information Sheet of a corporation sufficient proof that one is a shareholder in such corporation?

This is the main question for resolution in this petition for review on certiorari of the Amended Decision1of the Court of Appeals (CA) affirming the Decision2 of the Regional Trial Court (RTC), Branch 11, Cebu City in CEB-25916-SRC.

The Facts

On October 15, 1998, petitioners David and Jose Lao filed a petition with the Securities and Exchange Commission (SEC) against respondent Dionisio Lao, president of Pacific Foundry Shop Corporation (PFSC). Petitioners prayed for a declaration as stockholders and directors of PFSC, issuance of certificates of shares in their name and to be allowed to examine the corporate books of PFSC.3

Petitioners claimed that they are stockholders of PFSC based on the General Information Sheet filed with the SEC, in which they are named as stockholders and directors of the corporation. Petitioner David Lao alleged that he acquired 446 shares in PFSC from his father, Lao Pong Bao, which shares were previously purchased from a certain Hipolito Lao. Petitioner Jose Lao, on the other hand, alleged that he acquired 333 shares from respondent Dionisio Lao himself.4

Respondent denied petitioners' claim. He alleged that the inclusion of their names in the corporation's General Information Sheet was inadvertently made. He also claimed that petitioners did not acquire any shares in PFSC by any of the modes recognized by law, namely subscription, purchase, or transfer. Since they were neither stockholders nor directors of PFSC, petitioners had no right to be issued certificates or stocks or to inspect its corporate books.5

On June 19, 2000, Republic Act 8799, otherwise known as the Securities Regulation Code, was enacted, transferring jurisdiction over all intra-corporate disputes from the SEC to the RTC. Pursuant to the law, the petition with the SEC was transferred to the RTC in Cebu City and docketed as Civil Case No. CEB-25916-SRC. The case was consolidated with another intra-corporate






dispute, Civil Case No. CEB-25910-SRC, filed by the Heirs of Uy Lam Tiong against respondent Dionisio Lao.6

During pre-trial, the parties agreed to submit the case for resolution based on the evidence on record.7

RTC Disposition

On December 19, 2001, the RTC rendered a Joint Decision8 with the following pertinent disposition, thus:

WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by the Court in these cases:

(a) Denying the petition of David C. Lao and Jose C. Lao to be recognized as stockholders and directors of Pacific Foundry Shop Corporation, to be issued certificates of stock of said corporation and to be allowed to exercise rights of stockholders of the same corporation.9

In denying the petition, the RTC ratiocinated:

x x x Thus, the petitioners David C. Lao and Jose C Lao do not appear to have become registered stockholders of Pacific Foundry Shop corporation, as they do not appear to have acquired shares of stock of the corporation either as subscribers or by purchase from a holder of outstanding shares or by purchase from the corporation of additionally issued shares.

x x x x

Secondly, the claim or contention of the petitioners David C. Lao and Jose C. Lao is wanting in merit because they have no stock certificates in their names. A stock certificate, as we very well know, is the evidence of ownership of corporate stock. If ever the said petitioners acquired shares of stock of the corporation, there is a need for their acquisition of said shares to be registered in the Stock and Transfer Book of the corporation. Registration is necessary to entitle a person to exercise the rights of a stockholder and to hold office as director or other offices (12 Fletcher 343). That is why it is explicitly provided in Section 63 of the Corporation Code of the Philippines that no transfer of shares of stock shall be valid until the transfer is recorded in the books of the corporation. An unregistered transfer is not valid as against the





corporation (Uson vs. Diosomito, 61 Phil. 535). A transfer must be registered, or at least notice thereof given to the corporation for the purpose of registration, before the transferee can acquire any right as against the corporation other than the right to have the transfer registered (12 Fletcher 339). An unrecorded transferee can not enjoy the status of a stockholder, he can not vote nor he voted for (Price & Sulu Development Corp. vs. Martin, 58 Phil. 707). Until the transfer is registered, the transferee is not a stockholder but an outsider (Rivera vs. Florendo, G.R. No. L-57586, October 8, 1986). So, a person who has acquired or purchased shares of stock of a corporation, and who desires to be recognized as stockholder for the purpose of voting and exercising other rights of a stockholder, must secure such a standing by having the acquisition or transfer recorded in the corporate books (Price & Sulu development Corp. vs. Martin, supra). Unfortunately, in the cases at bench, the petitioners David C. Lao and Jose C. Lao did not secure such a standing. Consequently, their petition to be recognized as stockholders of Pacific Foundry Shop Corporation must fail.10

Petitioners appealed to the CA.

CA Disposition

On May 27, 2005, the CA rendered a Decision11 modifying that of the RTC, disposing as follows:

WHEREFORE, premises considered, judgment is hereby rendered modifying the Joint Decision dated December 19, 2001 of the trial court in so far as it relates to Civil Case No. CEB-25916-SRC by:

(a) Declaring that petitioners have owned since 1987 shares of stock in Pacific Foundry Shop Corporation, numbering 446 for petitioner-appellant David C. Lao and 333 for petitioner-appellant Jose C. Lao;

(b) Ordering respondent-appellee through the corporate secretary to issue to petitioners-appellants the certificates of stock for the aforementioned number of shares;

(c) Ordering respondent-appellee, as President of Pacific Foundry Shop Corporation, to allow petitioners-appellants to exercise their rights as stock holders;



(d) Ordering respondent-appellee to call a stockholders meeting every fourth Saturday of January in accordance with the By-Laws of Pacific Foundry shop Corporation.12

The CA decision was penned by Justice Arsenio Magpale and concurred in by Justices Sesinando Villon and Enrico Lanzanas.

In modifying the RTC decision, the appellate court gave credence to the General Information Sheet submitted by petitioners that names them as stockholders of PFSC, thus:

The General Information Sheet of PFSC for the years 1987-1998 state that petitioners-appellants David C. Lao and Jose C. Lao own 446 and 333 shares, respectively, in PFSC. It is also indicated therein that David C. Lao occupied various key positions in PFSC from 1987-1998 and Jose C. Lao served as Director in PFSC from 1990-1998. The Sworn Statements of Uy Lam Tiong, former corporate secretary of the PFSC, also state that petitioners-appellants David C. Lao and Jose C. Lao, per corporate records of PFSC, own shares of stock numbering 446 and 333, respectively. The minutes of the Annual Stockholders Meeting of PFSC on January 28, 1988 at 3:00 o'clock p.m. shows that among those present were petitioners-appellants David C. Lao and Jose C. Lao. During the said meeting, petitioner-appellant David C. Lao was nominated and elected Director of PFSC. Withal, the Minutes of the Meeting of the Board of Directors of PFSC at its Office at Hipodromo, Cebu City, on January 28, 1988 at 4:00 p.m. disclose that petitioner-appellant David C. Lao was elected vice-president of PFSC. Both minutes were signed by the officers of PFSC including respondent-appellee.13

Respondent filed a motion for reconsideration14 of the CA decision.

On July 11, 2005, respondent moved to inhibit15 the ponente of the CA decision, Justice Magpale, from resolving his pending motion for reconsideration.

On July 22, 2005, Justice Magpale issued a Resolution16 voluntarily inhibiting himself from further participating in the resolution of the pending motion for reconsideration. Justice Magpale stated:

Although the undersigned ponente does not agree with the imputations of respondent-appellee and that the same are not any of those grounds






mentioned in Rule 137 of the Revised Rules of Court, nonetheless the ponente voluntarily inhibits himself from further handling this case in order to free the entire court of the slightest suspicion of bias and prejudice against the respondent-appellee.17

Amended Decision

On August 31, 2005, the CA rendered an Amended Decision18 affirming that of the RTC, with a fallo reading:

IN VIEW OF THE FOREGOING, the May 27, 2005 Decision of this Court is hereby SET ASIDE and the Decision of the Regional Trial Court, Branch 11, Cebu City with respect to Civil Case No. 25916-SRC is hereby AFIRMED in toto.19

The Amended Decision was penned by Justice Enrico Lanzanas and concurred in by Justices Sesinando Villon and Vicente Yap. The CA stated:

Petitioners-appellants maintain that they acquired their shares of stocks through transfer - the third mode mentioned by the trial court. David C. Lao claims that he acquired his 446 shares through his father, Lao Pong Bao, when the latter purchased said shares from Hipolito Lao. On the other hand, Jose C. Lao asserts that he acquired his 333 shares through Dionisio C. Lao himself from the original 1,333 shares of stocks of the latter.

Petitioner-appellants asseverations are unavailing. To substantiate their statements, they merely relied on the General Information Sheets submitted to the Securities and Exchange Commission for the year 1987 to 1998, as well as on the Minutes of the Stockholders Meeting and Board of Directors Meeting held on January 28, 1988. They did not adduce evidence that would indubitably show that there was indeed a valid transfer of stocks, i.e. endorsement and delivery, from the transferors, Hipolito Lao and Dionisio Lao, to them as transferees.

x x x x

To our mind, David C. Lao utterly failed to confute the argument posited by respondent-appellee or demonstrate compliance with any of the statutory requirements as to warrant a favorable ruling on his part. No proof was ever shown that there was endorsement and delivery to him of the stock certificates representing the 446 shares of Hipolito Lao.




Neither was the transfer registered in PFSC's Stock and Transfer Book. Conversely, Dionisio C. Lao was able to show conformity with the aforementioned requirements. Accordingly, it is but logical to conclude that the certificate of stock covering 446 shares of Hipolito Lao was in fact endorsed and delivered to Dionisio C. Lao and as such is reflected in PFSC's Stock and Transfer Book x x x.

In fact, it is a rule that private transactions are presumed to have been faire and regular and that the regular course of business is presumed to have been followed. Thus, the transfer made by Hipolito Lao of the 446 shares of stocks to Dionisio C. Lao is deemed to have been valid and well-founded unless proven otherwise. David C. Lao's mere allegation that Dionisio Lao illegally appropriated upon himself the 446 shares failed to hurdle such presumption. In this jurisdiction, neither fraud nor evil is presumed and the record does not show either as to establish by clear and sufficient evidence that may lead Us to believe such allegation. The party alleging the same has the burden of proof to present evidence necessary to establish his claim, unfortunately however petitioners failed to do so. The General Information Sheets and the Minutes of the Meetings adduced by petitioners-appellants do not prove such allegation of fraud or deceit. In the absence thereof, the presumption remains that private transactions have been fair and regular.

As for the alleged shares of Jose C. Lao, We find his position identically situated with David C. Lao. There is also no evidence on record that would clearly establish how he acquired said shares of PFSC. Jose C. Lao failed to show that there was endorsement and delivery to him of the stock certificates or any documents showing such transfer or assignment. In fact, the 333 shares being claimed by him is still under the name of Dionisio C. Lao was reflected by the Certificate of Stock as well as in PFSC's Stock and Transfer Book. Corollary, Jose C. Lao could not be considered a stockholder of PFSC in the absence of support reflecting his right to the 333 shares other than the inclusion of his name in the General Information Sheets from 1987 to 1998 and the Minutes of the Stockholder's Meeting and Board of Director's Meeting.20

Petitioners moved for reconsideration but their motion was denied.21 Hence, the present petition for review on certiorari under Rule 45 of the 1997 Rules of Civil Procedure.

Issues



Petitioners raise five (5) issues for Our consideration, thus:

1. Whether or not the inhibition of Justice Arsenio J. Magpale is proper when there is no "extrinsic evidence of bias, bad faith, malice, or corrupt purpose" on the part of Justice Magpale, which is required by this Honorable Court in its decision in Webb, et al. v. People of the Philippines, 276 SCRA 243 [1997], as basis for disqualification.

2. Whether or not the inhibition of Justice Magpale constitutes, in effect, forum shopping, which is proscribed under Section 5, Rule 7 of the Rules of Court, as amended, and decisions of this Honorable Court.

3. Whether or not determination of ownership of shares of stock in a corporation shall be based on the Stock and Transfer Book alone, or other evidence can be considered pursuant to the decision of this Honorable Court in Tan v. Securities and Exchange Commission, 206 SCRA 740.

4. Whether or not the admissions and representations of respondent in the General Information Sheets submitted by him to the Securities and Exchange Commission during the years 1987 to 1998 that (a) petitioners were stockholders of Pacific Foundry Shop Corporation; that (b) petitioner David C. Lao and Jose C. Lao owned 446 and 333 shares in the corporation, respectively; and that (c) petitioners had been directors and officers of the corporation, as well as the Sworn Statement of Uy Lam Tiong, former Corporate Secretary, the Minutes of the Annual Stockholders Meeting of PFSC on January 28, 1988, and the Minutes of Meeting of the Board of Directors on January 28, 1988, mentioned by Justice Magpale in his ponencia, are sufficient proof of petitioners ownership of stocks in the corporation.

5. Whether or not respondent is stopped from questioning petitioners' ownership of stocks in the corporation in view of his admissions and representations in the General Information Sheets he submitted to the Securities and Exchange Commission from 1987 to 1998 that petitioners were stockholders and officers of the corporation.22

Essentially, only two (2) issues are raised in this petition. The first concerns the voluntary inhibition of Justice Magpale, while the second involves the substantive issue of whether or not petitioners are indeed stockholders of PFSC.


Our Ruling

We deny the petition.

Voluntary inhibition is within the sound discretion of a judge.

Petitioners claim that the motion to inhibit Justice Magpale from resolving the pending motion for reconsideration was improper and unethical. They assert that the "bias and prejudice" grounds alleged by private respondent were unsubstantiated and, worse, constituted proscribed forum shopping. They argue that Justice Magpale should have resolved the pending motion, instead of voluntarily inhibiting himself from the case.

In cases of voluntary inhibition, the law leaves to the sound discretion of the judge the decision to decide for himself the question of whether or not he will inhibit himself from the case. Section 1, Rule 137 of the Rules of Court provides:

Section 1. Disqualification of judges. - No judge or judicial officer shall sit in any case in which he, or his wife or child, is pecuniarily interested as heir, legatee, creditor, or otherwise, or in which he is related to either party within the sixth degree of consanguinity or affinity, or to counsel within the fourth degree, computed according to the rules of the civil law, or in which he has been executor, administrator, guardian, trustee, or counsel, or in which he has presided in any inferior court when his ruling or decision is the subject of review, without the written consent of all parties in interest, signed by them and entered upon the record.

A judge may, in the exercise of his sound discretion, disqualify himself from sitting in a case, for just or valid reasons other than those mentioned above.

Here, Justice Magpale voluntarily inhibited himself "in order to free the entire court [CA] of the slightest suspicion of bias and prejudice x x x."23 We certainly cannot nullify the decision of Justice Magpale recusing himself from the case because that is a matter left entirely to his discretion. Nor can We fault him for doing so. No judge should preside in a case in which he feels that he is not wholly free, disinterested, impartial, and independent.

We agree with petitioners that it may seem unpalatable and even revolting when a losing party seeks the disqualification of a judge who had previously ruled against him in the hope that a new judge might be more favorable to


him. But We cannot take that basic proposition too far. That Justice Magpale opted to voluntarily recuse himself from the appealed case is already fait accompli. It is, in popular idiom, water under the bridge.

Petitioners cannot bank on his voluntary inhibition to nullify the Amended Decision later issued by the appellate court. It is highly specious to assume that Justice Magpale would have ruled in favor of petitioners on the pending motion for reconsideration if he took a different course and opted to stay on with the case. It is also illogical to presume that the Amended Decision would not have been issued with or without the participation of Justice Magpale. The Amended Decision is too far removed from the issue of voluntary inhibition. It does not follow that petitioners would be better off were it not for the voluntary inhibition.

Petitioners failed to prove that they are shareholders of PSFC.

Petitioners insist that they are shareholders of PFSC. They claim purchasing shares in PFSC. Petitioner David Lao alleges that he acquired 446 shares in the corporation from his father, Lao Pong Bao, which shares were previously purchased from a certain Hipolito Lao. Petitioner Jose Lao, on the other hand, alleges that he acquired 333 shares from respondent Dionisio Lao.

Records, however, disclose that petitioners have no certificates of shares in their name. A certificate of stock is the evidence of a holder's interest and status in a corporation. It is a written instrument signed by the proper officer of a corporation stating or acknowledging that the person named in the document is the owner of a designated number of shares of its stock.24 It is prima facie evidence that the holder is a shareholder of a corporation.

Nor is there any written document that there was a sale of shares, as claimed by petitioners. Petitioners did not present any deed of assignment, or any similar instrument, between Lao Pong Bao and Hipolito Lao; or between Lao Pong Bao and petitioner David Lao. There is likewise no deed of assignment between petitioner Jose Lao and private respondent Dionisio Lao.

Absent a written document, petitioners must prove, at the very least, possession of the certificates of shares in the name of the alleged seller. Again, they failed to prove possession. They failed to prove the due delivery of the certificates of shares of the sellers to them. Section 63 of the Corporation Code provides:


Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice-president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

In contrast, respondent was able to prove that he is the owner of the disputed shares. He had in his possession the certificates of stocks of Hipolito Lao. The certificates of stocks were also properly endorsed to him. More importantly, the transfer was duly registered in the stock and transfer book of the corporation. Thus, as between the parties, respondent has proven his right over the disputed shares. As correctly ruled by the CA:

Au contraire, Dionisio C. Lao was able to show through competent evidence that he is undeniably the owner of the disputed shares of stocks being claimed by David C. Lao. He was able to validate that he has the physical possession of the certificates covering the shares of Hipolito Lao. Notably, it was Hipolito Lao who properly endorsed said certificates to herein Dionisio Lao and that such transfer was registered in PFSC's Stock and Transfer Book. These circumstances are more in accord with the valid transfer contemplated by Section 63 of the Corporation Code.25

The mere inclusion as shareholder of petitioners in the General Information Sheet of PFSC is insufficient proof that they are shareholders of the company.

Petitioners bank heavily on the General Information Sheet submitted by PFSC to the SEC in which they were named as shareholders of PFSC. They claim that respondent is now estopped from contesting the General Information Sheet.

While it may be true that petitioners were named as shareholders in the General Information Sheet submitted to the SEC, that document alone does


not conclusively prove that they are shareholders of PFSC. The information in the document will still have to be correlated with the corporate books of PFSC. As between the General Information Sheet and the corporate books, it is the latter that is controlling. As correctly ruled by the CA:

We agree with the trial court that mere inclusion in the General Information Sheets as stockholders and officers does not make one a stockholder of a corporation, for this may have come to pass by mistake, expediency or negligence. As professed by respondent-appellee, this was done merely to comply with the reportorial requirements with the SEC. This maybe against the law but "practice, no matter how long continued, cannot give rise to any vested right."

If a transferee of shares of stock who failed to register such transfer in the Stock and Transfer Book of the Corporation could not exercise the rights granted unto him by law as stockholder, with more reason that such rights be denied to a person who is not a stockholder of a corporation. Petitioners-appellants never secured such a standing as stockholders of PFSC and consequently, their petition should be denied.26

It should be stressed that the burden of proof is on petitioners to show that they are shareholders of PFSC. This is so because they do not have any certificates of shares in their name. Moreover, they do not appear in the corporate books as registered shareholders. If they had certificates of shares, the burden would have been with PFSC to prove that they are not shareholders of the corporation.

As discussed, petitioners failed to hurdle their burden. There is no written document evidencing their claimed purchase of shares. We note that petitioners agreed to submit their case for decision based merely on the documents on record. Hence, no testimonial evidence was presented to prove the alleged purchase of shares. Absent any documentary or testimonial evidence, the bare assertion of petitioners that they are shareholders cannot prevail.

All told, We agree with the RTC and CA decision that petitioners are not shareholders of PFSC.

WHEREFORE, the petition is DENIED and the appealed Amended Decision AFFIRMED IN FULL.


SO ORDERED.


Manila

THIRD DIVISION

G.R. No. 170735 December 17, 2007

IMMACULADA L. GARCIA, petitioner, vs.SOCIAL SECURITY COMMISSION LEGAL AND COLLECTION, SOCIAL SECURITY SYSTEM, respondents.

D E C I S I O N

CHICO-NAZARIO, J.:

This is petition for review on Certiorari under Rule 45 of the Rules of Court is assailing the 2 June 2005 Decision1and 8 December 2005 Resolution2 both of the Court of Appeals in CA-G.R. SP No. 85923. the appellate court affirmed the --- Order and --- Resolution both of the Social Security Commission (SSC) in SSC Case No. 10048, finding Immaculada L. Garcia (Garcia), the sole surviving director of Impact Corporation, petitioner herein, liable for unremitted, albeit collected, SSS contributions.

Petitioner Immaculada L. Garcia, Eduardo de Leon, Ricardo de Leon, Pacita Fernandez, and Consuelo Villanueva were directors3 of Impact Corporation. The corporation was engaged in the business of manufacturing aluminum tube containers and operated two factories. One was a "slug" foundry-factory located in Cuyapo, Nueva Ecija, while the other was an Extrusion Plant in Cainta, Metro Manila, which processed the "slugs" into aluminum collapsible tubes and similar containers for toothpaste and other related products.

Records show that around 1978, Impact Corporation started encountering financial problems. By 1980, labor unrest besieged the corporation.

In March 1983, Impact Corporation filed with the Securities and Exchange Commission (SEC) a Petition for Suspension of Payments,4 docketed as SEC Case No. 02423, in which it stated that:

[Impact Corporation] has been and still is engaged in the business of manufacturing aluminum tube containers x x x.

x x x x

In brief, it is an on-going, viable, and profitable enterprise.

On 8 May 1985, the union of Impact Corporation filed a Notice of Strike with the Ministry of Labor which was followed by a declaration of strike on 28 July 1985. Subsequently, the Ministry of Labor certified the labor dispute for compulsory arbitration to the National Labor Relations Commission (NLRC) in an Order5 dated 25 August 1985. The Ministry of Labor, in the same Order, noted the inability of Impact Corporation to pay wages, 13th month pay, and SSS remittances due to cash liquidity problems. A portion of the order reads:

On the claims of unpaid wages, unpaid 13th month pay and non-remittance of loan amortization and SSS premiums, we are for directing the company to pay the same to the workers and to remit loan amortizations and SSS premiums previously deducted from their wages to the Social Security System. Such claims were never contested by the company both during the hearing below and in our office. In fact, such claims were admitted by the company although it alleged cash liquidity as the main reason for such non-payment.

WHEREFORE, the dispute at Impact Corporation is hereby certified to the National Labor Relations Commission for compulsory arbitration in accordance with Article 264 (g) of the Labor Code, as amended.

x x x x

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The company is directed to pay all the entitled workers unpaid wages, unpaid 13th month pay and to remit to the Social Security System loan amortizations and SSS premiums previously deducted from the wages of the workers.6

On 3 July 1985, the Social Security System (SSS), through its Legal and Collection Division (LCD), filed a case before the SSC for the collection of unremitted SSS premium contributions withheld by Impact Corporation from its employees. The case which impleaded Impact Corporation as respondent was docketed as SSC Case No. 10048.7

Impact Corporation was compulsorily covered by the SSS as an employer effective 15 July 1963 and was assigned Employer I.D. No. 03-2745100-21.

In answer to the allegations raised in SSC Case No. 10048, Impact Corporation, through its then Vice President Ricardo de Leon, explained in a letter dated 18 July 1985 that it had been confronted with strikes in 1984 and layoffs were effected thereafter. It further argued that the P402,988.93 is erroneous. It explained among other things, that its operations had been suspended and that it was waiting for the resolution on its Petition for Suspension of Payments by the SEC under SEC Case No. 2423. Despite due notice, the corporation failed to appear at the hearings. The SSC ordered the investigating team of the SSS to determine if it can still file its claim for unpaid premium contributions against the corporation under the Petition for Suspension of Payments.

In the meantime, the Petition for Suspension of Payments was dismissed which was pending before the SEC in an Order8 dated 12 December 1985. Impact Corporation resumed operations but only for its winding up and dissolution.9 Due to Impact Corporation’s liability and cash flow problems, all of its assets, namely, its machineries, equipment, office furniture and fixtures, were sold to scrap dealers to answer for its arrears in rentals.

On 1 December 1995, the SSS-LCD filed an amended Petition10 in SSC Case No. 10048 wherein the directors of Impact Corporation were directly impleaded as respondents, namely: Eduardo de Leon, Ricardo de Leon,11 Pacita Fernandez, Consuelo Villanueva, and petitioner. The amounts sought to be collected totaled P453,845.78 andP10,856.85 for the periods August 1980 to December 1984 and August 1981 to July 1984, respectively, and the penalties for late remittance at the rate of 3% per month from the date the contributions fell due until fully paid pursuant to Section 22(a) of the Social Security Law,12 as amended, in the amounts of P49,941.67 andP2,474,662.82.

Period Unremitted Amount

Penalties(3% Interest Per

Month)

Total

August 1980 to December 1984 P 453,845.78 P49, 941.67 503,787.45August 1981 to July 1984 P 10,856.85 P2, 474, 662.82 2,485,519.67

Summonses were not served upon Eduardo de Leon, Pacita Fernandez, and Consuelo Villanueva, their whereabouts unknown. They were all later determined to be deceased. On the other hand, due to failure to file his responsive pleading, Ricardo de Leon was declared in default.

Petitioner filed with the SSC a Motion to Dismiss13 on grounds of prescription, lack of cause of action and cessation of business, but the Motion was denied for lack of merit.14 In her Answer with Counterclaim15 dated 20 May 1999, petitioner averred that Impact Corporation had ceased operations in 1980. In her defense, she insisted that she was a mere director without managerial functions, and she ceased to be such in 1982. Even as a stockholder and director of Impact Corporation, petitioner contended that she cannot be made personally liable for the corporate











obligations of Impact Corporation since her liability extended only up to the extent of her unpaid subscription, of which she had none since her subscription was already fully paid. The petitioner raised the same arguments in her Position Paper. 16

On 23 January 1998, Ricardo de Leon died following the death, too, of Pacita Fernandez died on 7 February 2000. In an Order dated 11 April 2000, the SSC directed the System to check if Impact Corporation had leviable properties to which the investigating team of respondent SSS manifested that the Impact Corporation had already been dissolved and its assets disposed of.17

In a Resolution dated 28 May 2003, the Social Security Commission ruled in favor of SSS and declared petitioner liable to pay the unremitted contributions and penalties, stating the following:

WHEREFORE, premises considered, this Commission finds, and so holds, that respondents Impact Corporation and/or Immaculada L. Garcia, as director and responsible officer of the said corporation, is liable to pay the SSS the amounts of P442,988.93, representing the unpaid SS contributions of their employees for the period August 1980 to December 1984, not inclusive, and P10,856.85, representing the balance of the unpaid SS contributions in favor of Donato Campos, Jaime Mascarenas, Bonifacio Franco and Romeo Fullon for the period August 1980 to December 1984, not inclusive, as well as the 3% per month penalty imposed thereon for late payment in the amounts of P3,194,548.63 and P78,441.33, respectively, computed as of April 30, 2003. This is without prejudice to the right of the SSS to collect the penalties accruing after April 30, 2003 and to institute other appropriate actions against the respondent corporation and/or its responsible officers.

Should the respondents pay their liability for unpaid SSS contributions within sixty (60) days from receipt of a copy of this Resolution, the 3% per month penalty for late payment thereof shall be deemed condoned pursuant to SSC Res. No. 397-S.97, as amended by SSC Res. Nos. 112-S.98 and 982-S.99, implementing the provision on condonation of penalty under Section 30 of R.A. No. 8282.

In the event the respondents fail to pay their liabilities within the aforestated period, let a writ of execution be issued, pursuant to Section 22 (c) [2] of the SS Law, as amended, for the satisfaction of their liabilities to the SSS.18

Petitioner filed a Motion for Reconsideration19 of the afore-quoted Decision but it was denied for lack of merit in an Order20 dated 4 August 2004, thus:

Nowhere in the questioned Resolution dated May 28, 2003 is it stated that the other directors of the defunct Impact Corporation are absolved from their contribution and penalty liabilities to the SSS. It is certainly farthest from the intention of the petitioner SSS or this Commission to pin the entire liability of Impact Corporation on movant Immaculada L. Garcia, to the exclusion of the directors of the corporation namely: Eduardo de Leon, Ricardo de Leon, Pacita Fernandez and Conzuelo Villanueva, who were all impleaded as parties-respondents in this case.

The case record shows that there was failure of service of summonses upon respondents Eduardo de Leon, Pacita Fernandez and Conzuelo Villanueva, who are all deceased, for the reason that their whereabouts are unknown. Moreover, neither the legal heirs nor the estate of the defaulted respondent Ricardo de Leon were substituted as parties-respondents in this case when he died on January 23, 1998. Needless to state, the Commission did not acquire jurisdiction over the persons or estates of the other directors of Impact Corporation, hence, it could not validly render any pronouncement as to their liabilities in this case.






Furthermore, the movant cannot raise in a motion for reconsideration the defense that she was no longer a director of Impact Corporation in 1982, when she was allegedly eased out by the managing directors of Impact Corporation as purportedly shown in the Deed of Sale and Assignment of Shares of Stock dated January 22, 1982. This defense was neither pleaded in her Motion to Dismiss dated January 17, 1996 nor in her Answer with Counterclaim dated May 18, 1999 and is, thus, deemed waived pursuant to Section 1, Rule 9 of the 1997 Rules of Civil Procedure, which has suppletory application to the Revised Rules of Procedure of the Commission.

Finally, this Commission has already ruled in the Order dated April 27, 1999 that since the original Petition was filed by the SSS on July 3, 1985, and was merely amended on December 1, 1995 to implead the responsible officers of Impact Corporation, without changing its causes of action, the same was instituted well within the 20-year prescriptive period provided under Section 22 (b) of the SS Law, as amended, considering that the contribution delinquency assessment covered the period August 1980 to December 1984.

In view thereof, the instant Motion for Reconsideration is hereby denied for lack of merit.

Petitioner elevated her case to the Court of Appeals via a Petition for Review. Respondent SSS filed its Comment dated 20 January 2005, and petitioner submitted her Reply thereto on 4 April 2005.

The Court of Appeals, applying Section 28(f) of the Social Security Law,21 again ruled against petitioner. It dismissed the petitioner’s Petition in a Decision dated 2 June 2005, the dispositive portion of which reads:

WHEREFORE, premises considered, the petition is DISMISSED for lack of merit. The assailed Resolution dated 28 May 2003 and the Order dated 4 August 2004 of the Social Security Commission are AFFIRMED in toto.22

Aggrieved, petitioner filed a Motion for Reconsideration of the appellate court’s Decision but her Motion was denied in a Resolution dated 8 December 2005.

Hence, the instant Petition in which petitioner insists that the Court of Appeals committed grave error in holding her solely liable for the collected but unremitted SSS premium contributions and the consequent late penalty payments due thereon. Petitioner anchors her Petition on the following arguments:

I. SECTION 28(F) OF THE SSS LAW PROVIDES THAT A MANAGING HEAD, DIRECTOR OR PARTNER IS LIABLE ONLY FOR THE PENALTIES OF THE EMPLOYER CORPORATION AND NOT FOR UNPAID SSS CONTRIBUTIONS OF THE EMPLOYER CORPORATION.

II. UNDER THE SSS LAW, IT IS THE MANAGING HEADS, DIRECTORS OR PARTNERS WHO SHALL BE LIABLE TOGETHER WITH THE CORPORATION. IN THIS CASE, PETITIONER HAS CEASED TO BE A STOCKHOLDER OF IMPACT CORPORATION IN 1982. EVEN WHILE SHE WAS A STOCKHOLDER, SHE NEVER PARTICIPATED IN THE DAILY OPERATIONS OF IMPACT CORPORATION.

III. UNDER SECTION 31 OF THE CORPORATION CODE, ONLY DIRECTORS, TRUSTEES OR OFFICERS WHO PARTICIPATE IN UNLAWFUL ACTS OR ARE GUILTY OF GROSS NEGLIGENCE AND BAD FAITH SHALL BE PERSONALLY LIABLE.



OTHERWISE, BEING A MERE STOCKHOLDER, SHE IS LIABLE ONLY TO THE EXTENT OF HER SUBSCRIPTION.

IV. IMPACT CORPORATION SUFFERED IRREVERSIBLE ECONOMIC LOSSES, EVENTS WHICH WERE NEITHER DESIRED NOR CAUSED BY ANY ACT OF THE PETITIONER. THUS, BY REASON OF FORTUITOUS EVENTS, THE PETITIONER SHOULD BE ABSOLVED FROM LIABILITY.

V. RESPONDENT SOCIAL SECURITY SYSTEM FAILED MISERABLY IN EXERTING EFFORTS TO ACQUIRE JURISDICTION OVER THE LEVIABLE ASSETS OF IMPACT CORPORATION, PERSON/S AND/OR ESTATE/S OF THE OTHER DIRECTORS OR OFFICERS OF IMPACT CORPORATION.

VI. THE HONORABLE COMMISSION SERIOUSLY ERRED IN NOT RENDERING A JUDGMENT BY DEFAULT AGAINST THE DIRECTORS UPON WHOM IT ACQUIRED JURISDICTION.

Based on the foregoing, petitioner prays that the Decision dated 2 June 2005 and the Resolution dated 8 December 2005 of the Court of Appeals be reversed and set aside, and a new one be rendered absolving her of any and all liabilities under the Social Security Law.

In sum, the core issue to be resolved in this case is whether or not petitioner, as the only surviving director of Impact Corporation, can be made solely liable for the corporate obligations of Impact Corporation pertaining to unremitted SSS premium contributions and penalties therefore.

As a covered employer under the Social Security Law, it is the obligation of Impact Corporation under the provisions of Sections 18, 19 and 22 thereof, as amended, to deduct from its duly covered employee’s monthly salaries their shares as premium contributions and remit the same to the SSS, together with the employer’s shares of the contributions to the petitioner, for and in their behalf.

From all indications, the corporation has already been dissolved. Respondents are now going after petitioner who is the only surviving director of Impact Corporation.

A cursory review of the alleged grave errors of law committed by the Court of Appeals above reveals there seems to be no dispute as to the assessed liability of Impact Corporation for the unremitted SSS premiums of its employees for the period January 1980 to December 1984.

There is also no dispute as to the fact that the employees’ SSS premium contributions have been deducted from their salaries by Impact Corporation.

Petitioner in assailing the Court of Appeals Decision, distinguishes the penalties from the unremitted or unpaid SSS premium contributions. She points out that although the appellate court is of the opinion that the concerned officers of an employer corporation are liable for the penalties for non-remittance of premiums, it still affirmed the SSC Resolution holding petitioner liable for the unpaid SSS premium contributions in addition to the penalties.

Petitioner avers that under the aforesaid provision, the liability does not include liability for the unremitted SSS premium contributions.

Petitioner’s argument is ridiculous. The interpretation petitioner would like us to adopt finds no support in law or in jurisprudence. While the Court of Appeals Decision provided that Section 28(f)

refers to the liabilities pertaining to penalty for the non-remittance of SSS employee contributions, holding that it is distinct from the amount of the supposed SSS remittances, petitioner mistakenly concluded that Section 28(f) is applicable only to penalties and not to the liability of the employer for the unremitted premium contributions. Clearly, a simplistic interpretation of the law is untenable. It is a rule in statutory construction that every part of the statute must be interpreted with reference to the context, i.e., that every part of the statute must be considered together with the other parts, and kept subservient to the general intent of the whole enactment.23 The liability imposed as contemplated under the foregoing Section 28(f) of the Social Security Law does not preclude the liability for the unremitted amount. Relevant to Section 28(f) is Section 22 of the same law.

SEC. 22. Remittance of Contributions. -- (a) The contributions imposed in the preceding Section shall be remitted to the SSS within the first ten (10) days of each calendar month following the month for which they are applicable or within such time as the Commission may prescribe. Every employer required to deduct and to remit such contributions shall be liable for their payment and if any contribution is not paid to the SSS as herein prescribed, he shall pay besides the contribution a penalty thereon of three percent (3%) per month from the date the contribution falls due until paid. If deemed expedient and advisable by the Commission, the collection and remittance of contributions shall be made quarterly or semi-annually in advance, the contributions payable by the employees to be advanced by their respective employers: Provided, That upon separation of an employee, any contribution so paid in advance but not due shall be credited or refunded to his employer.

Under Section 22(a), every employer is required to deduct and remit such contributions penalty refers to the 3% penalty that automatically attaches to the delayed SSS premium contributions. The spirit, rather than the letter of a law determines construction of a provision of law. It is a cardinal rule in statutory construction that in interpreting the meaning and scope of a term used in the law, a careful review of the whole law involved, as well as the intendment of the law, must be made.24 Nowhere in the provision or in the Decision can it be inferred that the persons liable are absolved from paying the unremitted premium contributions.

Elementary is the rule that when laws or rules are clear, it is incumbent upon the judge to apply them regardless of personal belief or predilections - when the law is unambiguous and unequivocal, application not interpretation thereof is imperative.25 However, where the language of a statute is vague and ambiguous, an interpretation thereof is resorted to. An interpretation thereof is necessary in instances where a literal interpretation would be either impossible or absurd or would lead to an injustice. A law is deemed ambiguous when it is capable of being understood by reasonably well-informed persons in either of two or more senses.26 The fact that a law admits of different interpretations is the best evidence that it is vague and ambiguous.27 In the instant case, petitioner interprets Section 28(f) of the Social Security Law as applicable only to penalties and not to the liability of the employer for the unremitted premium contributions. Respondents present a more logical interpretation that is consistent with the provisions as a whole and with the legislative intent behind the Social Security Law.

This Court cannot be made to accept an interpretation that would defeat the intent of the law and its legislators.28

Petitioner also challenges the finding of the Court of Appeals that under Section 28(f) of the Social Security Law, a mere director or officer of an employer corporation, and not necessarily a "managing" director or officer, can be held liable for the unpaid SSS premium contributions.

Section 28(f) of the Social Security Law provides the following:







(f) If the act or omission penalized by this Act be committed by an association, partnership, corporation or any other institution, its managing head, directors or partners shall be liable to the penalties provided in this Act for the offense.

This Court agrees in petitioner’s observation that the SSS did not even deny nor rebut the claim that petitioner was not the "managing head" of Impact Corporation. However, the Court of Appeals rightly held that petitioner, as a director of Impact Corporation, is among those officers covered by Section 28(f) of the Social Security Law.

Petitioner invokes the rule in statutory construction called ejusdem generic; that is, where general words follow an enumeration of persons or things, by words of a particular and specific meaning, such general words are not to be construed in their widest extent, but are to be held as applying only to persons or things of the same kind or class as those specifically mentioned. According to petitioner, to be held liable under Section 28(f) of the Social Security Law, one must be the "managing head," "managing director," or "managing partner." This Court though finds no need to resort to statutory construction. Section 28(f) of the Social Security Law imposes penalty on:

(1) the managing head;

(2) directors; or

(3) partners, for offenses committed by a juridical person

The said provision does not qualify that the director or partner should likewise be a "managing director" or "managing partner."29 The law is clear and unambiguous.

Petitioner nonetheless raises the defense that under Section 31 of the Corporation Code, only directors, trustees or officers who participate in unlawful acts or are guilty of gross negligence and bad faith shall be personally liable, and that being a mere stockholder, she is liable only to the extent of her subscription.

Section 31 of the Corporation Code, stipulating on the liability of directors, trustees, or officers, provides:

SEC. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

Basic is the rule that a corporation is invested by law with a personality separate and distinct from that of the persons composing it as well as from that of any other legal entity to which it may be related. A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. Following this, the general rule applied is that obligations incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities.30 A director, officer, and employee of a corporation are generally not held personally liable for obligations incurred by the corporation.

Being a mere fiction of law, however, there are peculiar situations or valid grounds that can exist to warrant the disregard of its independent being and the lifting of the corporate veil. This situation



might arise when a corporation is used to evade a just and due obligation or to justify a wrong, to shield or perpetrate fraud, to carry out other similar unjustifiable aims or intentions, or as a subterfuge to commit injustice and so circumvent the law.31 Thus, Section 31 of the Corporation Law provides:

Taking a cue from the above provision, a corporate director, a trustee or an officer, may be held solidarily liable with the corporation in the following instances:

1. When directors and trustees or, in appropriate cases, the officers of a corporation--

(a) vote for or assent to patently unlawful acts of the corporation;

(b) act in bad faith or with gross negligence in directing the corporate affairs;

(c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons.

2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto.

3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the Corporation.

4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action. 32

The aforesaid provision states:

SEC. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons.

The situation of petitioner, as a director of Impact Corporation when said corporation failed to remit the SSS premium contributions falls exactly under the fourth situation. Section 28(f) of the Social Security Law imposes a civil liability for any act or omission pertaining to the violation of the Social Security Law, to wit:

(f) If the act or omission penalized by this Act be committed by an association, partnership, corporation or any other institution, its managing head, directors or partners shall be liable to the penalties provided in this Act for the offense.

In fact, criminal actions for violations of the Social Security Law are also provided under the Revised Penal Code. The Social Security Law provides, in Section 28 thereof, to wit:

(h) Any employer who, after deducting the monthly contributions or loan amortizations from his employees’ compensation, fails to remit the said deductions to the SSS within thirty (30)



days from the date they became due shall be presumed to have misappropriated such contributions or loan amortizations and shall suffer the penalties provided in Article Three hundred fifteen of the Revised Penal Code.

(i) Criminal action arising from a violation of the provisions of this Act may be commenced by the SSS or the employee concerned either under this Act or in appropriate cases under the Revised Penal Code: x x x.

Respondents would like this Court to apply another exception to the rule that the persons comprising a corporation are not personally liable for acts done in the performance of their duties.

The Court of Appeals in the appealed Decision stated:

Anent the unpaid SSS contributions of Impact Corporation’s employees, the officers of a corporation are liable in behalf of a corporation, which no longer exists or has ceased operations. Although as a rule, the officers and members of a corporation are not personally liable for acts done in performance of their duties, this rule admits of exception, one of which is when the employer corporation is no longer existing and is unable to satisfy the judgment in favor of the employee, the officers should be held liable for acting on behalf of the corporation. Following the foregoing pronouncement, petitioner, as one of the directors of Impact Corporation, together with the other directors of the defunct corporation, are liable for the unpaid SSS contributions of their employees.33

On the other hand, the SSC, in its Resolution, presented this discussion:

Although as a rule, the officers and members of a corporation are not personally liable for acts done in the performance of their duties, this rule admits of exceptions, one of which is when the employer corporation is no longer existing and is unable to satisfy the judgment in favor of the employee, the officers should be held liable for acting on behalf of the corporation. x x x.34

The rationale cited by respondents in the two preceding paragraphs need not have been applied because the personal liability for the unremitted SSS premium contributions and the late penalty thereof attaches to the petitioner as a director of Impact Corporation during the period the amounts became due and demandable by virtue of a direct provision of law.

Petitioner’s defense that since Impact Corporation suffered irreversible economic losses, and by reason of fortuitous events, she should be absolved from liability, is also untenable. The evidence adduced totally belies this claim. A reference to the copy of the Petition for Suspension of Payments filed by Impact Corporation on 18 March 1983 before the SEC contained an admission that:

"[I]t has been and still is engaged in business" and "has been and still is engaged in the business of manufacturing aluminum tube containers" and "in brief, it is an on-going, viable, and profitable enterprise" which has "sufficient assets" and "actual and potential income-generation capabilities."

The foregoing document negates petitioner’s assertion and supports the contention that during the period involved Impact Corporation was still engaged in business and was an ongoing, viable, profitable enterprise. In fact, the latest SSS form RIA submitted by Impact Corporation is dated 7 May 1984. The assessed SSS premium contributions and penalty are obligations imposed upon Impact Corporation by law, and should have been remitted to the SSS within the first 10 days of



each calendar month following the month for which they are applicable or within such time as the SSC prescribes.35

This Court also notes the evident failure on the part of SSS to issue a judgment in default against Ricardo de Leon, who was the vice-president and officer of the corporation, upon his non-filing of a responsive pleading after summons was served on him. As can be gleaned from Section 11 of the SSS Revised Rules of Procedure, the Commissioner is mandated to render a decision either granting or denying the petition. Under the aforesaid provision, if respondent fails to answer within the time prescribed, the Hearing Commissioner may, upon motion of petitioner, or motu proprio, declare respondent in default and proceed to receive petitioner’s evidence ex parteand thereafter recommend to the Commission either the granting or denial of the petition as the evidence may warrant.36

On a final note, this Court sees it proper to quote verbatim respondents’ prefatory statement in their Comment:

The Social Security System is a government agency imbued with a salutary purpose to carry out the policy of the State to establish, develop, promote and perfect a sound and viable tax exempt social security system suitable to the needs of the people throughout the Philippines which shall promote social justice and provide meaningful protection to members and their beneficiaries against the hazards of disability, sickness, maternity, old-age, death and other contingencies resulting in loss of income or financial burden.

The soundness and viability of the funds of the SSS in turn depends on the contributions of its covered employee and employer members, which it invests in order to deliver the basic social benefits and privileges to its members. The entitlement to and amount of benefits and privileges of the covered members are contribution-based. Both the soundness and viability of the funds of the SSS as well as the entitlement and amount of benefits and privileges of its members are adversely affected to a great extent by the non-remittance of the much-needed contributions.37

The sympathy of the law on social security is toward its beneficiaries. This Court will not turn a blind eye on the perpetration of injustice. This Court cannot and will not allow itself to be made an instrument nor be privy to any attempt at the perpetration of injustice.

Following the doctrine laid down in Laguna Transportation Co., Inc. v. Social Security System,38 this Court rules that although a corporation once formed is conferred a juridical personality separate and distinct from the persons comprising it, it is but a legal fiction introduced for purposes of convenience and to subserve the ends of justice. The concept cannot be extended to a point beyond its reasons and policy, and when invoked in support of an end subversive of this policy, will be disregarded by the courts.

WHEREFORE, pursuant to the foregoing, the Decision of the Court of Appeals dated 2 June 2005 in CA-G.R. SP No. 85923 is hereby AFFIRMED WITH FINALITY. Petitioner Immaculada L. Garcia, as sole surviving director of Impact Corporation is hereby ORDERED to pay for the collected and unremitted SSS contributions of Impact Corporation. The case is REMANDED to the SSS for computation of the exact amount and collection thereof.

SO ORDERED.






Manila

SECOND DIVISION

G.R. No. 146667 January 23, 2007

JOHN F. McLEOD, Petitioner, vs.NATIONAL LABOR RELATIONS COMMISSION (First Division), FILIPINAS SYNTHETIC FIBER CORPORATION (FILSYN), FAR EASTERN TEXTILE MILLS, INC., STA. ROSA TEXTILES, INC., (PEGGY MILLS, INC.), PATRICIO L. LIM, and ERIC HU, Respondents.

D E C I S I O N

CARPIO, J.:

The Case

This is a petition for review1 to set aside the Decision2 dated 15 June 2000 and the Resolution3 dated 27 December 2000 of the Court of Appeals in CA-G.R. SP No. 55130. The Court of Appeals affirmed with modification the 29 December 1998 Decision4 of the National Labor Relations Commission (NLRC) in NLRC NCR 02-00949-95.

The Facts

The facts, as summarized by the Labor Arbiter and adopted by the NLRC and the Court of Appeals, are as follows:

On February 2, 1995, John F. McLeod filed a complaint for retirement benefits, vacation and sick leave benefits, non-payment of unused airline tickets, holiday pay, underpayment of salary and 13th month pay, moral and exemplary damages, attorney’s fees plus interest against Filipinas Synthetic Corporation (Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc., Patricio Lim and Eric Hu.

In his Position Paper, complainant alleged that he is an expert in textile manufacturing process; that as early as 1956 he was hired as the Assistant Spinning Manager of Universal Textiles, Inc. (UTEX); that he was promoted to Senior Manager and worked for UTEX till 1980 under its President, respondent Patricio Lim; that in 1978 Patricio Lim formed Peggy Mills, Inc. with respondent Filsyn having controlling interest; that complainant was absorbed by Peggy Mills as its Vice President and Plant Manager of the plant at Sta. Rosa, Laguna; that at the time of his retirement complainant was receiving P60,000.00 monthly with vacation and sick leave benefits; 13th month pay, holiday pay and two round trip business class tickets on a Manila-London-Manila itinerary every three years which is convertible to cas[h] if unused; that in January 1986, respondents failed to pay vacation and leave credits and requested complainant to wait as it was short of funds but the same remain unpaid at present; that complainant is entitled to such benefit as per CBA provision (Annex "A"); that respondents likewise failed to pay complainant’s holiday pay up to the present; that complainant is entitled to such benefits as per CBA provision (Annex "B"); that in 1989 the plant union staged a strike and in 1993 was found guilty of staging an illegal strike; that from 1989 to 1992 complainant was entitled to 4 round trip business class plane tickets on a Manila-London-Manila itinerary but this benefit not (sic) its monetary equivalent was not given; that on August 1990 the respondents reduced complainant’s monthly salary of P60,000.00 by P9,900.00 till November 1993 or a period of 39 months; that in 1991 Filsyn sold Peggy Mills, Inc. to Far Eastern Textile Mills, Inc. as per agreement (Annex "D") and this was renamed as Sta. Rosa Textile with Patricio Lim as Chairman and President; that complainant worked for Sta. Rosa until November 30 that from time to time the owners of Far Eastern consulted with complainant on technical aspects of reoperation of the plant as per correspondence (Annexes "D-1" and "D-2"); that when complainant reached and applied retirement age at the end of 1993, he was only given a reduced 13th month pay ofP44,183.63, leaving a balance of P15,816.87; that thereafter the owners of Far Eastern Textiles decided for cessation of operations of Sta. Rosa Textiles; that on two occasions, complainant wrote letters (Annexes "E-1" to "E-2") to Patricio Lim requesting for his retirement and other benefits; that in the last quarter of 1994 respondents offered complainant compromise settlement of only P300,000.00 which complainant rejected; that again complainant wrote a letter (Annex "F") reiterating his demand for full payment of all benefits and to no avail, hence this complaint; and that he is entitled to all his money claims pursuant to law.

http://www.lawphil.net/judjuris/juri2007/jan2007/gr_146667_2007.html#fnt4




On the other hand, respondents in their Position Paper alleged that complainant was the former Vice-President and Plant Manager of Peggy Mills, Inc.; that he was hired in June 1980 and Peggy Mills closed operations due to irreversible losses at the end of July 1992 but the corporation still exists at present; that its assets were acquired by Sta. Rosa Textile Corporation which was established in April 1992 but still remains non-operational at present; that complainant was hired as consultant by Sta. Rosa Textile in November 1992 but he resigned on November 30, 1993; that Filsyn and Far Eastern Textiles are separate legal entities and have no employer relationship with complainant; that respondent Patricio Lim is the President and Board Chairman of Sta. Rosa Textile Corporation; that respondent Eric Hu is a Taiwanese and is Director of Sta. Rosa Textiles, Inc.; that complainant has no cause of action against Filsyn, Far Eastern Textile Ltd., Sta. Rosa Textile Corporation and Eric Hu; that Sta. Rosa only acquired the assets and not the liabilities of Peggy Mills, Inc.; that Patricio Lim was only impleaded as Board Chairman of Sta. Rosa Textile and not as private individual; that while complainant was Vice President and Plant Manager of Peggy Mills, the union staged a strike up to July 1992 resulting in closure of operations due to irreversible losses as per Notice (Annex "1"); that complainant was relied upon to settle the labor problem but due to his lack of attention and absence the strike continued resulting in closure of the company; and losses to Sta. Rosa which acquired its assets as per their financial statements (Annexes "2" and "3"); that the attendance records of complainant from April 1992 to November 1993 (Annexes "4" and "5") show that he was either absent or worked at most two hours a day; that Sta. Rosa and Peggy Mills are interposing counterclaims for damages in the total amount of P36,757.00 against complainant; that complainant’s monthly salary at Peggy Mills was P50,495.00 and not P60,000.00; that Peggy Mills, does not have a retirement program; that whatever amount complainant is entitled should be offset with the counterclaims; that complainant worked only for 12 years from 1980 to 1992; that complainant was only hired as a consultant and not an employee by Sta. Rosa Textile; that complainant’s attendance record of absence and two hours daily work during the period of the strike wipes out any vacation/sick leave he may have accumulated; that there is no basis for complainant’s claim of two (2) business class airline tickets; that complainant’s pay already included the holiday pay; that he is entitled to holiday pay as consultant by Sta. Rosa; that he has waived this benefit in his 12 years of work with Peggy Mills; that he is not entitled to 13th month pay as consultant; and that he is not entitled to moral and exemplary damages and attorney’s fees.

In his Reply, complainant alleged that all respondents being one and the same entities are solidarily liable for all salaries and benefits and complainant is entitled to; that all respondents have the same address at 12/F B.A. Lepanto Building, Makati City; that their counsel holds office in the same address; that all respondents have the same offices and key personnel such as Patricio Lim and Eric Hu; that respondents’ Position Paper is verified by Marialen C. Corpuz who knows all the corporate officers of all respondents; that the veil of corporate fiction may be pierced if it is used as a shield to perpetuate fraud and confuse legitimate issues; that complainant never accepted the change in his position from Vice-President and Plant Manger to consultant and it is incumbent upon respondents to prove that he was only a consultant; that the Deed of Dation in Payment with Lease (Annex "C") proves that Sta. Rosa took over the assets of Peggy Mills as early as June 15, 1992 and not 1995 as alleged by respondents; that complainant never resigned from his job but applied for retirement as per letters (Annexes "E-1", "E-2" and "F"); that documents "G", "H" and "I" show that Eric Hu is a top official of Peggy Mills that the closure of Peggy Mills cannot be the fault of complainant; that the strike was staged on the issue of CBA negotiations which is not part of the usual duties and responsibilities as Plant Manager; that complainant is a British national and is prohibited by law in engaging in union activities; that as per Resolution (Annex "3") of the NLRC in the proper case, complainant testified in favor of management; that the alleged attendance record of complainant was lifted from the logbook of a security agency and is hearsay evidence; that in the other attendance record it shows that complainant was reporting daily and even on Saturdays; that his limited hours was due to the strike and cessation of operations; that as plant manager complainant was on call 24 hours a day; that respondents must pay complainant the unpaid portion of his salaries and his retirement benefits that cash voucher No. 17015 (Annex "K") shows that complainant drew the

monthly salary of P60,000.00 which was reduced to P50,495.00 in August 1990 and therefore without the consent of complainant; that complainant was assured that he will be paid the deduction as soon as the company improved its financial standing but this assurance was never fulfilled; that Patricio Lim promised complainant his retirement pay as per the latter’s letters (Annexes "E-1", "E-2" and "F"); that the law itself provides for retirement benefits; that Patricio Lim by way of Memorandum (Annex "M") approved vacation and sick leave benefits of 22 days per year effective 1986; that Peggy Mills required monthly paid employees to sign an acknowledgement that their monthly compensation includes holiday pay; that complainant was not made to sign this undertaking precisely because he is entitled to holiday pay over and above his monthly pay; that the company paid for complainant’s two (2) round trip tickets to London in 1983 and 1986 as reflected in the complainant’s passport (Annex "N"); that respondents claim that complainant is not entitled to 13th month pay but paid in 1993 and all the past 13 years; that complainant is entitled to moral and exemplary damages and attorney’s fees; that all doubts must be resolved in favor of complainant; and that complainant reserved the right to file perjury cases against those concerned.

In their Reply, respondents alleged that except for Peggy Mills, the other respondents are not proper persons in interest due to the lack of employer-employee relationship between them and complainant; that undersigned counsel does not represent Peggy Mills, Inc.

In a separate Position Paper, respondent Peggy Mills alleged that complainant was hired on February 10, 1991 as per Board Minutes (Annex "A"); that on August 19, 1987, the workers staged an illegal strike causing cessation of operations on July 21, 1992; that respondent filed a Notice of Closure with the DOLE (Annex "B"); that all employees were given separation pay except for complainant whose task was extended to December 31, 1992 to wind up the affairs of the company as per vouchers (Annexes "C" and "C-1"); that respondent offered complainant his retirement benefits under RA 7641 but complainant refused; that the regular salaries of complainant from closure up to December 31, 1992 have offset whatever vacation and sick leaves he accumulated; that his claim for unused plane tickets from 1989 to 1992 has no policy basis, the company’s formula of employees monthly rate x 314 days over 12 months already included holiday pay; that complainant’s unpaid portion of the 13th month pay in 1993 has no basis because he was only an employee up to December 31, 1992; that the 13th month pay was based on his last salary; and that complainant is not entitled to damages.5

On 3 April 1998, the Labor Arbiter rendered his decision with the following dispositive portion:

WHEREFORE, premises considered, We hold all respondents as jointly and solidarily liable for complainant’s money claims as adjudicated above and computed below as follows:

Retirement Benefits (one month salary for every year of service)

6/80 - 11/30/93 = 14 years

P60,000 x 14.0 mos. …………………… P840,000.00

Vacation and Sick Leave (3 yrs.)

P2,000.00 x 22 days x 3 yrs. …………… 132,000.00

Underpayment of Salaries (3 yrs.)

P60,000 - P50,495 = P9,505


P 9,505 x 36.0 mos. …………………... 342,180.00

Holiday Pay (3 yrs.)

P2,000 x 30 days ………………………. 60,000.00

Underpayment of 13th month pay (1993) ……... 15,816.87

Moral Damages ……………………………….. 3,000,000.00

Exemplary Damages ………………………….. 1,000,000.00

10% Attorney’s Fees …………………………. 138,999.68

TOTAL P 5,528,996.55

Unused Airline Tickets (3 yrs.)

(To be converted in Peso upon payment)

$2,450.00 x 3.0 [yrs.]..……………… $7,350.00

SO ORDERED.6

Filipinas Synthetic Fiber Corporation (Filsyn), Far Eastern Textile Mills, Inc. (FETMI), Sta. Rosa Textiles, Inc. (SRTI), Patricio L. Lim (Patricio), and Eric Hu appealed to the NLRC. The NLRC rendered its decision on 29 December 1998, thus:

WHEREFORE, the Decision dated 3 April 1998 is hereby REVERSED and SET ASIDE and a new one is entered ORDERING respondent Peggy Mills, Inc. to pay complainant his retirement pay equivalent to 22.5 days for every year of service for his twelve (12) years of service from 1980 to 1992 based on a salary rate of P50,495.00 a month.

All other claims are DISMISSED for lack of merit.

SO ORDERED.7

John F. McLeod (McLeod) filed a motion for reconsideration which the NLRC denied in its Resolution of 30 June 1999.8 McLeod thus filed a petition for certiorari before the Court of Appeals assailing the decision and resolution of the NLRC.9

The Ruling of the Court of Appeals

On 15 June 2000, the Court of Appeals rendered judgment as follows:

WHEREFORE, the decision dated December 29, 1998 of the NLRC is hereby AFFIRMED with the MODIFICATION that respondent Patricio Lim is jointly and solidarily liable with Peggy Mills, Inc., to pay the following amounts to petitioner John F. McLeod:





1. retirement pay equivalent to 22.5 days for every year of service for his twelve (12) years of service from 1980 to 1992 based on a salary rate of P50,495, a month;

2. moral damages in the amount of one hundred thousand (P100,000.00) Pesos;

3. exemplary damages in the amount of fifty thousand (P50,000.00) Pesos; and

4. attorney’s fees equivalent to 10% of the total award.

No costs is awarded.

SO ORDERED.10

The Court of Appeals rejected McLeod’s theory that all respondent corporations are the same corporate entity which should be held solidarily liable for the payment of his monetary claims.

The Court of Appeals ruled that the fact that (1) all respondent corporations have the same address; (2) all were represented by the same counsel, Atty. Isidro S. Escano; (3) Atty. Escano holds office at respondent corporations’ address; and (4) all respondent corporations have common officers and key personnel, would not justify the application of the doctrine of piercing the veil of corporate fiction.

The Court of Appeals held that there should be clear and convincing evidence that SRTI, FETMI, and Filsyn were being used as alter ego, adjunct or business conduit for the sole benefit of Peggy Mills, Inc. (PMI), otherwise, said corporations should be treated as distinct and separate from each other.

The Court of Appeals pointed out that the Articles of Incorporation of PMI show that it has six incorporators, namely, Patricio, Jose Yulo, Jr., Carlos Palanca, Jr., Cesar R. Concio, Jr., E. A. Picasso, and Walter Euyang. On the other hand, the Articles of Incorporation of Filsyn show that it has 10 incorporators, namely, Jesus Y. Yujuico, Carlos Palanca, Jr., Patricio, Ang Beng Uh, Ramon A. Yulo, Honorio Poblador, Jr., Cipriano Azada, Manuel Tomacruz, Ismael Maningas, and Benigno Zialcita, Jr.

The Court of Appeals pointed out that PMI and Filsyn have only two interlocking incorporators and directors, namely, Patricio and Carlos Palanca, Jr.

Reiterating the ruling of this Court in Laguio v. NLRC,11 the Court of Appeals held that mere substantial identity of the incorporators of two corporations does not necessarily imply fraud, nor warrant the piercing of the veil of corporate fiction.

The Court of Appeals also pointed out that when SRTI and PMI executed the Dation in Payment with Lease, it was clear that SRTI did not assume the liabilities PMI incurred before the execution of the contract.

The Court of Appeals held that McLeod failed to substantiate his claim that all respondent corporations should be treated as one corporate

entity. The Court of Appeals thus upheld the NLRC’s finding that no employer-employee relationship existed between McLeod and respondent corporations except PMI.



The Court of Appeals ruled that Eric Hu, as an officer of PMI, should be exonerated from any liability, there being no proof of malice or bad faith on his part. The Court of Appeals, however, ruled that McLeod was entitled to recover from PMI and Patricio, the company’s Chairman and President.

The Court of Appeals pointed out that Patricio deliberately and maliciously evaded PMI’s financial obligation to McLeod. The Court of Appeals stated that, on several occasions, despite his approval, Patricio refused and ignored to pay McLeod’s retirement benefits. The Court of Appeals stated that the delay lasted for one year prompting McLeod to initiate legal action. The Court of Appeals stated that although PMI offered to pay McLeod his retirement benefits, this offer for P300,000 was still below the "floor limits" provided by law. The Court of Appeals held that an employee could demand payment of retirement benefits as a matter of right.

The Court of Appeals stated that considering that PMI was no longer in operation, its "officer should be held liable for acting on behalf of the corporation."

The Court of Appeals also ruled that since PMI did not have a retirement program providing for retirement benefits of its employees, Article 287 of the Labor Code must be followed. The Court of Appeals thus upheld the NLRC’s finding that McLeod was entitled to retirement pay equivalent to 22.5 days for every year of service from 1980 to 1992 based on a salary rate of P50,495 a month.

The Court of Appeals held that McLeod was not entitled to payment of vacation, sick leave and holiday pay because as Vice President and Plant Manager, McLeod is a managerial employee who, under Article 82 of the Labor Code, is not entitled to these benefits.

The Court of Appeals stated that for McLeod to be entitled to payment of service incentive leave and holidays, there must be an agreement to that effect between him and his employer.

Moreover, the Court of Appeals rejected McLeod’s argument that since PMI paid for his two round-trip tickets Manila-London in 1983 and 1986, he was also "entitled to unused airline tickets." The Court of Appeals stated that the fact that PMI granted McLeod "free transport to and from Manila and London for the year 1983 and 1986 does not ipso facto characterize it as regular that would establish a prevailing company policy."

The Court of Appeals also denied McLeod’s claims for underpayment of salaries and his 13th month pay for the year 1994. The Court of Appeals upheld the NLRC’s ruling that it could be deduced from McLeod’s own narration of facts that he agreed to the reduction of his compensation from P60,000 to P50,495 in August 1990 to November 1993.

The Court of Appeals found the award of moral damages for P50,000 in order because of the "stubborn refusal" of PMI and Patricio to respect McLeod’s valid claims.

The Court of Appeals also ruled that attorney’s fees equivalent to 10% of the total award should be given to McLeod under Article 2208, paragraph 2 of the Civil Code.12

Hence, this petition.

The Issues

McLeod submits the following issues for our consideration:


1. Whether the challenged Decision and Resolution of the 14th Division of the Court of Appeals promulgated on 15 June 2000 and 27 December 2000, respectively, in CA-G.R. SP No. 55130 are in accord with law and jurisprudence;

2. Whether an employer-employee relationship exists between the private respondents and the petitioner for purposes of determining employer liability to the petitioner;

3. Whether the private respondents may avoid their financial obligations to the petitioner by invoking the veil of corporate fiction;

4. Whether petitioner is entitled to the relief he seeks against the private respondents;

5. Whether the ruling of [this] Court in Special Police and Watchman Association (PLUM) Federation v. National Labor Relations Commission cited by the Office of the Solicitor General is applicable to the case of petitioner; and

6. Whether the appeal taken by the private respondents from the Decision of the labor arbiter meets the mandatory requirements recited in the Labor Code of the Philippines, as amended.13


The petition must fail.

McLeod asserts that the Court of Appeals should not have upheld the NLRC’s findings that he was a managerial employee of PMI from 20 June 1980 to 31 December 1992, and then a consultant of SRTI up to 30 November 1993. McLeod asserts that if only for this "brazen assumption," the Court of Appeals should not have sustained the NLRC’s ruling that his cause of action was only against PMI.

These assertions do not deserve serious consideration.

Records disclose that McLeod was an employee only of PMI.14 PMI hired McLeod as its acting Vice President and General Manager on 20 June 1980.15 PMI confirmed McLeod’s appointment as Vice President/Plant Manager in the Special Meeting of its Board of Directors on 10 February 1981.16 McLeod himself testified during the hearing before the Labor Arbiter that his "regular employment" was with PMI.17

When PMI’s rank-and-file employees staged a strike on 19 August 1989 to July 1992, PMI incurred serious business losses.18 This prompted PMI to stop permanently plant operations and to send a notice of closure to the Department of Labor and Employment on 21 July 1992.19

PMI informed its employees, including McLeod, of the closure.20 PMI paid its employees, including managerial employees, except McLeod, their unpaid wages, sick leave, vacation leave, prorated 13th month pay, and separation pay. Under the compromise agreement between PMI and its employees, the employer-employee relationship between them ended on 25 November 1992.21

Records also disclose that PMI extended McLeod’s service up to 31 December 1992 "to wind up some affairs" of the company.22 McLeod testified on cross-examination that he received his last salary from PMI in December 1992.23












It is thus clear that McLeod was a managerial employee of PMI from 20 June 1980 to 31 December 1992.

However, McLeod claims that after FETMI purchased PMI in January 1993, he "continued to work at the same plant with the same responsibilities" until 30 November 1993. McLeod claims that FETMI merely renamed PMI as SRTI. McLeod asserts that it was for this reason that when he reached the retirement age in 1993, he asked all the respondents for the payment of his benefits.24

These assertions deserve scant consideration.

What took place between PMI and SRTI was dation in payment with lease. Pertinent portions of the contract that PMI and SRTI executed on 15 June 1992 read:

WHEREAS, PMI is indebted to the Development Bank of the Philippines ("DBP") and as security for such debts (the "Obligations") has mortgaged its real properties covered by TCT Nos. T-38647, T-37136, and T-37135, together with all machineries and improvements found thereat, a complete listing of which is hereto attached as Annex "A" (the "Assets");

WHEREAS, by virtue of an inter-governmental agency arrangement, DBP transferred the Obligations, including the Assets, to the Asset Privatization Trust ("APT") and the latter has received payment for the Obligations from PMI, under APT’s Direct Debt Buy-Out ("DDBO") program thereby causing APT to completely discharge and cancel the mortgage in the Assets and to release the titles of the Assets back to PMI;

WHEREAS, PMI obtained cash advances from SRTC in the total amount of TWO HUNDRED TEN MILLION PESOS (P210,000,000.00) (the "Advances") to enable PMI to consummate the DDBO with APT, with SRTC subrogating APT as PMI’s creditor thereby;

WHEREAS, in payment to SRTC for PMI’s liability, PMI has agreed to transfer all its rights, title and interests in the Assets by way of a dation in payment to SRTC, provided that simultaneous with the dation in payment, SRTC shall grant unto PMI the right to lease the Assets under terms and conditions stated hereunder;

x x x x

NOW THEREFORE, for and in consideration of the foregoing premises, and of the terms and conditions hereinafter set forth, the parties hereby agree as follows:

1. CESSION. In consideration of the amount of TWO HUNDRED TEN MILLION PESOS (P210,000,000.00), PMI hereby cedes, conveys and transfers to SRTC all of its rights, title and interest in and to the Assets by way of a dation in payment.25 (Emphasis supplied)

As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the selling corporation fraudulently enters into the transaction to escape liability for those debts.26

None of the foregoing exceptions is present in this case.




Here, PMI transferred its assets to SRTI to settle its obligation to SRTI in the sum of P210,000,000. We are not convinced that PMI fraudulently transferred these assets to escape its liability for any of its debts. PMI had already paid its employees, except McLeod, their money claims.

There was also no merger or consolidation of PMI and SRTI.

Consolidation is the union of two or more existing corporations to form a new corporation called the consolidated corporation. It is a combination by agreement between two or more corporations by which their rights, franchises, and property are united and become those of a single, new corporation, composed generally, although not necessarily, of the stockholders of the original corporations.

Merger, on the other hand, is a union whereby one corporation absorbs one or more existing corporations, and the absorbing corporation survives and continues the combined business.

The parties to a merger or consolidation are called constituent corporations. In consolidation, all the constituents are dissolved and absorbed by the new consolidated enterprise. In merger, all constituents, except the surviving corporation, are dissolved. In both cases, however, there is no liquidation of the assets of the dissolved corporations, and the surviving or consolidated corporation acquires all their properties, rights and franchises and their stockholders usually become its stockholders.

The surviving or consolidated corporation assumes automatically the liabilities of the dissolved corporations, regardless of whether the creditors have consented or not to such merger or consolidation.27

In the present case, there is no showing that the subject dation in payment involved any corporate merger or consolidation. Neither is there any showing of those indicative factors that SRTI is a mere instrumentality of PMI.

Moreover, SRTI did not expressly or impliedly agree to assume any of PMI’s debts. Pertinent portions of the subject Deed of Dation in Payment with Lease provide, thus:

2. WARRANTIES AND REPRESENTATIONS. PMI hereby warrants and represents the following:

x x x x

(e) PMI shall warrant that it will hold SRTC or its assigns, free and harmless from any liability for claims of PMI’s creditors, laborers, and workers and for physical injury or injury to property arising from PMI’s custody, possession, care, repairs, maintenance, use or operation of the Assets except ordinary wear and tear;28(Emphasis supplied)

Also, McLeod did not present any evidence to show the alleged renaming of "Peggy Mills, Inc." to "Sta. Rosa Textiles, Inc."

Hence, it is not correct for McLeod to treat PMI and SRTI as the same entity.

Respondent corporations assert that SRTI hired McLeod as consultant after PMI stopped operations.29 On the other hand, McLeod asserts that he was respondent corporations’ employee from 1980 to 30 November 1993.30However, McLeod failed to present any proof of employer-employee relationship between him and Filsyn, SRTI, or FETMI. McLeod testified, thus:





ATTY. ESCANO:

Do you have any employment contract with Far Eastern Textile?

WITNESS:

It is my belief up the present time.

ATTY. AVECILLA:

May I request that the witness be allowed to go through his Annexes, Your Honor.

ATTY. ESCANO:

Yes, but I want a precise answer to that question. If he has an employment contract with Far Eastern Textile?

WITNESS:

Can I answer it this way, sir? There is not a valid contract but I was under the impression taking into consideration that the closeness that I had at Far Eastern Textile is enough during that period of time of the development of Peggy Mills to reorganize a staff. I was under the basic impression that they might still retain my status as Vice President and Plant Manager of the company.

ATTY. ESCANO:

But the answer is still, there is no employment contract in your possession appointing you in any capacity by Far Eastern?

WITNESS:

There was no written contract, sir.

x x x x

ATTY. ESCANO:

So, there is proof that you were in fact really employed by Peggy Mills?

WITNESS:

Yes, sir.

ATTY. ESCANO:

Of course, my interest now is to whether or not there is a similar document to present that you were employed by the other respondents like Filsyn Corporation?

WITNESS:

I have no document, sir.

ATTY. ESCANO:

What about Far Eastern Textile Mills?

WITNESS:

I have no document, sir.

ATTY. ESCANO:

And Sta. Rosa Textile Mills?

WITNESS:

There is no document, sir.31

x x x x

ATTY. ESCANO:

Q Yes. Let me be more specific, Mr. McLeod. Do you have a contract of employment from Far Eastern Textiles, Inc.?

A No, sir.

Q What about Sta. Rosa Textile Mills, do you have an employment contract from this company?

A No, sir.

x x x x

Q And what about respondent Eric Hu. Have you had any contract of employment from Mr. Eric Hu?

A Not a direct contract but I was taken in and I told to take over this from Mr. Eric Hu. Automatically, it confirms that Mr. Eric Hu, in other words, was under the control of Mr. Patricio Lim at that period of time.

Q No documents to show, Mr. McLeod?

A No. No documents, sir.32

McLeod could have presented evidence to support his allegation of employer-employee relationship between him and any of Filsyn, SRTI, and FETMI, but he did not. Appointment letters or employment contracts, payrolls, organization charts, SSS registration, personnel list, as well as testimony of co-employees, may serve as evidence of employee status.33

It is a basic rule in evidence that parties must prove their affirmative allegations. While technical rules are not strictly followed in the NLRC, this does not mean that the rules on proving allegations




are entirely ignored. Bare allegations are not enough. They must be supported by substantial evidence at the very least.34

However, McLeod claims that "for purposes of determining employer liability, all private respondents are one and the same employer" because: (1) they have the same address; (2) they are all engaged in the same business; and (3) they have interlocking directors and officers.35

This assertion is untenable.

A corporation is an artificial being invested by law with a personality separate and distinct from that of its stockholders and from that of other corporations to which it may be connected.36

While a corporation may exist for any lawful purpose, the law will regard it as an association of persons or, in case of two corporations, merge them into one, when its corporate legal entity is used as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The doctrine applies only when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime,37 or when it is made as a shield to confuse the legitimate issues, or where a corporation is the 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.38

To disregard the separate juridical personality of a corporation, the wrongdoing must be established clearly and convincingly. It cannot be presumed.39

Here, we do not find any of the evils sought to be prevented by the doctrine of piercing the corporate veil.

Respondent corporations may be engaged in the same business as that of PMI, but this fact alone is not enough reason to pierce the veil of corporate fiction.40

In Indophil Textile Mill Workers Union v. Calica,41 the Court ruled, thus:

In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the creation of the corporation is a devise to evade the application of the CBA between petitioner Union and private respondent Company. While we do not discount the possibility of the similarities of the businesses of private respondent and Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in granting the relief sought. The fact that the businesses of private respondent and Acrylic are related, that some of the employees of the private respondent are the same persons manning and providing for auxiliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in the same compound, it is our considered opinion that these facts are not sufficient to justify the piercing of the corporate veil of Acrylic.42 (Emphasis supplied)

Also, the fact that SRTI and PMI shared the same address, i.e., 11/F BA-Lepanto Bldg., Paseo de Roxas, Makati City,43 can be explained by the two companies’ stipulation in their Deed of Dation in Payment with Lease that "simultaneous with the dation in payment, SRTC shall grant unto PMI the right to lease the Assets under terms and conditions stated hereunder."44

As for the addresses of Filsyn and FETMI, Filsyn held office at 12th Floor, BA-Lepanto Bldg., Paseo de Roxas, Makati City,45 while FETMI held office at 18F, Tun Nan Commercial Building, 333 Tun Hwa South Road, Sec. 2, Taipei, Taiwan, R.O.C.46 Hence, they did not have the same address as that of PMI.














That respondent corporations have interlocking incorporators, directors, and officers is of no moment.

The only interlocking incorporators of PMI and Filsyn were Patricio and Carlos Palanca, Jr.47 While Patricio was Director and Board Chairman of Filsyn, SRTI, and PMI,48 he was never an officer of FETMI.

Eric Hu, on the other hand, was Director of Filsyn and SRTI.49 He was never an officer of PMI.

Marialen C. Corpuz, Filsyn’s Finance Officer,50 testified on cross-examination that (1) among all of Filsyn’s officers, only she was the one involved in the management of PMI; (2) only she and Patricio were the common officers between Filsyn and PMI; and (3) Filsyn and PMI are "two separate companies."51

Apolinario L. Posio, PMI’s Chief Accountant, testified that "SRTI is a different corporation from PMI."52

At any rate, the existence of interlocking incorporators, directors, and officers is not enough justification to pierce the veil of corporate fiction, in the absence of fraud or other public policy considerations.53

In Del Rosario v. NLRC,54 the Court ruled that substantial identity of the incorporators of corporations does not necessarily imply fraud.

In light of the foregoing, and there being no proof of employer-employee relationship between McLeod and respondent corporations and Eric Hu, McLeod’s cause of action is only against his former employer, PMI.

On Patricio’s personal liability, it is settled that in the absence of malice, bad faith, or specific provision of law, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities.55

To reiterate, a corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it. The rule is that obligations incurred by the corporation, acting through its directors, officers, and employees, are its sole liabilities.56

Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to a patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2) they consent to the issuance of watered down stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (3) they agree to hold themselves personally and solidarily liable with the corporation; or (4) they are made by specific provision of law personally answerable for their corporate action.57

Considering that McLeod failed to prove any of the foregoing exceptions in the present case, McLeod cannot hold Patricio solidarily liable with PMI.

The records are bereft of any evidence that Patricio acted with malice or bad faith. Bad faith is a question of fact and is evidentiary. Bad faith does not connote bad judgment or negligence. It












imports a dishonest purpose or some moral obliquity and conscious wrongdoing. It means breach of a known duty through some ill motive or interest. It partakes of the nature of fraud.58

In the present case, there is nothing substantial on record to show that Patricio acted in bad faith in terminating McLeod’s services to warrant Patricio’s personal liability. PMI had no other choice but to stop plant operations. The work stoppage therefore was by necessity. The company could no longer continue with its plant operations because of the serious business losses that it had suffered. The mere fact that Patricio was president and director of PMI is not a ground to conclude that he should be held solidarily liable with PMI for McLeod’s money claims.

The ruling in A.C. Ransom Labor Union-CCLU v. NLRC,59 which the Court of Appeals cited, does not apply to this case. We quote pertinent portions of the ruling, thus:

(a) Article 265 of the Labor Code, in part, expressly provides:

"Any worker whose employment has been terminated as a consequence of an unlawful lockout shall be entitled to reinstatement with full backwages."

Article 273 of the Code provides that:

"Any person violating any of the provisions of Article 265 of this Code shall be punished by a fine of not exceeding five hundred pesos and/or imprisonment for not less than one (1) day nor more than six (6) months."

(b) How can the foregoing provisions be implemented when the employer is a corporation? The answer is found in Article 212 (c) of the Labor Code which provides:

"(c) ‘Employer’ includes any person acting in the interest of an employer, directly or indirectly. The term shall not include any labor organization or any of its officers or agents except when acting as employer.".

The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. Since RANSOM is an artificial person, it must have an officer who can be presumed to be the employer, being the "person acting in the interest of (the) employer" RANSOM. The corporation, only in the technical sense, is the employer.

The responsible officer of an employer corporation can be held personally, not to say even criminally, liable for non-payment of back wages. That is the policy of the law.

x x x x

(c) If the policy of the law were otherwise, the corporation employer can have devious ways for evading payment of back wages. In the instant case, it would appear that RANSOM, in 1969, foreseeing the possibility or probability of payment of back wages to the 22 strikers, organized ROSARIO to replace RANSOM, with the latter to be eventually phased out if the 22 strikers win their case. RANSOM actually ceased operations on May 1, 1973, after the December 19, 1972 Decision of the Court of Industrial Relations was promulgated against RANSOM.60 (Emphasis supplied)




Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade payment of backwages to the 22 strikers. This situation, or anything similar showing malice or bad faith on the part of Patricio, does not obtain in the present case. In Santos v. NLRC,61 the Court held, thus:

It is true, there were various cases when corporate officers were themselves held by the Court to be personally accountable for the payment of wages and money claims to its employees. In A.C. Ransom Labor Union-CCLU vs. NLRC, for instance, the Court ruled that under the Minimum Wage Law, the responsible officer of an employer corporation could be held personally liable for nonpayment of backwages for "(i)f the policy of the law were otherwise, the corporation employer (would) have devious ways for evading payment of backwages." In the absence of a clear identification of the officer directly responsible for failure to pay the backwages, the Court considered the President of the corporation as such officer. The case was cited in Chua vs. NLRC in holding personally liable the vice-president of the company, being the highest and most ranking official of the corporation next to the President who was dismissed for the latter’s claim for unpaid wages.

A review of the above exceptional cases would readily disclose the attendance of facts and circumstances that could rightly sanction personal liability on the part of the company officer. In A.C. Ransom, the corporate entity was a family corporation and execution against it could not be implemented because of the disposition posthaste of its leviable assets evidently in order to evade its just and due obligations. The doctrine of "piercing the veil of corporate fiction" was thus clearly appropriate. Chua likewise involved another family corporation, and this time the conflict was between two brothers occupying the highest ranking positions in the company. There were incontrovertible facts which pointed to extreme personal animosity that resulted, evidently in bad faith, in the easing out from the company of one of the brothers by the other.

The basic rule is still that which can be deduced from the Court’s pronouncement in Sunio vs. National Labor Relations Commission; thus:

We come now to the personal liability of petitioner, Sunio, who was made jointly and severally responsible with petitioner company and CIPI for the payment of the backwages of private respondents. This is reversible error. The Assistant Regional Director’s Decision failed to disclose the reason why he was made personally liable. Respondents, however, alleged as grounds thereof, his being the owner of one-half (½) interest of said corporation, and his alleged arbitrary dismissal of private respondents.

Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of petitioner corporation. There appears to be no evidence on record that he acted maliciously or in bad faith in terminating the services of private respondents. His act, therefore, was within the scope of his authority and was a corporate act.

It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. Petitioner Sunio, therefore, should not have been made personally answerable for the payment of private respondents’ back salaries.62 (Emphasis supplied)

Thus, the rule is still that the doctrine of piercing the corporate veil applies only when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime. In the absence of malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer cannot be made personally liable for corporate liabilities. Neither Article 212(c) nor Article 273 (now 272) of the Labor Code expressly makes any corporate officer personally liable for



the debts of the corporation. As this Court ruled in H.L. Carlos Construction, Inc. v. Marina Properties Corporation:63

We concur with the CA that these two respondents are not liable. Section 31 of the Corporation Code (Batas Pambansa Blg. 68) provides:

"Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith ... shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders and other persons."

The personal liability of corporate officers validly attaches only when (a) they assent to a patently unlawful act of the corporation; or (b) they are guilty of bad faith or gross negligence in directing its affairs; or (c) they incur conflict of interest, resulting in damages to the corporation, its stockholders or other persons.

The records are bereft of any evidence that Typoco acted in bad faith with gross or inexcusable negligence, or that he acted outside the scope of his authority as company president. The unilateral termination of the Contract during the existence of the TRO was indeed contemptible – for which MPC should have merely been cited for contempt of court at the most – and a preliminary injunction would have then stopped work by the second contractor. Besides, there is no showing that the unilateral termination of the Contract was null and void.64

McLeod is not entitled to payment of vacation leave and sick leave as well as to holiday pay. Article 82, Title I, Book Three of the Labor Code, on Working Conditions and Rest Periods, provides:

Coverage. ─ The provisions of this title shall apply to employees in all establishments and undertakings whether for profit or not, but not to government employees, managerial employees, field personnel, members of the family of the employer who are dependent on him for support, domestic helpers, persons in the personal service of another, and workers who are paid by results as determined by the Secretary of Labor in appropriate regulations.

As used herein, "managerial employees" refer to those whose primary duty consists of the management of the establishment in which they are employed or of a department or subdivision thereof, and to other officers or members of the managerial staff. (Emphasis supplied)

As Vice President/Plant Manager, McLeod is a managerial employee who is excluded from the coverage of Title I, Book Three of the Labor Code. McLeod is entitled to payment of vacation leave and sick leave only if he and PMI had agreed on it. The payment of vacation leave and sick leave depends on the policy of the employer or the agreement between the employer and employee.65 In the present case, there is no showing that McLeod and PMI had an agreement concerning payment of these benefits.

McLeod’s assertion of underpayment of his 13th month pay in December 1993 is unavailing.66 As already stated, PMI stopped plant operations in 1992. McLeod himself testified that he received his last salary from PMI in December 1992. After the termination of the employer-employee relationship between McLeod and PMI, SRTI hired McLeod as consultant and not as employee. Since McLeod was no longer an employee, he was not entitled to the 13th month pay.67 Besides, there is no evidence on record that McLeod indeed received his alleged "reduced 13th month pay of P44,183.63" in December 1993.68







Also unavailing is McLeod’s claim that he was entitled to the "unpaid monetary equivalent of unused plane tickets for the period covering 1989 to 1992 in the amount of P279,300.00."69 PMI has no company policy granting its officers and employees expenses for trips abroad.70 That at one time PMI reimbursed McLeod for his and his wife’s plane tickets in a vacation to London71 could not be deemed as an established practice considering that it happened only once. To be considered a "regular practice," the giving of the benefits should have been done over a long period, and must be shown to have been consistent and deliberate.72

In American Wire and Cable Daily Rated Employees Union v. American Wire and Cable Co., Inc.,73 the Court held that for a bonus to be enforceable, the employer must have promised it, and the parties must have expressly agreed upon it, or it must have had a fixed amount and had been a long and regular practice on the part of the employer.

In the present case, there is no showing that PMI ever promised McLeod that it would continue to grant him the benefit in question. Neither is there any proof that PMI and McLeod had expressly agreed upon the giving of that benefit.

McLeod’s reliance on Annex M74 can hardly carry the day for him. Annex M, which is McLeod’s letter addressed to "Philip Lim, VP Administration," merely contains McLeod’s proposals for the grant of some benefits to supervisory and confidential employees. Contrary to McLeod’s allegation, Patricio did not sign the letter. Hence, the letter does not embody any agreement between McLeod and the management that would entitle McLeod to his money claims.

Neither can McLeod’s assertions find support in Annex U.75 Annex U is the Agreement which McLeod and Universal Textile Mills, Inc. executed in 1959. The Agreement merely contains the renewal of the service agreement which the parties signed in 1956.

McLeod cannot successfully pretend that his monthly salary of P60,000 was reduced without his consent.

McLeod testified that in 1990, Philip Lim explained to him why his salary would have to be reduced. McLeod said that Philip told him that "they were short in finances; that it would be repaid."76 Were McLeod not amenable to that reduction in salary, he could have immediately resigned from his work in PMI.

McLeod knew that PMI was then suffering from serious business losses. In fact, McLeod testified that PMI was not able to operate from August 1989 to 1992 because of the strike. Even before 1989, as Vice President of PMI, McLeod was aware that the company had incurred "huge loans from DBP."77 As it happened, McLeod continued to work with PMI. We find it pertinent to quote some portions of Apolinario Posio’s testimony, to wit:

Q You also stated that before the period of the strike as shown by annex "K" of the reply filed by the complainant which was I think a voucher, the salary of Mr. McLeod was roughly P60,000.00 a month?

A Yes, sir.

Q And as shown by their annex "L" to their reply, that this was reduced to roughly P50,000.00 a month?

A Yes, sir.










Q You stated that this was indeed upon the instruction by the Vice-President of Peggy Mills at that time and that was Mr. Philip Lim, would you not?

A Yes, sir.

Q Of your own personal knowledge, can you say if this was, in fact, by agreement between Mr. Philip Lim or any other officers of Peggy Mills and Mr. McLeod?

A If I recall it correctly, I assume it was an agreement, verbal agreement with, between Mr. Philip Lim and Mr. McLeod, because the voucher that we prepared was actually acknowledged by Mr. McLeod, the reduced amount was acknowledged by Mr. McLeod thru the voucher that we prepared.

Q In other words, Mr. Witness, you mean to tell us that Mr. McLeod continuously received the reduced amount ofP50,000.00 by signing the voucher and receiving the amount in question?

A Yes, sir.

Q As far as you remember, Mr. Posio, was there any complaint by Mr. McLeod because of this reduced amount of his salary at that time?

A I don’t have any personal knowledge of any complaint, sir.

Q At least, that is in so far as you were concerned, he said nothing when he signed the voucher in question?

A Yes, sir.

Q Now, you also stated that the reason for what appears to be an agreement between Peggy Mills and Mr. McLeod in so far as the reduction of his salary from P60,000.00 to P50,000.00 a month was because he would have a reduced number of working days in view of the strike at Peggy Mills, is that right?

A Yes, sir.

Q And that this was so because on account of the strike, there was no work to be done in the company?

A Yes, sir.78

x x x x

Q Now, you also stated if you remember during the first time that you testified that in the beginning, the monthly salary of the complainant was P60,000.00, is that correct?

A Yes, sir.

Q And because of the long period of the strike, when there was no work to be done, by agreement with the complainant, his monthly salary was adjusted to only P50,495 because he would not have to report for work on Saturday. Do you remember having made that explanation?


A Yes, sir.

Q You also stated that the complainant continuously received his monthly salary in the adjusted amount ofP50,495.00 monthly signing the necessary vouchers or pay slips for that without complaining, is that not right, Mr. Posio?

A Yes, sir.79

Since the last salary that McLeod received from PMI was P50,495, that amount should be the basis in computing his retirement benefits. McLeod must be credited only with his service to PMI as it had a juridical personality separate and distinct from that of the other respondent corporations.

Since PMI has no retirement plan,80 we apply Section 5, Rule II of the Rules Implementing the New Retirement Law which provides:

5.1 In the absence of an applicable agreement or retirement plan, an employee who retires pursuant to the Act shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months being considered as one whole year.

5.2 Components of One-half (1/2) Month Salary. ─ For the purpose of determining the minimum retirement pay due an employee under this Rule, the term "one-half month salary" shall include all of the following:

(a) Fifteen (15) days salary of the employee based on his latest salary rate. x x x

With McLeod having worked with PMI for 12 years, from 1980 to 1992, he is entitled to a retirement pay equivalent to ½ month salary for every year of service based on his latest salary rate of P50,495 a month.

There is no basis for the award of moral damages.

Moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is guilty of gross negligence amounting to bad faith, or in wanton disregard of his contractual obligations. The breach must be wanton, reckless, malicious, or in bad faith, oppressive or abusive.81 From the records of the case, the Court finds no ultimate facts to support a conclusion of bad faith on the part of PMI.

Records disclose that PMI had long offered to pay McLeod his money claims. In their Comment, respondents assert that they offered to pay McLeod the sum of P840,000, as "separation benefits, and not P300,000, if only to buy peace and to forestall any complaint" that McLeod may initiate before the NLRC. McLeod admitted at the hearing before the Labor Arbiter that PMI has made this offer ─

ATTY. ESCANO:

x x x According to your own statement in your Position Paper and I am referring to page 8, your unpaid retirement benefit for fourteen (14) years of service at P60,000.00 per year is P840,000.00, is that correct?

WITNESS:




That is correct, sir.

ATTY. ESCANO:

And this amount is correct P840,000.00, according to your Position Paper?

WITNESS:

That is correct, sir.

ATTY. ESCANO:

The question I want to ask is, are you aware that this amount was offered to you sometime last year through your own lawyer, my good friend, Atty. Avecilla, who is right here with us?

WITNESS:

I was aware, sir.

ATTY. ESCANO:

So this was offered to you, is that correct?

WITNESS:

I was told that a fixed sum of P840,000.00 was offered.

ATTY. ESCANO:

And , of course, the reason, if I may assume, that you declined this offer was that, according to you, there are other claims which you would like to raise against the Respondents which, by your impression, they were not willing to pay in addition to this particular amount?

WITNESS:

Yes, sir.

ATTY. ESCANO:

The question now is, if the same amount is offered to you by way of retirement which is exactly what you stated in your own Position Paper, would you accept it or not?

WITNESS:

Not on the concept without all the basic benefits due me, I will refuse.82

x x x x

ATTY. ROXAS:


Q You mentioned in the cross-examination of Atty. Escano that you were offered the separation pay in 1994, is that correct, Mr. Witness?

WITNESS:

A I was offered a settlement of P300,000.00 for complete settlement and that was I think in January or February 1994, sir.

ATTY. ESCANO:

No. What was mentioned was the amount of P840,000.00.

WITNESS:

What did you say, Atty. Escano?

ATTY. ESCANO:

The amount that I mentioned was P840,000.00 corresponding to the . . . . . . .

WITNESS:

May I ask that the question be clarified, your Honor?

ATTY. ROXAS:

Q You mentioned that you were offered for the settlement of your claims in 1994 for P840,000.00, is that right, Mr. Witness?

A During that period in time, while the petition in this case was ongoing, we already filed a case at that period of time, sir. There was a discussion. To the best of my knowledge, they are willing to settle for P840,000.00 and based on what the Attorney told me, I refused to accept because I believe that my position was not in anyway due to a compromise situation to the benefits I am entitled to.83

Hence, the awards for exemplary damages and attorney’s fees are not proper in the present case.84

That respondent corporations, in their appeal to the NLRC, did not serve a copy of their memorandum of appeal upon PMI is of no moment. Section 3(a), Rule VI of the NLRC New Rules of Procedure provides:

Requisites for Perfection of Appeal. ─ (a) The appeal shall be filed within the reglementary period as provided in Section 1 of this Rule; shall be under oath with proof of payment of the required appeal fee and the posting of a cash or surety bond as provided in Section 5 of this Rule; shall be accompanied by a memorandum of appeal x x x and proof of service on the other party of such appeal. (Emphasis supplied)

The "other party" mentioned in the Rule obviously refers to the adverse party, in this case, McLeod. Besides, Section 3, Rule VI of the Rules which requires, among others, proof of service of the



memorandum of appeal on the other party, is merely a rundown of the contents of the required memorandum of appeal to be submitted by the appellant. These are not jurisdictional requirements.85

WHEREFORE, we DENY the petition and AFFIRM the Decision of the Court of Appeals in CA-G.R. SP No. 55130, with the following MODIFICATIONS: (a) the retirement pay of John F. McLeod should be computed at ½ month salary for every year of service for 12 years based on his salary rate of P50,495 a month; (b) Patricio L. Lim is absolved from personal liability; and (c) the awards for moral and exemplary damages and attorney’s fees are deleted. No pronouncement as to costs.

SO ORDERED.

THIRD DIVISION

ATTY. ANDREA UY and FELIX G.R. No. 157851


YUSAY,Petitioners,

- versus - ARLENE VILLANUEVA and NATIONAL LABOR RELATIONS COMMISSION,

Respondents.

Present: YNARES-SANTIAGO, J., Chairperson,AUSTRIA-MARTINEZ,CHICO-NAZARIO, andNACHURA, JJ. Promulgated: June 29, 2007

x------------------------------------------------------------------------------------x

D E C I S I O N

NACHURA, J.:

This appeal on certiorari under Rule 45 of the Rules of Court seeks the

nullification of the February 28, 2002 Resolution and the February 27, 2003 Resolution denying the motion for reconsideration thereof of the Former Tenth Division of the Court of Appeals (CA) in CA-G.R. SP No. 68680.

The antecedents of the case are as follows: Countrywide Rural Bank of La Carlota, Inc. (Countrywide Bank) is a private

banking corporation engaged in rural banking and other allied services through its branches nationwide.

Sometime in 1998, Countrywide Bank experienced liquidity problems and

its treasury department was unable to comply with its branches’ demands for fresh funds. Its various branches eventually experienced bank runs.[1]

http://sc.judiciary.gov.ph/jurisprudence/2007/june2007/157851.htm#_ftn1

Several of the bank’s depositors were alarmed at the prospect of losing their

deposits and investments. A group of depositors, holding about 70% of the bank’s deposit accounts, met and agreed to organize themselves into a “Committee of Depositors.” Petitioner Felix Yusay was elected by the Committee as Chairman of the Interim Board of Directors, while petitioner Atty. Andrea Uy was designated Secretary. According to petitioners, the Committee was formed for the purpose of protecting their collective interests and to increase their chances of recovering their deposits.[2]

With the consent and approval of the incumbent Board of Directors, the

Committee of Depositors assumed temporary administrative control of the remaining operations of the bank.[3] The incumbent Board of Directors informed the Committee that some employees had tendered courtesy resignations, while some had expressed their willingness to resign upon official request. The Committee then accepted some of the courtesy resignations.[4]

The Bangko Sentral ng Pilipinas (BSP) subsequently placed the bank under

receivership and appointed a liquidator. Meanwhile, the Philippine Deposit Insurance System (PDIC) commenced the processing of claims for return of deposits.[5]

Realizing that their bid to rehabilitate the bank had failed, the Committee of

Depositors disbanded.[6]

Eventually, three cases for illegal dismissal were filed against Countrywide

Bank before the National Labor Relations Commission (NLRC). These were filed by Amalia Bueno (NLRC Case No. RAB-XI-01-50037-99), Amelia Valdez and Lyn Villa (NLRC Case No. RAB-XI-01-20039-99), and herein private respondent Arlene Villanueva (NLRC Case No. RAB-XI-01-50043-99).[7]

Private respondent Villanueva avers that she was a regular employee of

Countrywide Bank’s Marbel, South Cotabato branch. On December 7, 1998, she received a memorandum from the Interim Board of Directors accepting her courtesy resignation. She, however, denies that she submitted a written courtesy resignation.[8]








On November 16, 1999, Labor Arbiter Arturo P. Gamolo of NLRC Sub-

Regional Arbitration Branch No. XI, General Santos City rendered a Decision in RAB-XI-01-50043-99, the dispositive portion of which reads:

WHEREFORE, premises considered, respondent Country Wide Rural

Bank of La Carlota, Inc. and Individual Respondents Atty. Andrea Uy and Felix Yusay are solidarily liable to pay complainant Arlene Villanueva the sum PESOS: ONE HUNDRED THIRTEEN THOUSAND

SIX HUNDRED FORTY (P113,640.00) ONLY representing her monetary awards and attorney’s fees.[9]

On January 21, 2000, Villanueva filed a Motion for Execution of Judgment[10] to which Countrywide Bank, through the PDIC, filed an Opposition. [11]

Thereafter, Labor Arbiter Gamolo rendered a Resolution and Order for all

three cases against Countrywide Bank, the dispositive portion of which reads:

Wherefore, finding the PDIC’s opposition to complainants’ motion for execution meritorious, complainants are hereby directed to file their respective money claims as adjudged in the decisions rendered in the above-entitled cases before the liquidation court for the latter’s approval of inclusion in the Bank’s Distribution Plan.

SO ORDERED.[12]

Petitioners then filed a Notice of Appeal with Memorandum of Appeal with the NLRC, 5th Division, Cagayan de Oro City.[13] On November 27, 2000, the NLRC dismissed the appeal for being filed out of time.[14] Petitioners filed a motion for reconsideration.[15] The NLRC then recalled its November 27, 2000 Resolution and set the case for clarificatory hearing.[16]

Petitioners, however, received the Resolution five days after the scheduled

clarificatory hearing. They instead filed their memorandum in lieu of the clarificatory hearing.

On October 10, 2001, the NLRC rendered another Resolution reinstating

its November 27, 2000 Resolution.[17]

Petitioners filed a petition for certiorari before the CA to nullify the

NLRC’s November 27, 2000 and October 10, 2001 Resolutions.










On February 28, 2002, the Tenth Division of the CA dismissed the petition for certiorari on technical grounds. In particular, the CA cited the following grounds for dismissal:

1. Failure to attach necessary pleadings and comments which are material

portion of the records in able [sic] for this to [sic] judiciously evaluate the merit of the case such as:

a.) memorandum of appeal filed by the petitioner on May 18,

2000; b.) Motion for Reconsideration of the petitioners dated December

21, 2000; in violation of Section 3, Rule 46 of the 1997 Rules of Civil Procedure as amended;

2. Failure to attach certified photocopy copies [sic] of the assailed resolutions

and decisions of the original documents in violation of the same rules; and

3. Failure to send copy of the resolution to the public respondent.[18]

Petitioners filed a Motion for Reconsideration[19] arguing that the failure to attach the abovementioned documents was merely a procedural lapse on their part. They, likewise, attached the documents to the motion.

Their motion for reconsideration having been denied,[20] petitioners filed the

present appeal on certiorari.

They argue that the CA’s dismissal of their petition for certiorari on technical grounds deprived them of substantial justice. They assail the CA’s Resolution dismissing their petition on technical grounds. They cite previous decisions of this Court where it held that technicalities can be relaxed in order to uphold the substantive rights of the parties.[21]

They likewise allege that the Labor Arbiter ruled in favor of respondent

Villanueva based only on the pleadings filed by the latter. They allege that they were not properly served summons and notices which led to their failure to file their position paper. They also argue that they cannot be held solidarily liable to





private respondent because they were mere depositors of the bank and not stockholders. Even assuming that they were stockholders, they still cannot be held individually liable for the bank’s obligations.

On the other hand, private respondent argues that the appeal

on certiorari merely reiterated arguments and issues on questions of facts that have already been passed upon by competent authority.[22] Having none of the circumstances that will warrant exemption from the requirement that a petition for review on certiorari under Rule 45 shall only raise questions of law, the petition must be dismissed. Likewise, private respondent argues that the petition has no other purpose than to delay the final execution of the decision.

While this case was pending, petitioners filed a Manifestation [23] on February

20, 2007, informing this Court that the case entitled Atty. Andrea Uy and Felix Yusay v. Amalia Bueno,[24] docketed as G.R. No. 159119 and involving the same factual antecedents as the present case, was decided by this Court’s Second Division on March 14, 2006 in this wise:

IN VIEW WHEREOF, the petition is GRANTED. The Court of Appeals

Decision dated January 24, 2003 and Resolution dated May 26, 2003 in CA-G.R. SP No. 70672, which found petitioner Atty. Andrea Uy[25] solidarily liable with Countrywide Rural Bank of [La] Carlota, Inc. in Marbel, Koronadal City, South Cotabato, are REVERSED. No costs.

SO ORDERED.[26]

In the Bueno case, the Court found that, per the records of the case, petitioner Uy was a “mere depositor,”[27] one of several depositors who formed themselves into a group or association indicating their intention to help rehabilitate Countrywide Rural Bank.[28] It also found no evidence that the Committee of Depositors that elected petitioner Uy as Interim President and Corporate Secretary was recognized by the Bangko Sentral ng Pilipinas, hence, had no legal authority to act for the bank.[29] As such, the Court said:

Lacking this evidence, the act of petitioner Uy in dismissing the

respondent cannot be deemed an act as an officer of the bank. Consequently, it cannot be held that there existed an employer-employee relationship between petitioner Uy and respondent Bueno when the former allegedly dismissed the









latter. This requirement of employer-employee relationship is jurisdictional for the provisions of the Labor Code, specifically Book VI thereof, on Post-Employment, to apply. Since the employer-employee relationship between petitioner Uy and respondent Bueno was not established, the labor arbiter never acquired jurisdiction over petitioner Uy. Consequently, whether petitioner Uy was properly served summons is immaterial. Likewise, that she terminated the services of respondent Bueno in bad faith and with malice is of no moment. Her liability, if any, should be determined in another forum.[30]

The Court noted the manifestation in a Resolution[31] dated April 23, 2007. We find the present petition meritorious. At the outset, we note that Countrywide Bank did not appeal the NLRC’s

rulings. As to the bank, therefore, the NLRC Decision has become final and executory.

Rule 45 of the Rules of Civil Procedure provides that only questions of law

shall be raised in an appeal by certiorari before this Court. This rule, however, admits of certain exceptions, namely, (1) when the findings are grounded entirely on speculations, surmises, or conjectures; (2) when the inference made is manifestly mistaken, absurd, or impossible; (3) when there is a grave abuse of discretion; (4) when the judgment is based on misappreciation of facts; (5) when the findings of fact are conflicting; (6) when in making its findings, the same are contrary to the admissions of both appellant and appellee; (7) when the findings are contrary to those of the trial court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in the petition as well as in the petitioner’s main and reply briefs are not disputed by the respondent; and (10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on record.[32]

In this case, the CA committed grave abuse of discretion in dismissing the

petition without first examining its merits. The policy of our judicial system is to encourage full adjudication of the merits of an appeal. In the exercise of its equity jurisdiction, this Court may reverse the dismissal of appeals that are grounded merely on technicalities.[33]





In the past, the Court has held that technicalities should not be permitted to stand in the way of equitably and completely resolving the rights and obligations of the parties. Where the ends of substantial justice would be better served, the application of technical rules of procedure may be relaxed.[34] Rules of procedure should indeed be viewed as mere tools designed to facilitate the attainment of justice.[35]

Section 1, Rule 65 of the Rules of Court provides:

SECTION 1. Petition for certiorari. – When any tribunal, board or officer exercising judicial or quasi-judicial functions has acted without or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition in the proper court, alleging the facts with certainty and praying that judgment be rendered annulling or modifying the proceedings of such tribunal, board or officer, and granting such incidental reliefs as law and justice may require.

The petition shall be accompanied by a certified true copy of the

judgment, order or resolution subject thereof, copies of all pleadings and documents relevant and pertinent thereto, and a sworn certification of non-forum shopping as provided in the third paragraph of Section 3, Rule 46. (emphasis supplied)

Records show that in the petition for certiorari, filed before the CA, the petitioners attached photocopies of the assailed October 10, 2001 NLRC Resolution,[36] the NLRCResolution dated November 27, 2000,[37] the Labor Arbiter’s Decision dated November 16, 1999,[38] and the Labor Arbiter’s Resolution and Order dated April 17, 2000.[39]Subsequently, when the CA dismissed the petition on technical grounds, petitioners filed a motion for reconsideration explaining the reason for the omission and attaching, in addition to the abovementioned documents, the other documents referred to in the CA Resolution.

The Court’s ruling in the case of Garcia v. Philippine Airlines[40] is most

instructive, to wit:








It is evident, therefore, that aside from the assailed decision, order or resolution, not every pleading or document mentioned in the petition is required to be submitted – only those that are pertinent and relevant to the judgment, order or resolution subject of the petition. The initial determination of what pleadings, documents or orders are relevant and pertinent to the petition rests on the petitioner. If, upon its initial review of the petition, the CA is of the view that additional pleadings, documents or order should have been submitted and appended to the petition, the following are its options: (a) dismiss the petition under the last paragraph of Rule 46 of the Rules of Court; (b) order the petitioner to submit the required additional pleadings, documents, or order within a specific period of time; or (c) order the petitioner to file an amended petition appending thereto the required pleadings, documents or order within a fixed period.

If the CA opts to dismiss the petition outright and the petitioner files a

motion for the reconsideration of such dismissal, appending thereto the requisite pleadings, documents or order/resolution with an explanation for the failure to append the required documents to the original petition, this would constitute substantial compliance with the Rules of Court. In such case, then, the petition should be reinstated. As this Court emphasized in Cusi-Hernandez v. Diaz:

x x x x We must stress that “cases should be determined on the merits after full

opportunity to all parties for ventilation of their causes and defenses, rather than on technicality or some procedural imperfections. In that way, the ends of justice would be served better.” Moreover, the Court has held:

“Dismissal of appeals purely on technical grounds is frowned upon and

the rules of procedure ought not to be applied in a very rigid, technical sense, for they are adopted to help secure, not override, substantial justice, and thereby defeat their very aims.”

Rules of procedure are mere tools designed to expedite the decision or

resolution of cases and other matters pending in court. A strict and rigid application of rules that would result in technicalities that tend to frustrate rather than promote substantial justice must be avoided. (citations omitted)

In putting a premium on technical rules over the just resolution of the case, therefore, the CA overlooked the right of petitioners to the full adjudication of their petition on its merits. Indeed, while labor laws mandate the speedy administration of justice with least attention to technicalities, this must be done without sacrificing the fundamental requisites of due process.[41]


We now proceed to rule on the merits of the case. In order to sustain a finding of illegal dismissal, we must first determine the

relationship between the petitioners and private respondent. Illegal dismissal presupposes that there was an employer-employee relationship between the dismissed employee and the persons complained of.

To determine whether there was an employer-employee relationship

between petitioners and private respondent, the Court has consistently used the “four-fold” test. The test calls for the determination of (1) whether the alleged employer has the power of selection and engagement of an employee; (2) whether he has control of the employee with respect to the means and methods by which work is to be accomplished; (3) whether he has the power to dismiss; and (4) whether the employee was paid wages. Of the four, the control test is the most important element.[42]

In the instant case, all these elements are attributable to the bank itself and

not to petitioners. There is no question that private respondent was an employee of the bank. As mentioned above, the NLRC Decision has become final and executory as to the bank. Its liability for private respondent’s dismissal is no longer in dispute.

The same cannot be said of petitioners. Petitioners assumed only limited

administrative control of the bank as part of the “Committee of Depositors.” However, there is no showing that they took over the management and control of the bank.

Given that there is in fact no employer-employee relationship between

petitioners and private respondents, the Labor Arbiter, and consequently, the NLRC, is without jurisdiction to adjudicate the dispute between them. The cases a Labor Arbiter can hear and decide are “employment-related.”[43]

Even assuming that an employer-employee relationship does exist between

petitioners and private respondent, the former still cannot be held liable with Countrywide Bank for the illegal dismissal of private respondent. Corporate officers are not personally liable for the money claims of discharged corporate



employees, unless they acted with evident malice and bad faith in terminating their employment.[44]

First, we agree with petitioners that they are not corporate officers of the

bank. It has been held that an “office” is created by the charter of the corporation

and the officer is elected by the directors or stockholders. On the other hand, an “employee” usually occupies no office and generally is employed not by action of the directors or stockholders but by the managing officer of the corporation who also determines the compensation to be paid to such employee.[45]

Given this distinction, petitioners are neither officers nor employees of the

bank. They are mere depositors who sought to manage the bank in order to save it. Next, settled is the rule in this jurisdiction that a corporation is vested by law

with a legal personality separate and distinct from those acting for and in its behalf and, in general, from the people comprising it.[46]

The general rule is that obligations incurred by the corporation, acting

through its directors, officers, and employees, are its sole liabilities. However, solidary liability may be incurred, but only under the following exceptional circumstances:

1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent to patently unlawful acts of the corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; (c) are guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons; 2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file with the corporate secretary his written objection thereto; 3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the corporation; or 4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.[47]





Not one of these circumstances is present in this case. Furthermore, the doctrine of piercing the veil of corporate fiction finds no

application in the case. Piercing the veil of corporate fiction may only be done when “the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime.”[48]

The general rule is that a corporation will be looked upon as a separate legal

entity, unless and until sufficient reason to the contrary appears. For the separate juridical personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly established. It cannot be presumed.[49] Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a corporation is not in itself sufficient ground for disregarding the separate corporate personality.[50]

In the case at bar, petitioners are not even stockholders of the bank but mere

depositors. That they assumed temporary control of the bank’s administration did not change the character of their relationship with the bank. In fact, their bid to convert their interest in the bank to that of stockholders failed as the BSP denied their plan to rehabilitate the bank.

Finally, we have noted petitioners’ Manifestation[51] dated January 31,

2007 and this Court’s decision in Atty. Andrea Uy and Felix Yusay v. Amalia Bueno.[52]

In previous cases, the Court has held, “When a court has laid down a

principle of law as applicable to a certain set of facts, it will adhere to that principle and apply it to all future cases in which the facts are substantially the same. Stare decisis et non quieta movere. Stand by the decision and disturb not what is settled. It simply means that a conclusion reached in one case should be applied to those that follow if the facts are substantially the same, even though the parties may be different. It comes from the basic principle of justice that like cases ought to be decided alike. Thus, where the same question relating to the same event is brought by parties similarly situated as in a previous case already litigated and decided by a






competent court, the rule of stare decisis is a bar to any attempt to relitigate the same issue.”[53]

Petitioners’ liability, if there be any, must be determined in the proper action

and at the proper forum. WHEREFORE, premises considered, the petition is GRANTED.

The February 28, 2002 Resolution in CA-G.R. SP No. 68680 of the Court of Appeals is REVERSEDand SET ASIDE. The Decision of the Labor Arbiter in RAB-XI-01-50037-99, finding petitioners solidarily liable with Countrywide Rural Bank of La Carlota is, likewise,REVERSED and SET ASIDE. No pronouncement as to costs.

SO ORDERED.



Manila

THIRD DIVISION

G.R. No. 159617 August 8, 2007

ROBERTO C. SICAM and AGENCIA de R.C. SICAM, INC., petitioners, vs.LULU V. JORGE and CESAR JORGE, respondents.

D E C I S I O N

AUSTRIA-MARTINEZ, J.:

Before us is a Petition for Review on Certiorari filed by Roberto C. Sicam, Jr. (petitioner Sicam) and Agencia deR.C. Sicam, Inc. (petitioner corporation) seeking to annul the Decision1 of the Court of Appeals dated March 31, 2003, and its Resolution2 dated August 8, 2003, in CA G.R. CV No. 56633.

It appears that on different dates from September to October 1987, Lulu V. Jorge (respondent Lulu) pawned several pieces of jewelry with Agencia de R. C. Sicam located at No. 17 Aguirre Ave., BF Homes Parañaque, Metro Manila, to secure a loan in the total amount of P59,500.00.

On October 19, 1987, two armed men entered the pawnshop and took away whatever cash and jewelry were found inside the pawnshop vault. The incident was entered in the police blotter of the Southern Police District, Parañaque Police Station as follows:

Investigation shows that at above TDPO, while victims were inside the office, two (2) male unidentified persons entered into the said office with guns drawn. Suspects(sic) (1) went straight inside and poked his gun toward Romeo Sicam and thereby tied him with an electric wire while suspects (sic) (2) poked his gun toward Divina Mata and Isabelita Rodriguez and ordered them to lay (sic) face flat on the floor. Suspects asked forcibly the case and assorted pawned jewelries items mentioned above.

Suspects after taking the money and jewelries fled on board a Marson Toyota unidentified plate number.3

Petitioner Sicam sent respondent Lulu a letter dated October 19, 1987 informing her of the loss of her jewelry due to the robbery incident in the pawnshop. On November 2, 1987, respondent Lulu then wrote a letter4 to petitioner Sicam expressing disbelief stating that when the robbery happened, all jewelry pawned were deposited with Far East Bank near the pawnshop since it had been the practice that before they could withdraw, advance notice must be given to the pawnshop so it could withdraw the jewelry from the bank. Respondent Lulu then requested petitioner Sicam to prepare the pawned jewelry for withdrawal on November 6, 1987 but petitioner Sicam failed to return the jewelry.

On September 28, 1988, respondent Lulu joined by her husband, Cesar Jorge, filed a complaint against petitioner Sicam with the Regional Trial Court of Makati seeking indemnification for the loss





of pawned jewelry and payment of actual, moral and exemplary damages as well as attorney's fees. The case was docketed as Civil Case No. 88-2035.

Petitioner Sicam filed his Answer contending that he is not the real party-in-interest as the pawnshop was incorporated on April 20, 1987 and known as Agencia de R.C. Sicam, Inc; that petitioner corporation had exercised due care and diligence in the safekeeping of the articles pledged with it and could not be made liable for an event that is fortuitous.

Respondents subsequently filed an Amended Complaint to include petitioner corporation.

Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is concerned considering that he is not the real party-in-interest. Respondents opposed the same. The RTC denied the motion in an Order dated November 8, 1989.5

After trial on the merits, the RTC rendered its Decision6 dated January 12, 1993, dismissing respondents’ complaint as well as petitioners’ counterclaim. The RTC held that petitioner Sicam could not be made personally liable for a claim arising out of a corporate transaction; that in the Amended Complaint of respondents, they asserted that "plaintiff pawned assorted jewelries in defendants' pawnshop"; and that as a consequence of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of a stockholder.

The RTC further ruled that petitioner corporation could not be held liable for the loss of the pawned jewelry since it had not been rebutted by respondents that the loss of the pledged pieces of jewelry in the possession of the corporation was occasioned by armed robbery; that robbery is a fortuitous event which exempts the victim from liability for the loss, citing the case of Austria v. Court of Appeals;7 and that the parties’ transaction was that of a pledgor and pledgee and under Art. 1174 of the Civil Code, the pawnshop as a pledgee is not responsible for those events which could not be foreseen.

Respondents appealed the RTC Decision to the CA. In a Decision dated March 31, 2003, the CA reversed the RTC, the dispositive portion of which reads as follows:

WHEREFORE, premises considered, the instant Appeal is GRANTED, and the Decision dated January 12, 1993,of the Regional Trial Court of Makati, Branch 62, is hereby REVERSED and SET ASIDE, ordering the appellees to pay appellants the actual value of the lost jewelry amounting to P272,000.00, and attorney' fees of P27,200.00.8

In finding petitioner Sicam liable together with petitioner corporation, the CA applied the doctrine of piercing the veil of corporate entity reasoning that respondents were misled into thinking that they were dealing with the pawnshop owned by petitioner Sicam as all the pawnshop tickets issued to them bear the words "Agencia de R.C. Sicam"; and that there was no indication on the pawnshop tickets that it was the petitioner corporation that owned the pawnshop which explained why respondents had to amend their complaint impleading petitioner corporation.

The CA further held that the corresponding diligence required of a pawnshop is that it should take steps to secure and protect the pledged items and should take steps to insure itself against the loss of articles which are entrusted to its custody as it derives earnings from the pawnshop trade which petitioners failed to do; that Austria is not applicable to this case since the robbery incident happened in 1961 when the criminality had not as yet reached the levels attained in the present day; that they are at least guilty of contributory negligence and should be held liable for the loss of jewelries; and that robberies and hold-ups are foreseeable risks in that those engaged in the pawnshop business are expected to foresee.





The CA concluded that both petitioners should be jointly and severally held liable to respondents for the loss of the pawned jewelry.

Petitioners’ motion for reconsideration was denied in a Resolution dated August 8, 2003.

Hence, the instant petition for review with the following assignment of errors:

THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED ITSELF TO REVERSAL, WHEN IT ADOPTED UNCRITICALLY (IN FACT IT REPRODUCED AS ITS OWN WITHOUT IN THE MEANTIME ACKNOWLEDGING IT) WHAT THE RESPONDENTS ARGUED IN THEIR BRIEF, WHICH ARGUMENT WAS PALPABLY UNSUSTAINABLE.

THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED ITSELF TO REVERSAL BY THIS HONORABLE COURT, WHEN IT AGAIN ADOPTED UNCRITICALLY (BUT WITHOUT ACKNOWLEDGING IT) THE SUBMISSIONS OF THE RESPONDENTS IN THEIR BRIEF WITHOUT ADDING ANYTHING MORE THERETO DESPITE THE FACT THAT THE SAID ARGUMENT OF THE RESPONDENTS COULD NOT HAVE BEEN SUSTAINED IN VIEW OF UNREBUTTED EVIDENCE ON RECORD.9

Anent the first assigned error, petitioners point out that the CA’s finding that petitioner Sicam is personally liable for the loss of the pawned jewelries is "a virtual and uncritical reproduction of the arguments set out on pp. 5-6 of the Appellants’ brief."10

Petitioners argue that the reproduced arguments of respondents in their Appellants’ Brief suffer from infirmities, as follows:

(1) Respondents conclusively asserted in paragraph 2 of their Amended Complaint that Agencia de R.C. Sicam, Inc. is the present owner of Agencia de R.C. Sicam Pawnshop, and therefore, the CA cannot rule against said conclusive assertion of respondents;

(2) The issue resolved against petitioner Sicam was not among those raised and litigated in the trial court; and

(3) By reason of the above infirmities, it was error for the CA to have pierced the corporate veil since a corporation has a personality distinct and separate from its individual stockholders or members.

Anent the second error, petitioners point out that the CA finding on their negligence is likewise an unedited reproduction of respondents’ brief which had the following defects:

(1) There were unrebutted evidence on record that petitioners had observed the diligence required of them, i.e, they wanted to open a vault with a nearby bank for purposes of safekeeping the pawned articles but was discouraged by the Central Bank (CB) since CB rules provide that they can only store the pawned articles in a vault inside the pawnshop premises and no other place;

(2) Petitioners were adjudged negligent as they did not take insurance against the loss of the pledged jelweries, but it is judicial notice that due to high incidence of crimes, insurance companies refused to cover pawnshops and banks because of high probability of losses due to robberies;



(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39, 45-46), the victim of robbery was exonerated from liability for the sum of money belonging to others and lost by him to robbers.

Respondents filed their Comment and petitioners filed their Reply thereto. The parties subsequently submitted their respective Memoranda.


To begin with, although it is true that indeed the CA findings were exact reproductions of the arguments raised in respondents’ (appellants’) brief filed with the CA, we find the same to be not fatally infirmed. Upon examination of the Decision, we find that it expressed clearly and distinctly the facts and the law on which it is based as required by Section 8, Article VIII of the Constitution. The discretion to decide a case one way or another is broad enough to justify the adoption of the arguments put forth by one of the parties, as long as these are legally tenable and supported by law and the facts on records.11

Our jurisdiction under Rule 45 of the Rules of Court is limited to the review of errors of law committed by the appellate court. Generally, the findings of fact of the appellate court are deemed conclusive and we are not duty-bound to analyze and calibrate all over again the evidence adduced by the parties in the court a quo.12 This rule, however, is not without exceptions, such as where the factual findings of the Court of Appeals and the trial court are conflicting or contradictory13 as is obtaining in the instant case.

However, after a careful examination of the records, we find no justification to absolve petitioner Sicam from liability.

The CA correctly pierced the veil of the corporate fiction and adjudged petitioner Sicam liable together with petitioner corporation. The rule is that the veil of corporate fiction may be pierced when made as a shield to perpetrate fraud and/or confuse legitimate issues. 14 The theory of corporate entity was not meant to promote unfair objectives or otherwise to shield them.15

Notably, the evidence on record shows that at the time respondent Lulu pawned her jewelry, the pawnshop was owned by petitioner Sicam himself. As correctly observed by the CA, in all the pawnshop receipts issued to respondent Lulu in September 1987, all bear the words "Agencia de R. C. Sicam," notwithstanding that the pawnshop was allegedly incorporated in April 1987. The receipts issued after such alleged incorporation were still in the name of "Agencia de R. C. Sicam," thus inevitably misleading, or at the very least, creating the wrong impression to respondents and the public as well, that the pawnshop was owned solely by petitioner Sicam and not by a corporation.

Even petitioners’ counsel, Atty. Marcial T. Balgos, in his letter16 dated October 15, 1987 addressed to the Central Bank, expressly referred to petitioner Sicam as the proprietor of the pawnshop notwithstanding the alleged incorporation in April 1987.

We also find no merit in petitioners' argument that since respondents had alleged in their Amended Complaint that petitioner corporation is the present owner of the pawnshop, the CA is bound to decide the case on that basis.

Section 4 Rule 129 of the Rules of Court provides that an admission, verbal or written, made by a party in the course of the proceedings in the same case, does not require proof. The admission may







be contradicted only by showing that it was made through palpable mistake or that no such admission was made.

Thus, the general rule that a judicial admission is conclusive upon the party making it and does not require proof, admits of two exceptions, to wit: (1) when it is shown that such admission was made through palpable mistake, and (2) when it is shown that no such admission was in fact made. The latter exception allows one to contradict an admission by denying that he made such an admission.17

The Committee on the Revision of the Rules of Court explained the second exception in this wise:

x x x if a party invokes an "admission" by an adverse party, but cites the admission "out of context," then the one making the "admission" may show that he made no "such" admission, or that his admission was taken out of context.

x x x that the party can also show that he made no "such admission", i.e., not in the sense in which the admission is made to appear.

That is the reason for the modifier "such" because if the rule simply states that the admission may be contradicted by showing that "no admission was made," the rule would not really be providing for a contradiction of the admission but just a denial.18 (Emphasis supplied).

While it is true that respondents alleged in their Amended Complaint that petitioner corporation is the present owner of the pawnshop, they did so only because petitioner Sicam alleged in his Answer to the original complaint filed against him that he was not the real party-in-interest as the pawnshop was incorporated in April 1987. Moreover, a reading of the Amended Complaint in its entirety shows that respondents referred to both petitioner Sicam and petitioner corporation where they (respondents) pawned their assorted pieces of jewelry and ascribed to both the failure to observe due diligence commensurate with the business which resulted in the loss of their pawned jewelry.

Markedly, respondents, in their Opposition to petitioners’ Motion to Dismiss Amended Complaint, insofar as petitioner Sicam is concerned, averred as follows:

Roberto C. Sicam was named the defendant in the original complaint because the pawnshop tickets involved in this case did not show that the R.C. Sicam Pawnshop was a corporation. In paragraph 1 of his Answer, he admitted the allegations in paragraph 1 and 2 of the Complaint. He merely added "that defendant is not now the real party in interest in this case."

It was defendant Sicam's omission to correct the pawnshop tickets used in the subject transactions in this case which was the cause of the instant action. He cannot now ask for the dismissal of the complaint against him simply on the mere allegation that his pawnshop business is now incorporated. It is a matter of defense, the merit of which can only be reached after consideration of the evidence to be presented in due course.19

Unmistakably, the alleged admission made in respondents' Amended Complaint was taken "out of context" by petitioner Sicam to suit his own purpose. Ineluctably, the fact that petitioner Sicam continued to issue pawnshop receipts under his name and not under the corporation's name militates for the piercing of the corporate veil.

We likewise find no merit in petitioners' contention that the CA erred in piercing the veil of corporate fiction of petitioner corporation, as it was not an issue raised and litigated before the RTC.




Petitioner Sicam had alleged in his Answer filed with the trial court that he was not the real party-in-interest because since April 20, 1987, the pawnshop business initiated by him was incorporated and known as Agencia deR.C. Sicam. In the pre-trial brief filed by petitioner Sicam, he submitted that as far as he was concerned, the basic issue was whether he is the real party in interest against whom the complaint should be directed.20 In fact, he subsequently moved for the dismissal of the complaint as to him but was not favorably acted upon by the trial court. Moreover, the issue was squarely passed upon, although erroneously, by the trial court in its Decision in this manner:

x x x The defendant Roberto Sicam, Jr likewise denies liability as far as he is concerned for the reason that he cannot be made personally liable for a claim arising from a corporate transaction.

This Court sustains the contention of the defendant Roberto C. Sicam, Jr. The amended complaint itself asserts that "plaintiff pawned assorted jewelries in defendant's pawnshop." It has been held that " as a consequence of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of the stockholder, nor is the stockholder's debt or credit that of a corporation.21

Clearly, in view of the alleged incorporation of the pawnshop, the issue of whether petitioner Sicam is personally liable is inextricably connected with the determination of the question whether the doctrine of piercing the corporate veil should or should not apply to the case.

The next question is whether petitioners are liable for the loss of the pawned articles in their possession.

Petitioners insist that they are not liable since robbery is a fortuitous event and they are not negligent at all.

We are not persuaded.

Article 1174 of the Civil Code provides:

Art. 1174. Except in cases expressly specified by the law, or when it is otherwise declared by stipulation, or when the nature of the obligation requires the assumption of risk, no person shall be responsible for those events which could not be foreseen or which, though foreseen, were inevitable.

Fortuitous events by definition are extraordinary events not foreseeable or avoidable. It is therefore, not enough that the event should not have been foreseen or anticipated, as is commonly believed but it must be one impossible to foresee or to avoid. The mere difficulty to foresee the happening is not impossibility to foresee the same. 22

To constitute a fortuitous event, the following elements must concur: (a) the cause of the unforeseen and unexpected occurrence or of the failure of the debtor to comply with obligations must be independent of human will; (b) it must be impossible to foresee the event that constitutes the caso fortuito or, if it can be foreseen, it must be impossible to avoid; (c) the occurrence must be such as to render it impossible for the debtor to fulfill obligations in a normal manner; and, (d) the obligor must be free from any participation in the aggravation of the injury or loss. 23





The burden of proving that the loss was due to a fortuitous event rests on him who invokes it.24 And, in order for a fortuitous event to exempt one from liability, it is necessary that one has committed no negligence or misconduct that may have occasioned the loss. 25

It has been held that an act of God cannot be invoked to protect a person who has failed to take steps to forestall the possible adverse consequences of such a loss. One's negligence may have concurred with an act of God in producing damage and injury to another; nonetheless, showing that the immediate or proximate cause of the damage or injury was a fortuitous event would not exempt one from liability. When the effect is found to be partly the result of a person's participation -- whether by active intervention, neglect or failure to act -- the whole occurrence is humanized and removed from the rules applicable to acts of God. 26

Petitioner Sicam had testified that there was a security guard in their pawnshop at the time of the robbery. He likewise testified that when he started the pawnshop business in 1983, he thought of opening a vault with the nearby bank for the purpose of safekeeping the valuables but was discouraged by the Central Bank since pawned articles should only be stored in a vault inside the pawnshop. The very measures which petitioners had allegedly adopted show that to them the possibility of robbery was not only foreseeable, but actually foreseen and anticipated. Petitioner Sicam’s testimony, in effect, contradicts petitioners’ defense of fortuitous event.

Moreover, petitioners failed to show that they were free from any negligence by which the loss of the pawned jewelry may have been occasioned.

Robbery per se, just like carnapping, is not a fortuitous event. It does not foreclose the possibility of negligence on the part of herein petitioners. In Co v. Court of Appeals,27 the Court held:

It is not a defense for a repair shop of motor vehicles to escape liability simply because the damage or loss of a thing lawfully placed in its possession was due to carnapping. Carnapping per se cannot be considered as a fortuitous event. The fact that a thing was unlawfully and forcefully taken from another's rightful possession, as in cases of carnapping, does not automatically give rise to a fortuitous event. To be considered as such, carnapping entails more than the mere forceful taking of another's property. It must be proved and established that the event was an act of God or was done solely by third parties and that neither the claimant nor the person alleged to be negligent has any participation. In accordance with the Rules of Evidence, the burden of proving that the loss was due to a fortuitous event rests on him who invokes it — which in this case is the private respondent. However, other than the police report of the alleged carnapping incident, no other evidence was presented by private respondent to the effect that the incident was not due to its fault. A police report of an alleged crime, to which only private respondent is privy, does not suffice to establish the carnapping. Neither does it prove that there was no fault on the part of private respondent notwithstanding the parties' agreement at the pre-trial that the car was carnapped. Carnapping does not foreclose the possibility of fault or negligence on the part of private respondent.28

Just like in Co, petitioners merely presented the police report of the Parañaque Police Station on the robbery committed based on the report of petitioners' employees which is not sufficient to establish robbery. Such report also does not prove that petitioners were not at fault.

On the contrary, by the very evidence of petitioners, the CA did not err in finding that petitioners are guilty of concurrent or contributory negligence as provided in Article 1170 of the Civil Code, to wit:






Art. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay, and those who in any manner contravene the tenor thereof, are liable for damages.29

Article 2123 of the Civil Code provides that with regard to pawnshops and other establishments which are engaged in making loans secured by pledges, the special laws and regulations concerning them shall be observed, and subsidiarily, the provisions on pledge, mortgage and antichresis.

The provision on pledge, particularly Article 2099 of the Civil Code, provides that the creditor shall take care of the thing pledged with the diligence of a good father of a family. This means that petitioners must take care of the pawns the way a prudent person would as to his own property.

In this connection, Article 1173 of the Civil Code further provides:

Art. 1173. The fault or negligence of the obligor consists in the omission of that diligence which is required by the nature of the obligation and corresponds with the circumstances of the persons, of time and of the place. When negligence shows bad faith, the provisions of Articles 1171 and 2201, paragraph 2 shall apply.

If the law or contract does not state the diligence which is to be observed in the performance, that which is expected of a good father of a family shall be required.

We expounded in Cruz v. Gangan30 that negligence is the omission to do something which a reasonable man, guided by those considerations which ordinarily regulate the conduct of human affairs, would do; or the doing of something which a prudent and reasonable man would not do.31 It is want of care required by the circumstances.

A review of the records clearly shows that petitioners failed to exercise reasonable care and caution that an ordinarily prudent person would have used in the same situation. Petitioners were guilty of negligence in the operation of their pawnshop business. Petitioner Sicam testified, thus:

Court:

Q. Do you have security guards in your pawnshop?

A. Yes, your honor.

Q. Then how come that the robbers were able to enter the premises when according to you there was a security guard?

A. Sir, if these robbers can rob a bank, how much more a pawnshop.

Q. I am asking you how were the robbers able to enter despite the fact that there was a security guard?

A. At the time of the incident which happened about 1:00 and 2:00 o'clock in the afternoon and it happened on a Saturday and everything was quiet in the area BF Homes Parañaque they pretended to pawn an article in the pawnshop, so one of my employees allowed him to come in and it was only when it was announced that it was a hold up.

Q. Did you come to know how the vault was opened?




A. When the pawnshop is official (sic) open your honor the pawnshop is partly open. The combination is off.

Q. No one open (sic) the vault for the robbers?

A. No one your honor it was open at the time of the robbery.

Q. It is clear now that at the time of the robbery the vault was open the reason why the robbers were able to get all the items pawned to you inside the vault.

A. Yes sir.32

revealing that there were no security measures adopted by petitioners in the operation of the pawnshop. Evidently, no sufficient precaution and vigilance were adopted by petitioners to protect the pawnshop from unlawful intrusion. There was no clear showing that there was any security guard at all. Or if there was one, that he had sufficient training in securing a pawnshop. Further, there is no showing that the alleged security guard exercised all that was necessary to prevent any untoward incident or to ensure that no suspicious individuals were allowed to enter the premises. In fact, it is even doubtful that there was a security guard, since it is quite impossible that he would not have noticed that the robbers were armed with caliber .45 pistols each, which were allegedly poked at the employees.33 Significantly, the alleged security guard was not presented at all to corroborate petitioner Sicam's claim; not one of petitioners' employees who were present during the robbery incident testified in court.

Furthermore, petitioner Sicam's admission that the vault was open at the time of robbery is clearly a proof of petitioners' failure to observe the care, precaution and vigilance that the circumstances justly demanded. Petitioner Sicam testified that once the pawnshop was open, the combination was already off. Considering petitioner Sicam's testimony that the robbery took place on a Saturday afternoon and the area in BF Homes Parañaque at that time was quiet, there was more reason for petitioners to have exercised reasonable foresight and diligence in protecting the pawned jewelries. Instead of taking the precaution to protect them, they let open the vault, providing no difficulty for the robbers to cart away the pawned articles.

We, however, do not agree with the CA when it found petitioners negligent for not taking steps to insure themselves against loss of the pawned jewelries.

Under Section 17 of Central Bank Circular No. 374, Rules and Regulations for Pawnshops, which took effect on July 13, 1973, and which was issued pursuant to Presidential Decree No. 114, Pawnshop Regulation Act, it is provided that pawns pledged must be insured, to wit:

Sec. 17. Insurance of Office Building and Pawns- The place of business of a pawnshop and the pawns pledged to it must be insured against fire and against burglary as well as for the latter(sic), by an insurance company accredited by the Insurance Commissioner.

However, this Section was subsequently amended by CB Circular No. 764 which took effect on October 1, 1980, to wit:

Sec. 17 Insurance of Office Building and Pawns – The office building/premises and pawns of a pawnshop must be insured against fire. (emphasis supplied).



where the requirement that insurance against burglary was deleted. Obviously, the Central Bank considered it not feasible to require insurance of pawned articles against burglary.

The robbery in the pawnshop happened in 1987, and considering the above-quoted amendment, there is no statutory duty imposed on petitioners to insure the pawned jewelry in which case it was error for the CA to consider it as a factor in concluding that petitioners were negligent.

Nevertheless, the preponderance of evidence shows that petitioners failed to exercise the diligence required of them under the Civil Code.

The diligence with which the law requires the individual at all times to govern his conduct varies with the nature of the situation in which he is placed and the importance of the act which he is to perform.34 Thus, the cases ofAustria v. Court of Appeals,35 Hernandez v. Chairman, Commission on Audit36 and Cruz v. Gangan37 cited by petitioners in their pleadings, where the victims of robbery were exonerated from liability, find no application to the present case.

In Austria, Maria Abad received from Guillermo Austria a pendant with diamonds to be sold on commission basis, but which Abad failed to subsequently return because of a robbery committed upon her in 1961. The incident became the subject of a criminal case filed against several persons. Austria filed an action against Abad and her husband (Abads) for recovery of the pendant or its value, but the Abads set up the defense that the robbery extinguished their obligation. The RTC ruled in favor of Austria, as the Abads failed to prove robbery; or, if committed, that Maria Abad was guilty of negligence. The CA, however, reversed the RTC decision holding that the fact of robbery was duly established and declared the Abads not responsible for the loss of the jewelry on account of a fortuitous event. We held that for the Abads to be relieved from the civil liability of returning the pendant under Art. 1174 of the Civil Code, it would only be sufficient that the unforeseen event, the robbery, took place without any concurrent fault on the debtor’s part, and this can be done by preponderance of evidence; that to be free from liability for reason of fortuitous event, the debtor must, in addition to the casus itself, be free of any concurrent or contributory fault or negligence.38

We found in Austria that under the circumstances prevailing at the time the Decision was promulgated in 1971, the City of Manila and its suburbs had a high incidence of crimes against persons and property that rendered travel after nightfall a matter to be sedulously avoided without suitable precaution and protection; that the conduct of Maria Abad in returning alone to her house in the evening carrying jewelry of considerable value would have been negligence per se and would not exempt her from responsibility in the case of robbery. However we did not hold Abad liable for negligence since, the robbery happened ten years previously; i.e., 1961, when criminality had not reached the level of incidence obtaining in 1971.

In contrast, the robbery in this case took place in 1987 when robbery was already prevalent and petitioners in fact had already foreseen it as they wanted to deposit the pawn with a nearby bank for safekeeping. Moreover, unlike in Austria, where no negligence was committed, we found petitioners negligent in securing their pawnshop as earlier discussed.

In Hernandez, Teodoro Hernandez was the OIC and special disbursing officer of the Ternate Beach Project of the Philippine Tourism in Cavite. In the morning of July 1, 1983, a Friday, he went to Manila to encash two checks covering the wages of the employees and the operating expenses of the project. However for some reason, the processing of the check was delayed and was completed at about 3 p.m. Nevertheless, he decided to encash the check because the project employees would be waiting for their pay the following day; otherwise, the workers would have to wait until July 5, the earliest time, when the main office would open. At that time, he had two choices: (1) return to Ternate, Cavite that same afternoon and arrive early evening; or (2) take the money with him to his






house in Marilao, Bulacan, spend the night there, and leave for Ternate the following day. He chose the second option, thinking it was the safer one. Thus, a little past 3 p.m., he took a passenger jeep bound for Bulacan. While the jeep was on Epifanio de los Santos Avenue, the jeep was held up and the money kept by Hernandez was taken, and the robbers jumped out of the jeep and ran. Hernandez chased the robbers and caught up with one robber who was subsequently charged with robbery and pleaded guilty. The other robber who held the stolen money escaped. The Commission on Audit found Hernandez negligent because he had not brought the cash proceeds of the checks to his office in Ternate, Cavite for safekeeping, which is the normal procedure in the handling of funds. We held that Hernandez was not negligent in deciding to encash the check and bringing it home to Marilao, Bulacan instead of Ternate, Cavite due to the lateness of the hour for the following reasons: (1) he was moved by unselfish motive for his co-employees to collect their wages and salaries the following day, a Saturday, a non-working, because to encash the check on July 5, the next working day after July 1, would have caused discomfort to laborers who were dependent on their wages for sustenance; and (2) that choosing Marilao as a safer destination, being nearer, and in view of the comparative hazards in the trips to the two places, said decision seemed logical at that time. We further held that the fact that two robbers attacked him in broad daylight in the jeep while it was on a busy highway and in the presence of other passengers could not be said to be a result of his imprudence and negligence.

Unlike in Hernandez where the robbery happened in a public utility, the robbery in this case took place in the pawnshop which is under the control of petitioners. Petitioners had the means to screen the persons who were allowed entrance to the premises and to protect itself from unlawful intrusion. Petitioners had failed to exercise precautionary measures in ensuring that the robbers were prevented from entering the pawnshop and for keeping the vault open for the day, which paved the way for the robbers to easily cart away the pawned articles.

In Cruz, Dr. Filonila O. Cruz, Camanava District Director of Technological Education and Skills Development Authority (TESDA), boarded the Light Rail Transit (LRT) from Sen. Puyat Avenue to Monumento when her handbag was slashed and the contents were stolen by an unidentified person. Among those stolen were her wallet and the government-issued cellular phone. She then reported the incident to the police authorities; however, the thief was not located, and the cellphone was not recovered. She also reported the loss to the Regional Director of TESDA, and she requested that she be freed from accountability for the cellphone. The Resident Auditor denied her request on the ground that she lacked the diligence required in the custody of government property and was ordered to pay the purchase value in the total amount of P4,238.00. The COA found no sufficient justification to grant the request for relief from accountability. We reversed the ruling and found that riding the LRT cannot per se be denounced as a negligent act more so because Cruz’s mode of transit was influenced by time and money considerations; that she boarded the LRT to be able to arrive in Caloocan in time for her 3 pm meeting; that any prudent and rational person under similar circumstance can reasonably be expected to do the same; that possession of a cellphone should not hinder one from boarding the LRT coach as Cruz did considering that whether she rode a jeep or bus, the risk of theft would have also been present; that because of her relatively low position and pay, she was not expected to have her own vehicle or to ride a taxicab; she did not have a government assigned vehicle; that placing the cellphone in a bag away from covetous eyes and holding on to that bag as she did is ordinarily sufficient care of a cellphone while traveling on board the LRT; that the records did not show any specific act of negligence on her part and negligence can never be presumed.

Unlike in the Cruz case, the robbery in this case happened in petitioners' pawnshop and they were negligent in not exercising the precautions justly demanded of a pawnshop.

WHEREFORE, except for the insurance aspect, the Decision of the Court of Appeals dated March 31, 2003 and its Resolution dated August 8, 2003, are AFFIRMED.



Manila

FIRST DIVISION

G.R. No. 160273 January 18, 2008

CEBU COUNTRY CLUB, INC., SABINO R. DAPAT, RUBEN D. ALMENDRAS, JULIUS Z. NERI, DOUGLAS L. LUYM, CESAR T. LIBI, RAMONTITO* E. GARCIA and JOSE B. SALA, petitioners, vs.RICARDO F. ELIZAGAQUE, respondent.

D E C I S I O N

SANDOVAL-GUTIERREZ, J.:

For our resolution is the instant Petition for Review on Certiorari under Rule 45 of the 1997 Rules of Civil Procedure, as amended, assailing the Decision1 dated January 31, 2003 and Resolution dated October 2, 2003 of the Court of Appeals in CA-G.R. CV No. 71506.

The facts are:

Cebu Country Club, Inc. (CCCI), petitioner, is a domestic corporation operating as a non-profit and non-stock private membership club, having its principal place of business in Banilad, Cebu City. Petitioners herein are members of its Board of Directors.

Sometime in 1987, San Miguel Corporation, a special company proprietary member of CCCI, designated respondent Ricardo F. Elizagaque, its Senior Vice President and Operations Manager for the Visayas and Mindanao, as a special non-proprietary member. The designation was thereafter approved by the CCCI’s Board of Directors.

In 1996, respondent filed with CCCI an application for proprietary membership. The application was indorsed by CCCI’s two (2) proprietary members, namely: Edmundo T. Misa and Silvano Ludo.

As the price of a proprietary share was around the P5 million range, Benito Unchuan, then president of CCCI, offered to sell respondent a share for only P3.5 million. Respondent, however, purchased the share of a certain Dr. Butalid for only P3 million. Consequently, on September 6, 1996, CCCI issued Proprietary Ownership Certificate No. 1446 to respondent.

During the meetings dated April 4, 1997 and May 30, 1997 of the CCCI Board of Directors, action on respondent’s application for proprietary membership was deferred. In another Board meeting held on July 30, 1997, respondent’s application was voted upon. Subsequently, or on August 1, 1997, respondent received a letter from Julius Z. Neri, CCCI’s corporate secretary, informing him that the Board disapproved his application for proprietary membership.


http://www.lawphil.net/judjuris/juri2008/jan2008/gr_160273_2008.html#fnt*

On August 6, 1997, Edmundo T. Misa, on behalf of respondent, wrote CCCI a letter of reconsideration. As CCCI did not answer, respondent, on October 7, 1997, wrote another letter of reconsideration. Still, CCCI kept silent. On November 5, 1997, respondent again sent CCCI a letter inquiring whether any member of the Board objected to his application. Again, CCCI did not reply.

Consequently, on December 23, 1998, respondent filed with the Regional Trial Court (RTC), Branch 71, Pasig City a complaint for damages against petitioners, docketed as Civil Case No. 67190.

After trial, the RTC rendered its Decision dated February 14, 2001 in favor of respondent, thus:

WHEREFORE, judgment is hereby rendered in favor of plaintiff:

1. Ordering defendants to pay, jointly and severally, plaintiff the amount of P2,340,000.00 as actual or compensatory damages.

2. Ordering defendants to pay, jointly and severally, plaintiff the amount of P5,000,000.00 as moral damages.

3. Ordering defendants to pay, jointly and severally, plaintiff the amount of P1,000,000.00 as exemplary damages.

4. Ordering defendants to pay, jointly and severally, plaintiff the amount of P1,000,000.00 as and by way of attorney’s fees and P80,000.00 as litigation expenses.

5. Costs of suit.

Counterclaims are hereby DISMISSED for lack of merit.

SO ORDERED.2

On appeal by petitioners, the Court of Appeals, in its Decision dated January 31, 2003, affirmed the trial court’s Decision with modification, thus:

WHEREFORE, premises considered, the assailed Decision dated February 14, 2001 of the Regional Trial Court, Branch 71, Pasig City in Civil Case No. 67190 is hereby AFFIRMED with MODIFICATION as follows:

1. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee the amount ofP2,000,000.00 as moral damages;

2. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee the amount ofP1,000,000.00 as exemplary damages;

3. Ordering defendants-appellants to pay, jointly and severally, plaintiff-appellee the mount of P500,000.00 as attorney’s fees and P50,000.00 as litigation expenses; and

4. Costs of the suit.

The counterclaims are DISMISSED for lack of merit.


SO ORDERED.3

On March 3, 2003, petitioners filed a motion for reconsideration and motion for leave to set the motion for oral arguments. In its Resolution4 dated October 2, 2003, the appellate court denied the motions for lack of merit.

Hence, the present petition.

The issue for our resolution is whether in disapproving respondent’s application for proprietary membership with CCCI, petitioners are liable to respondent for damages, and if so, whether their liability is joint and several.

Petitioners contend, inter alia, that the Court of Appeals erred in awarding exorbitant damages to respondent despite the lack of evidence that they acted in bad faith in disapproving the latter’s application; and in disregarding their defense of damnum absque injuria.

For his part, respondent maintains that the petition lacks merit, hence, should be denied.

CCCI’s Articles of Incorporation provide in part:

SEVENTH: That this is a non-stock corporation and membership therein as well as the right of participation in its assets shall be limited to qualified persons who are duly accredited owners of Proprietary Ownership Certificates issued by the corporation in accordance with its By-Laws.

Corollary, Section 3, Article 1 of CCCI’s Amended By-Laws provides:

SECTION 3. HOW MEMBERS ARE ELECTED – The procedure for the admission of new members of the Club shall be as follows:

(a) Any proprietary member, seconded by another voting proprietary member, shall submit to the Secretary a written proposal for the admission of a candidate to the "Eligible-for-Membership List";

(b) Such proposal shall be posted by the Secretary for a period of thirty (30) days on the Club bulletin board during which time any member may interpose objections to the admission of the applicant by communicating the same to the Board of Directors;

(c) After the expiration of the aforesaid thirty (30) days, if no objections have been filed or if there are, the Board considers the objections unmeritorious, the candidate shall be qualified for inclusion in the "Eligible-for-Membership List";

(d) Once included in the "Eligible-for-Membership List" and after the candidate shall have acquired in his name a valid POC duly recorded in the books of the corporation as his own, he shall become a Proprietary Member, upon a non-refundable admission fee of P1,000.00, provided that admission fees will only be collected once from any person.

On March 1, 1978, Section 3(c) was amended to read as follows:



(c) After the expiration of the aforesaid thirty (30) days, the Board may, by unanimous vote of all directors present at a regular or special meeting, approve the inclusion of the candidate in the "Eligible-for-Membership List".

As shown by the records, the Board adopted a secret balloting known as the "black ball system" of voting wherein each member will drop a ball in the ballot box. A white ball represents conformity to the admission of an applicant, while a black ball means disapproval. Pursuant to Section 3(c), as amended, cited above, a unanimous vote of the directors is required. When respondent’s application for proprietary membership was voted upon during the Board meeting on July 30, 1997, the ballot box contained one (1) black ball. Thus, for lack of unanimity, his application was disapproved.

Obviously, the CCCI Board of Directors, under its Articles of Incorporation, has the right to approve or disapprove an application for proprietary membership. But such right should not be exercised arbitrarily. Articles 19 and 21 of the Civil Code on the Chapter on Human Relations provide restrictions, thus:

Article 19. 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.

Article 21. Any person who willfully causes loss or injury to another in a manner that is contrary to morals, good customs or public policy shall compensate the latter for the damage.

In GF Equity, Inc. v. Valenzona,5 we expounded Article 19 and correlated it with Article 21, thus:

This article, known to contain what is commonly referred to as the principle of abuse of rights, sets certain standards which must be observed not only in the exercise of one's rights but also in the performance of one's duties. These standards are the following: to act with justice; to give everyone his due; and to observe honesty and good faith. The law, therefore, recognizes a primordial limitation on all rights; that in their exercise, the norms of human conduct set forth in Article 19 must be observed. A right, though by itself legal because recognized or granted by law as such, may nevertheless become the source of some illegality. When a right is exercised in a manner which does not conform with the norms enshrined in Article 19 and results in damage to another, a legal wrong is thereby committed for which the wrongdoer must be held responsible. But while Article 19 lays down a rule of conduct for the government of human relations and for the maintenance of social order, it does not provide a remedy for its violation. Generally, an action for damages under either Article 20 or Article 21 would be proper. (Emphasis in the original)

In rejecting respondent’s application for proprietary membership, we find that petitioners violated the rules governing human relations, the basic principles to be observed for the rightful relationship between human beings and for the stability of social order. The trial court and the Court of Appeals aptly held that petitioners committed fraud and evident bad faith in disapproving respondent’s applications. This is contrary to morals, good custom or public policy. Hence, petitioners are liable for damages pursuant to Article 19 in relation to Article 21 of the same Code.

It bears stressing that the amendment to Section 3(c) of CCCI’s Amended By-Laws requiring the unanimous vote of the directors present at a special or regular meeting was not printed on the application form respondent filled and submitted to CCCI. What was printed thereon was the original provision of Section 3(c) which was silent on the required number of votes needed for admission of an applicant as a proprietary member.


Petitioners explained that the amendment was not printed on the application form due to economic reasons. We find this excuse flimsy and unconvincing. Such amendment, aside from being extremely significant, was introduced way back in 1978 or almost twenty (20) years before respondent filed his application. We cannot fathom why such a prestigious and exclusive golf country club, like the CCCI, whose members are all affluent, did not have enough money to cause the printing of an updated application form.

It is thus clear that respondent was left groping in the dark wondering why his application was disapproved. He was not even informed that a unanimous vote of the Board members was required. When he sent a letter for reconsideration and an inquiry whether there was an objection to his application, petitioners apparently ignored him. Certainly, respondent did not deserve this kind of treatment. Having been designated by San Miguel Corporation as a special non-proprietary member of CCCI, he should have been treated by petitioners with courtesy and civility. At the very least, they should have informed him why his application was disapproved.

The exercise of a right, though legal by itself, must nonetheless be in accordance with the proper norm. When the right is exercised arbitrarily, unjustly or excessively and results in damage to another, a legal wrong is committed for which the wrongdoer must be held responsible.6 It bears reiterating that the trial court and the Court of Appeals held that petitioners’ disapproval of respondent’s application is characterized by bad faith.

As to petitioners’ reliance on the principle of damnum absque injuria or damage without injury, suffice it to state that the same is misplaced. In Amonoy v. Gutierrez,7 we held that this principle does not apply when there is an abuse of a person’s right, as in this case.

As to the appellate court’s award to respondent of moral damages, we find the same in order. Under Article 2219 of the New Civil Code, moral damages may be recovered, among others, in acts and actions referred to in Article 21. We believe respondent’s testimony that he suffered mental anguish, social humiliation and wounded feelings as a result of the arbitrary denial of his application. However, the amount of P2,000,000.00 is excessive. While there is no hard-and-fast rule in determining what would be a fair and reasonable amount of moral damages, the same should not be palpably and scandalously excessive. Moral damages are not intended to impose a penalty to the wrongdoer, neither to enrich the claimant at the expense of the defendant.8 Taking into consideration the attending circumstances here, we hold that an award to respondent of P50,000.00, instead of P2,000,000.00, as moral damages is reasonable.

Anent the award of exemplary damages, Article 2229 allows it by way of example or correction for the public good. Nonetheless, since exemplary damages are imposed not to enrich one party or impoverish another but to serve as a deterrent against or as a negative incentive to curb socially deleterious actions,9 we reduce the amount fromP1,000,000.00 to P25,000.00 only.

On the matter of attorney’s fees and litigation expenses, Article 2208 of the same Code provides, among others, that attorney’s fees and expenses of litigation may be recovered in cases when exemplary damages are awarded and where the court deems it just and equitable that attorney’s fees and expenses of litigation should be recovered, as in this case. In any event, however, such award must be reasonable, just and equitable. Thus, we reduce the amount of attorney’s fees (P500,000.00) and litigation expenses (P50,000.00) to P50,000.00 andP25,000.00, respectively.

Lastly, petitioners’ argument that they could not be held jointly and severally liable for damages because only one (1) voted for the disapproval of respondent’s application lacks merit.

Section 31 of the Corporation Code provides:





SEC. 31. Liability of directors, trustees or officers. — Directors or trustees who willfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faithin directing the affairs of the corporation or acquire any personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation, its stockholders or members and other persons. (Emphasis ours)

WHEREFORE, we DENY the petition. The challenged Decision and Resolution of the Court of Appeals in CA-G.R. CV No. 71506 are AFFIRMED with modification in the sense that (a) the award of moral damages is reduced fromP2,000,000.00 to P50,000.00; (b) the award of exemplary damages is reduced from P1,000,000.00 to P25,000.00; and (c) the award of attorney’s fees and litigation expenses is reduced from P500,000.00 and P50,000.00 toP50,000.00 and P25,000.00, respectively.


SO ORDERED.

Buss ORG II

Documents

Transcript of Buss ORG II