039. State v. Standard Oil $%!&O': twinkle 49 Ohio St. 137; 30 N.E.

279; 1892 Ohio LEXIS 127 An agreement that would have created a (ono)ol*, even i March 2 1892 it reduced !rices, i+ +till a,ain+t )-.lic )olic* because they !O"I#: Contrary to Law/ Public Policy can raise the !rices at e"ceedingly high rates. "ON!EN!E: Minshall, J. in ictione #uris subsistit ae$uitas % &ith legal ictions, e$uity always e"ists. /$#!S '. (tandard )il desired to enter into an elaborate agreement that would have consolidated several cor!orations and !artnershi!s into one cor!oration o!erated as a trust. *. All o the owners and holders o its ca!ital stock, including all the o icers and directors o said de endant com!any, signed said agreements, without attaching the cor!orate name and seal o said de endant com!any thereto, and the o icial designations o its o icers. +. (ince the signing o the agreement, the nine trustees have been and still are able to choose and have chosen annually such boards o directors o de endant com!any as they ,nine trustees- have seen it and control the action o (tandard )il in the conduct and management o its business. +. Plainti attorney general brought an action in $uo warranto to !reclude the urtherance o the transaction. .. (tandard )il contends that all o the shares o stock o de endant e"ce!t seven were trans erred to the nine trustees, and these seven were retained only or the $uali ication o the directory, which the trustees might rom time to time select, either rom their own numbers or rom others o their choice and the trans ers were made by de endant/s trans erring o icers u!on its stock books. And dividends o the com!any are !aid to the holders o its stock as also a!!earing in its books. 0. Also, (tandard )il urther contends that the nine trustees individually owned ma#ority interests in the stocks o the various cor!orations, and that they could e"ercise the same voting !ower by virtue o their own stocks. ISS%E0+: '.Ma#or: 1( the agreement against !ublic !olicy/ contrary to law2 (ub issues: *. &)3 4he (tandard )il Com!any o )hio acted in their cor!orate ca!acity. +. &)3 section 5678, 9evised (tatues which !rovides: :3othing in this cha!ter contained shall authori;e an action against a cor!oration or or eiture o charter, unless the same be commenced within ive years a ter the act com!lained o was done or committed.: <ars this action2 &EL1: '. =>(. 4he agreement creates mono!oly which would have been against the !ublic !olicy o the state. 4he court ousted the oil com!any rom the right to make the agreement and o the !ower to !er orm it. *. =>(. 4he !ro!erty and assets o the cor!oration could only be trans erred by a cor!orate act, and the agreement could not in this res!ect, be carried into e ect, other than by such cor!orate act. +. 3). 4he whole o (ec 5678, 9evised (tatutes, is not $uoted by the de endant? it urther !roceeds: :3or shall an action be brought against a cor!oration or the e"ercise o a !ower or ranchise under its charter which it has used and e"ercised or a term o twenty years.: '$!IO: '.4he law re$uires that a cor!oration should be controlled and managed by its directors in the interest o its own stock% holders, and con ormable to the !ur!ose or which it was created by the laws o its state. <y this agreement, indirectly it is true, but none the less e ectually, the de endant is controlled and managed by the (tandard )il 4rust, an association with its !rinci!al !lace o business in 3ew =ork City, and organi;ed or a !ur!ose contrary to the !olicy o our laws. 1ts ob#ect was to establish a virtual mono!oly o the business o !roducing !etroleum, and o manu acturing, re ining and dealing in it and all its !roducts, throughout the entire country, and by which it might not merely control the !roduction, but the !rice at its !leasure. $ll +-ch a++ociation+ are contrar* to the )olic* o2 o-r +tate and void. Mon!olies have always been regarded as contrary to the s!irit and !olicy o the common law because: '. :the !rice o the same commodity will be raised, or he who has the sole selling o any commodity, may well make the !rice as he !leases.: *. :4he incident to a mono!oly is, that a ter the mono!oly is granted, the commodity is not so good and merchantable as it was be ore? or the !atentee having the sole trade, regards only his !rivate bene it, and not the commonwealth. +. :1t tends to the im!overishment o divers arti icers and others, who be ore, by the labor o their hands in their art or

trade, had mantained themselves and their amilies, who will now o necessity be constrained to live in idleness and beggary.: 4he third ob#ection, though re$uently overlooked, is none the less im!ortant. *. 4he general !ro!osition that a cor!oration is to be regarded as a legal entity, e"isting se!arate and a!art rom the nat%ural !ersons com!osing it, is not dis!uted? but that the statement is a mere iction, e"isting only in idea, is well under%stood, and not controverted by anyone who !retends to accurate knowledge on the sub#ect. (o long as a !ro!er use is made o the iction, that a cor!oration is an entity a!art rom its shareholders, it is harmless, and, because convenient, should not be called in $uestion? but where it is urged to an end subversive o its !olicy, or such is the issue, the iction must be ignored, and the $uestion determined, whether the act in $uestion, though done by shareholders, that is to say, by the !ersons united in one body, was done sim!ly as individuals and with res!ect to their individual interests as shareholders, or was done ostensibly as such, but, as a matter o act, to control the cor!oration and a ect the transaction o its business, in the same manner as i the act had been clothed with all the ormalities o a cor!orate act. 4he !ro!erty and assets o the cor!oration could only be trans erred by a cor!orate act, and the agreement could not in this res!ect, be carried into e ect, other than by such cor!orate act? and clearly indicates that the !ur!ose o the stockholders o the de endant, in becoming a !arty to it, was to a ect their !ro!erty and business as a cor!oration? in other words, was to act in their cor!orate, and not in their individual, ca!acity. 4he agreement, as !er ormed by the members o the de endant, as e ectually !laces the !ro!erty and business o the de endant under the control and management o the (tandard )il 4rust, as i the same had been trans erred as !rovided in the original agreement. +. Plainti avers that the irst !art does not a!!ly to !roceedings instituted on behal o the state to or eit charter o a cor!oration. Court says the statute gives no e"em!tion and it still a!!lies. @owever, the ne"t !art which !rovides A3or shall an action be brought against a cor!oration or the e"ercise o a !ower or ranchise under its charter which it has used and e"ercised or a term o twenty years: a!!lies. 4here ore within that time such a !roceeding may be brought. #$SE L$30 1O#!'INE: a cor!oration is an arti icial !erson, or entity, a!art rom its members, is merely a descri!tion, in igurative language, o a cor!oration viewed as a collective body? a cor!oration is really an association o !ersons, and no #udicial dictum or legislative enactment can alter this act >BC>P4 when there is an urge to an end subversive o its !olicy, or such is the issue, then the iction must be ignored. 1ISSEN!IN40#ON#%''IN4 O"INION: none.

C.C Laguna 4rans. v. ((( $%!&O': 3. Manalo ,A!ril *7, '85C, D.9. 3o. L%'.5C5!O"I#: Contrary to Law/Public Policy? >vasion o Liability to Dovernment "ON!EN!E: <arrera J., /$#!S '. 4hat sometime in '8.8, the <iEan 4rans!ortation Co., a cor!oration duly registered with the (ecurities and >"change Commission, sold !art o the lines and e$ui!ment it o!erates to Don;alo Mercado, Artemio Mercado, Florentino Mata and Gominador Hera Cru;? *. 4hat a ter the sale, the said vendees ormed an unregistered !artnershi! under the name o Laguna 4rans!ortation Com!any which continued to o!erate the lines and e$ui!ment bought rom the <iEan 4rans!ortation Com!any, in addition to new lines which it was able to secure rom the Public (ervice Commission +. 4hat the original !artners orming the Laguna 4rans!ortation Com!any, with the addition o two new members, organi;ed a cor!oration known as the Laguna 4rans!ortation Com!any, 1nc., which was registered with the (ecurities and >"change Commission on 5-ne 20 1967, and which cor!oration is the !lainti now in this case .. 4hat the cor!oration continued the same trans!ortation business o the unregistered !artnershi! 0. 4hat !rior to 3ovember '', '806, !lainti re$uested or e"em!tion rom coverage by the (ystem on the ground that it started o!eration only on June *C, '805, when it was registered with the (ecurities and >"change Commission but on 3ovember '', '806, the (ocial (ecurity (ystem noti ied !lainti that it was covered? 5. )n 3ovember '., '806, !lainti through counsel sent a letter to the (ocial (ecurity (ystem contesting the claim o the (ystem that !lainti was covered, 6. the trial court rendered a decision declaring the !etitioner was an em!loyer engaged in business as common carrier which had been in o!eration or at least two years !rior to the enactment o 9e!ublic Act 3o. ''5', as amended by 9e!ublic Act '68* and by virtue thereo , it was sub#ect to com!ulsory coverage under said law. 7. the !etitioner directly a!!ealed to the (C PetitionerIs contention: lower court erred in holding that it is an em!loyer engaged in business as a common carrier which had been in o!eration or at least * years !rior to the enactment o the (ocial (ecurity Act and, there ore, sub#ect to com!ulsory coverage thereunder. (ection 8, !rovides: (>C. 8 Compulsory Coverage. J K.4hat the Commission may not compel any employer to become a member of the System unless he shall have been in operation for at least two years . . . . LL,((( enactment: June '7, '80.? PetitionerIs incor!oration: June *C, '805ISS%E: &)3 !etitioner is e"em!ted rom the coverage &EL1: 3o Petitioner/s argument would de eat, rather than !romote, the ends or which the (ocial (ecurity Act was enacted. An em!loyer could easily circumvent the statute by sim!ly changing his orm o organi;ation every other year, and then claim e"em!tion rom contribution to the (ystem as re$uired, on the theory that, as a new entity, it has not been in o!eration or a !eriod o at least * years. the door to raudulent circumvention o the statute would, thereby, be o!ened.

'$!IO: 4he irm name :Laguna 4rans!ortation Com!any: was not altered, e"ce!t with the addition o the word :1nc.: to indicate that !etitioner was duly incor!orated under e"isting laws. 4he cor!oration continued the same trans!ortation business o the unregistered !artnershi!, using the same lines and e$ui!ment. 4here was, in e ect, only a change in the orm o the organi;ation o the entity engaged in the business o trans!ortation o !assengers. @ence, said entity as an em!loyer engaged in business, was already in o!eration or at least + years !rior to the enactment o the (ocial (ecurity Act on June '7, '80. and or at least two years !rior to the !assage o the amendatory act on June *', '806. Petitioner argues that, since it was registered as a cor!oration with the (ecurities and >"change Commission only on June *C, '805, it must be considered to have been in o!eration only on said date. &hile it is true that a cor!oration once ormed is con erred a #uridical !ersonality se!arate and district rom the !ersons com!osing it, it is but a legal iction introduced or !ur!oses o convenience and to subserve the ends o #ustice. 4he conce!t cannot be e"tended to a !oint beyond its reasons and !olicy, and when invoked in su!!ort o an end subversive o this !olicy, will be disregarded by the courts. #$SE L$30 1O#!'INE: Deneral rule: it is that a cor!oration will be looked u!on as a legal entity, and until su icient reason to the contrary a!!ears >"ce!tion: &hen the motion o legal entity is used to de eat !ublic convenience, #usti y wrong, !rotect raud, or de end crime, the law will regard the cor!oration as an association o !ersons. &here a cor!oration was ormed by, and consisted o members o a !artnershi! whose business and !ro!erty was conveyed and trans erred to the cor!oration or the !ur!ose o continuing its business, in !ayment or which cor!orate ca!ital stock was issued, such cor!oration is !resumed to have assumed !artnershi! debts, and is prima facie liable there or. 4he reason or the rule is that the members o the !artnershi! may be said to have sim!ly !ut on a new coat, or taken on a cor!orate cloak, and the cor!oration is a mere continuation o the !artnershi!. 1ISSEN!IN40#ON#%''IN4 O"INION:

041 Marvel 8ld,. #or). v. 1avid $-thor: (arah Calica 24 /e.r-ar* 1946 4.'. No. L96081 Note: 4he cor!orate iction has been disregarded because the !o)ic: Piercing the Cor!orate Heil? Contrary to cor!oration was used to evade ta"es. @ence, the e ect is !ersonal Law/Public Policy: >vasion o Liability to liability on the !art o stockholders. Dovernment "onente: Labrador /act+: '. Plainti s, stockholders o Marvel <uilding Cor!oration, brought an action to en#oin de endant Collector o 1nternal 9evenue rom selling at !ublic auction !ro!erties. 1t includes three !arcels o land, with the buildings situated thereon: Aguinaldo <uilding, the &ise <uilding, and the Gewey <oulevard%Padre Faura Mansion, all registered in the name o the said cor!oration. *. Plainti s alleged that the !ro!erties belong to the Marvel <uilding Cor!oration. +. Ge endant alleged that the !ro!erties belong to Maria <. Castro %evidenced by endorsement in blank o the shares o stock issued in the name o the other incor!orators, and the !ossession thereo by Maria <. Castro .. 4he Articles o 1ncor!oration dated '* February '8.6 and according to it the ca!ital stock is P*,CCC,CCC, o which P',C*0,CCC was ,at the time o incor!oration- subscribed and !aid or by incor!orators which includes Maria <. Castro ,with *0C shares-. 0. Maria <. Castro was elected as President and Ma"imo Cristobal as (ecretary 4reasurer. 5. )n '0 (e!tember '80C, the (ecretary o Finance, u!on consideration o the re!ort o a s!ecial committee assigned to study the war !ro its ta" case o Mrs. Maria <. Castro, recommended the collection o P+,08+,80C.67 as war !ro its ta"es or the latter, and on (e!tember **, '80+ the President instructed the Collector that ste!s be taken to collect the same. 6. Pursuant thereto, !ro!erties were sei;ed by the Collector o 1nternal 9evenue on +' )ctober '80C. 7. 4he by%laws o the cor!oration was not !resented nor any o its transactions or accounts. 8. CF1 o Manila ordered the release o the !ro!erties or ailure to !rove that Maria <. Castro is the true owner o all the stock certi icates o the cor!oration 'C. @ence the a!!eal o de endant. I++-e+: &hether or not Maria <. Castro is the owner o shares o stock o Marvel <uilding Cor!oration &eld: =es. (hareholders are AdummiesM o Maria <. Castro 'atio: 4he act that certi icates in !ossession o Castro were indorsed in blank, Castro had enormous !ro its and had motive to hide them, other subscribers had no incomes, and directors never met shows that other shareholders may be considered as dummies o Castro. @ence, cor!orate veil may be !ierced. 4he most im!ortant evidence !resented by the C19 to !rove his claim that Maria <. Castro is the sole and e"clusive owner o the shares o stock o the Marvel <uilding Cor!oration is su!!osed endorsement in blank o the shares o stock issued in the name o the other incor!orators and the !ossession thereo by Maria <. Castro. 4he second most im!ortant evidence !resented by the C19 is the act that the other stockholders did not have incomes in such amounts, during the time o the organi;ation o the cor!oration in '8.6, or immediately thereto, as to enable them to !ay in ull or their su!!osed subscri!tions. Moreover, the ailure on the !art o the !lainti s to !rove that the shareholders are not dummies o Maria <. Castro is signi icant. %4he non%!roduction o evidence that would naturally have been !roduced by an honest and there ore earless claimant !ermits the in erence that its tenor is un avorable to the !arty/s cause. #a+e La;01octrine: 4he veil o cor!orate iction may be !ierced when it is used as a shield to urther an end subversive o #ustice, or or !ur!oses that could not have been intended by law that created it or to de eat !ublic convenience, #usti y wrong, !rotect raud or de end crime or to !er!etuate raud or con use legitimate issues or to circumvent the law or !er!etuate dece!tion or as an alter ego, ad#unct or business conduit or the sole bene it o the stockholders.

042. !an 8oon 8ee v. 5arencio June +C, '877, D.9. 3o. L%.'++6 !O"I#: >vasion o Liability to Creditors "ONEN!E: Paras, J?

$%!&O': Ge Du;man, <ien 9es!ondent D9AP@1C and PAGC) ,same <)G and o icers- wanted to evade o liability by claiming that the !rinting machine was PAGC)Is !ro!erty and not D9AP@1C

/$#!S '. Petitioner herein, doing business under the name and style o Anchor (u!!ly Co., +old on credit to herein !rivate res!ondent Dra!hic Publishing, 1nc. ,D9AP@1C or short- )a)er )rod-ct+ a(o-ntin, to "66 214.73. *. )n Gecember *C, '86*, D9AP@1C made !artial !ayment by check to !etitioner in the total amount o P*.,7.7.6.? and on Gecember *', '86*, a !romissory note was e"ecuted to cover the balance o P+C,+50.88. +. 1n the said !romissory note, it was sti!ulated that the amount will be !aid on monthly installments and that ailure to !ay any installment would make the amount immediately demandable with an interest o '*N !er annum. .. )n (e!tember 5, '86+, or ailure o D9AP@1C to !ay any installment, !etitioner iled with the then Court o First 1nstance o Manila, !resided over by herein res!ondent #udge or a (um o Money. 0. 9es!ondent #udge declared D9AP@1C in de ault or ailure to ile its answer within the reglementary !eriod and !lainti ,!etitioner herein- was allowed to !resent its evidence e" !arte. 5. 1n a Gecision dated January '7, '86., the trial co-rt ordered 4'$"&I# to )a* the )etitioner the +-( o2 "30 376.99 ;ith 12< intere+t 2ro( March 30 1973 -ntil 2-ll* )aid )l-+ the co+t+ o2 +-it. )n motion o !etitioner, a writ o e"ecution was issued by res!ondent #udge? but the a orestated writ having e"!ired without the sheri inding any !ro!erty o D9AP@1C, an alias writ o e"ecution was issued on July *, '86.. 6. 4he e"ecuting sheri levied u!on one =1> -nit )rintin, (achine Identi2ied a+ ?Ori,inal &eidel.er, #*linder "re++@ 1n a 3otice o (ale o >"ecution o Personal Pro!erty dated July *8, '86., said !rinting machine was scheduled or auction sale? but in a letter dated July '8, '86., herein !rivate res!ondent "hili))ine $(erican 1r-, #o()an* ="$1#O 2or +hort> had in2or(ed the +heri22 that the )rintin, (achine i+ it+ )ro)ert* and not that o2 4'$"&I# , and accordingly, advised the sheri to cease and desist rom carrying out the scheduled auction sale. 7. 3otwithstanding the said letter, the +heri22 )roceeded ;ith the +ched-led a-ction +ale +old the )ro)ert* to the )etitioner it .ein, the hi,he+t .idder and i++-ed a #erti2icate o2 Sale in 2avor o2 )etitioner . More than ive ,0hours a ter the auction sale and the issuance o the certi icate o sale, PAGC) iled an :A idavit o 4hird Party Claim: with the ) ice o the City (heri . 8. )n July +C,'86., PAGC) iled with the Court o First 1nstance o Manila, a Motion to 3ulli y (ale on >"ecution which was o!!osed by the !etitioner. 'C.9es!ondent #udge, in an )rder dated March *5, '860 ,1bid., !!. 5.%58-, ruled in avor o PAGC). 4he (heri is ordered to return the said machinery to its owner, the Phili!!ine American Grug Co. ''. Petitioner iled a Motion For 9econsideration and an Addendum to Motion or 9econsideration ,1bid., !!. 8.%C7-, but in an )rder dated August '+, '860, the same was denied or lack o merit. @ence, the instant !etition. ISS%E: &hether or not the veil o cor!orate iction should be !ierced2 &EL1: =es. PAGC), as its name suggests, is a drug com!any not engaged in the !rinting business. (o it is dubious that it really owns the said !rinting machine regardless o PAGC)Is title over it. Further, the !rinting machine, as shown by evidence, has been in DP1Is !remises even be ore the date when PAGC) alleged that it ac$uired ownershi! thereo . '$!IO: '. 1t is true that a cor!oration, u!on coming into being, is invested by law with a !ersonality se!arate and distinct rom that o the !ersons com!osing it as well as rom any other legal entity to which it may be related. *. As a matter o act, the doctrine that a cor!oration is a legal entity distinct and se!arate rom the members and stockholders who com!ose it is recogni;ed and res!ected in all cases which are within reason and the law. +. @owever, this se!arate and distinct !ersonality is merely a iction created by law or convenience and to !romote #ustice. Accordingly, this +e)arate )er+onalit* o2 the cor)oration (a* .e di+re,arded or the veil o2 cor)orate 2iction )ierced in ca+e+ ;here it i+ -+ed a+ a cloaA or cover 2or 2ra-d or ille,alit* or to ;orA an inB-+tice or ;here nece++ar* to achieve eC-it* or ;hen nece++ar* 2or the )rotection o2 creditor+. .. Cor!orations are com!osed o natural !ersons and the legal iction o a se!arate cor!orate !ersonality is not a shield or the commission o in#ustice and ine$uity. Likewise, this is true when the cor!oration is merely an ad#unct, business conduit or alter ego o another cor!oration. 1n such case, the iction o se!arate and distinct cor!oration entities should be disregarded. 0. 1n the instant case, !etitioner/s evidence established that "$1#O ;a+ never en,a,ed in the )rintin, .-+ine++; that the .oard o2 director+ and the o22icer+ o2 4'$"&I# and "$1#O ;ere the +a(e; and that "$1#O hold+ 60< +hare o2 +tocA o2 4'$"&I#. Petitioner likewise stressed that PAGC)/s own evidence shows that the !rinting machine

in $uestion had been in the !remises o D9AP@1C since May, '850, long be ore PAGC) even ac$uired its alleged title on July '', '855 rom Ca!itol Publishing. 4hat the said machine was allegedly leased by PAGC) to D9AP@1C on January *., '855, even be ore PAGC) !urchased it rom Ca!ital Publishing on July '', '855, only serves to show that PAGC)/s claim o ownershi! over the !rinting machine is not only arce and sham but also unbelievable. 5. Considering the a orestated !rinci!les and the circumstances established in this case, res!ondent #udge should have !ierced PAGC)/s veil o cor!orate 1dentity. #$SE L$30 1O#!'INE: (e!arate !ersonality o the cor!oration may be disregarded, or the veil o cor!orate iction !ierced, in cases where it is used as a cloak or cover or raud or illegality, or to work an in#ustice, or where necessary to achieve e$uity or when necessary or the !rotection o creditors. 1ISSEN!IN40#ON#%''IN4 O"INION:

C.+ N$!ION$L M$'DE!IN4 #O'"O'$!ION $%!&O': Ganna Laura Oerrudo =N$M$'#O> v. $SSO#I$!E1 /IN$N#E #OM"$NE IN#. F /'$N#IS#O SE#I" APiercing the veil o cor!orate ictionM is allowed when a *6 A!ril '856, D.9. 3o. L%*C775 cor!oration is a mere alter ego o a !erson, and such !erson !O"I#: Piercing the Cor!orate Heil % >vasion o Liability hides behind the !rinci!le that a cor!oration has a to Creditors !ersonality distinct and se!arate rom its stockholders, in "ONEN!E: Gi;on, J. order to commit acts o raud against others. /$#!S '. March *0, '807 % Associated Finance Com!any, 1nc. ,A(()C1A4>G-, through its President, Francisco (yci!, entered into an agreement to e"change sugar with 3ational Marketing Cor!oration ,3AMA9C)- ,re!resented by its then Deneral Manager, <en#amin >strella-. A(()C1A4>G would deliver to 3AMA9C) 'CC !ounds o AHictoriasM and/or A3ationalM re ined sugar in e"change or 6,6+*.6' bags o <usilak and '6, *70.C7 !iculs o APasumilM raw sugar belonging to 3AMA9C). *. May '8, '807 P 1n com!liance with the agreement, 3AMA9C) delivered to A(()C1A4>G 6,6+*.6' bags o <usilak and '6,*70.C7 !iculs o APasumilM domestic raw sugar. +. January '*, '808 P <ecause A(()C1A4>G ailed to deliver to 3AMA9C) the agreed 'CC !ounds o Hictoria and/or 3ational re ined sugar, 3AMA9C) demanded in writing rom A(()C1A4>G to either: ,a- immediately deliver the re ined sugar be ore January *C, or ,b- !ay its e$uivalent cash value amounting to P+6*,5+8.7C. .. (ince A(()C1A4>G re used to deliver the raw sugar or !ay or the re ined sugar 3AMA9C) delivered to it, 3AMA9C) instituted the !resent action in the lower court to recover the sum o P.C+,0'..*7 in !ayment o the raw sugar received by de endants. 0. (yci!Is de ense: @e cannot be held liable because it is a known !rinci!le that a cor!oration has a !ersonality distinct and se!arate rom that o its stockholders and that the latter are not !ersonally liable or the cor!orate obligations. ISS%E: &hether or not Francisco (yci! may be held liable, #ointly and severally liable with co%de endant cor!oration, or the sums o money ad#udged in avor o 3AMA9C) &EL1: =es, because when the cor!oration is the mere alter ego o a !erson, the !rinci!le o cor!orate iction may be disregarded, es!ecially when the !erson hides behind the said !rinci!le in order to commit acts o raud against others. '$!IO: '. (yci! was guilty o raud because through alse re!resentations, he succeeded in inducing 3AMA9C) to enter into the e"change agreement, with ull knowledge, on his !art, that A(()C1A4>G was in no !osition to com!ly with the obligation. *. (yci! cannot seek re uge behind the general !rinci!le that a cor!oration has a !ersonality distinct and se!arate rom that o its stockholders and that the latter are not !ersonally liable or the cor!orate obligations. +. 4he Court elt #usti ied in :!iercing the veil o cor!orate iction: and holding (yci! !ersonally liable, #ointly and severally with A(()C1A4>G, or the sums o money ad#udged in avor o a!!ellant since, when the cor!oration is the mere alter ego o a !erson, the cor!orate iction may be disregarded? the same being true when the cor!oration is controlled, and its a airs are so conducted as to make it merely an instrumentality, agency or conduit o another. 3h* S*ci) +ho-ld .e lia.le: '. (yci! owned P5C,CCC worth o shares in the de endant cor!oration, while his wi e owned P*C,CCC. 4he !ar value o the subscribed ca!ital stock o A(()C1A4>G was only P'C0,CCC.CC *. 3egotiations related to the sub#ect e"change agreement were >BCLQ(1H>L= conducted by (yci! in behal o A(()C1A4>G. +. At the time o the negotiations, A(()C1A4>G was already insolvent. .. &hen 3AMA9C) asked Ge endants to com!ly with the e"change agreement, instead o making delivery o the sugar, Ge endants o ered to !ay its value ,at the rate o P'0.+C !er bag- instead % a clear indication that they did not have the sugar contracted or. #$SE L$30 1O#!'INE: &hen the cor!oration is the mere alter ego o a !erson, the cor!orate iction may be disregarded? the same being true when the cor!oration is controlled and its a airs are so conducted as to make it merely an instrumentality, agency or conduit o another.

044 5$#IN!O v. &ONO'$8LE $""E$LS and ME!'O"OLI!$N !'%S! #OM"$NE G.R. No. 80043 June 6, 1991 !O"I#: >vasion o Liability to Creditors "ONEN!E: GAH1G>, J9., J. /$#!S

#O%'! O/ 8$ND $N1

$%!&O': >rnesto C. Palomi$ue 111 Jacinto, !resident/DM and owner o 0*N o cor!o, owes Metro<ank sum o money, signs trust recei!ts there or. Jacinto absconds. Jacinto ordered to #ointly and severally !ay Metro<ank. Cor!o veil !ierced because it was used as a shield to !er!etuate raud and/or con use legitimate issues. 4here was no clear cut delimitation between the !ersonality o Jacinto and the cor!oration.

'. Jacinto ,!etitioner- is the President and Deneral Manager o 1nland 1ndustries, 1nc. where he owned 0*N o the shares. *. Jacinto owes Metro<ank a sum o money and in order to secure the debt, signs trust recei!ts there or. +. Jacinto, tried to esca!e liability and shi t the entire blame under the trust recei!ts solely and e"clusively on the cor!oration. @e asserted that he cannot be held solidarily liable with the latter because he #ust signed said instruments in his o icial ca!acity as !resident o 1nland 1ndustries, 1nc. and the latter has a #uridical !ersonality distinct and se!arate rom its o icers and stockholders. .. 4he Court o A!!eals, a irming the decision o the 9egional 4rial Court, ordered Jacinto to #ointly and severally !ay Metro<ank. 0. Jacinto a!!ealed, $uestioning the decision o the Court o A!!eals whether it can validly !ierce the iction o cor!orate identity o 1nland 1ndustries, 1nc. even i absolutely no !roo was !resented in court to serve as legal #usti ication or it. ISS%E: &hether or not Jacinto is solidarily liable to Metro<ank or the trust recei!ts. &EL1: =es, cor!orate veil should be !ierced because there was no clear cut delimitation between the !ersonality o Jacinto and the cor!oration. Gecision a irmed. '$!IO: '. As to the liability o 9oberto A. Jacinto, it would a!!ear that he is in in act, the cor!oration itsel known as 1nland 1ndustries, 1nc. Aside rom the act that he is admittedly the President and Deneral Manager o the cor!oration and a substantial stockholder thereo , it was de endant 9oberto A. Jacinto who dealt entirely with Metro<nak in those transactions. 1n the 4rust 9ecei!ts that he signed su!!osedly in behal o 1nland 1ndustries, 1nc., it is not even mentioned that he did so in this o icial ca!acity. 9oberto A. Jacinto was !ractically the cor!oration itsel , the 1nland industries, 1nc. *. 1t is undis!uted that 9oberto Jacinto even admitted that he and his wi e own 0*N o the stocks o the cor!oration. >vidence shows that Jacinto in act acted in his ca!acity as President/Deneral Manager o the cor!oration and that :all the goods covered by the three ,+- Letters o Credit and !aid or under the <ills o >"change were delivered to and received 1nland 1ndustries, 1nc. through 9oberto A. Jacinto, its President and Deneral Manager, who signed or and in behal o de endant 1nland and agreed to the terms and conditions o three ,+- se!arate trust recei!ts covering the same. +. (u!reme Court: RK the same is #ust a clever ruse and a convenient !loy to thwart his !ersonal liability there or by taking re uge under the !rotective mantle o the se!arate cor!orate !ersonality o the de endant cor!oration.M #$SE 1O#!'INES: '. :&hen the veil o cor!orate iction is made as a shield to !er!etuate raud and/or con use legitimate issues, the same should be !ierced.: *. &hile on the ace o the com!laint there is no s!eci ic allegation that the cor!oration is a mere alter ego o !etitioner, subse$uent develo!ments, rom the sti!ulation o acts u! to the !resentation o evidence and the e"amination o witnesses, une$uivocally show that res!ondent Metro!olitan <ank and 4rust Com!any sought to !rove that !etitioner and the cor!oration are one or that he is the cor!oration. 3o serious ob#ection was heard rom !etitioner.

046 #L$"$'OLS S!EEL $N1 N$IL "L$N! G #I' $LLIE1 3O'DE'SH $SSO#I$!ION 1EME!'IO 4$'LI!OS and 9 other ;orAer+ July +', '860, D9 3o. L%+C7** !O"I#: Piercing the Cor!orate Heil? >vasion o Liability/ )bligation to >m!loyees "ON!EN!E: MASA(1A9, J.

$%!&O': ,Seith MeridoresCla!arols (teel and 3ail Plant was dissolved and subse$uently, Cla!arols (teel Cor!oration was ormed. >duardo Cla!arol thought that by dissolving the old cor!oration, its liabilities in !aying back wages would also be gone. Note: theres a separate issue on computation of back wages in the case, but well not touch on that here.

/$#!S '. )n Aug. 5, '806, a com!laint or un air labor !ractice was iled by the Allied &orkersI Association and Gemetrio Darlitos, et. Al against Cla!arols (teel and 3ail Plant ,Cla!arols*. 4he Court o 1ndustrial 9elations ,C19- ruled in res!ondentIs avor? it declared Cla!arols guilty o union busting and illegal dismissal due to !artici!ation o res!ondents in union activities. 4he C19 ordered the reinstatement and !ayment o back wages. +. 4he res!ondents iled a motion or e"ecution o the decision. 4he C19 granted the motion or e"ecution o the order. .. (everal attem!ts were made by the res!ondents ,accom!anied by the Chie o Police o 4alisay, 3egros )cc- to be reinstated to their work but Cla!arols ,through its accountant, Francisco Cusi- re used alleging that there was no order rom >duardo Cla!arols. 0. 9ecords show that Cla!arols was already dissolved on June +C, '806? and Cla!arols (teel Cor!oration succeeded it on July ', '806. 4he latter also eventually sto!!ed o!eration on Gec. 6, '85*. 5. Petitioners iled an o!!osition contending that it could not !ersonally reinstate res!ondent workers alleging that under the circumstances !resently engul ing the com!any, and assuming the workers are entitled to back wages, it was only limited to + months since Cla!arols sto!!ed o!erations in '85*. ISS%E: &hether or not Cla!arols (teel and 3ail Plant was one the same with Cla!arols (teel Cor!oration2 &EL1: =es. 4he latter cor!oration was a continuation and successor o the irst entity, and its emergence was skill ully timed to avoid the inancial liability that already attached to its !redecessor. '$!IO: '. 9es!ondent Court/s indings that indeed the Cla!arols (teel and 3ail Plant, which ceased o!eration o June +C, '806, was (QCC>>G>G by the Cla!arols (teel Cor!oration e ective the ne"t day, July ', '806 u! to Gecember 6, '85*, when the latter inally ceased to o!erate, were not dis!uted by !etitioners. *. 1t is very clear that the latter cor!oration was a continuation and successor o the irst entity, and its emergence was skill ully timed to avoid the inancial liability that already attached to its !redecessor, the Cla!arols (teel and 3ail Plant. <oth !redecessors and successor were owned and controlled by the !etitioner >duardo Cla!arols and there was no break in the succession and continuity o the same business. +. 4his ?avoidin,9the9lia.ilit*? scheme is very !atent, considering that 8CN o the subscribed shares o stocks o the Cla!arols (teel Cor!oration ,the second cor!oration- was owned by res!ondent ,herein !etitioner- Cla!arols himsel , and all the assets o the dissolved Cla!arols (teel and 3ail Plant were turned over to the emerging Cla!arols (teel Cor!oration. .. 1t is very obvious that the +econd cor)oration +eeA+ the )rotective +hield o2 a cor)orate 2iction whose veil in the !resent case could, and should, be !ierced as it was deliberately and maliciously designed to evade its inancial obligation to its em!loyees. #$SE L$30 1O#!'INE: 4he case cited several !ast cases o the (C conveying the message: '. &hen the notion o legal entity is used to de eat !ublic convenience, #usti y wrong, !rotect raud, or de end crime, the law will regard the cor!oration as an association or !ersons, or, in the case o two cor!orations, will merge them into one. ,=utivo and (ons @ardware Co. v Court o 4a" A!!eals- '85'. *. &here a cor!oration is a dummy and serves no business !ur!ose and is intended only as a blind, the cor!orate iction may be ignored. ,Liddel and Co, 1nc. v Collector o 1nternal 9evenue- '85'. +. where a cor!oration is merely an ad#unct, business conduit or alter ego o another cor!oration, the iction o se!arate and distinct cor!orate entities should be disregarded. ,Commissioner o 1nternal 9evenue v 3orton and @arrison Co.- '85..

047. Indo)hil !eItile Mill 3orAer+ %nion9"!43O v. $%!&O': Marvin #alica Piercing is not allowed unless the remedy sought is to make '88*%C*%C+ T D.9. 3o. 85.8C the o icer or another cor!oration !ecuniarily liable or !O"I#: >vasion o Liability / )bligation to >m!loyees cor!orate debts "ONEN!E: M>G1ALG>A, J. /$#!S '. 1ndo!hil Qnion is a legitimate labor organi;ation duly registered with the G)L> and the e"clusive bargaining unit o all rank and ile em!loyees o 1ndo!hil 4e"tile Mills. *. )n A!ril '876, the Qnion and 1ndo!hil e"ecuted a C<A e ective A!ril ', '876 to March +', '88C. )n 3ovember '876, 1ndo!hil Acrylic was ormed and registered with the (>C. 1n '887, Acrylic became international and hired workers according to its criteria and standards. +. (ometime in July '878, the workers o Acrylic unioni;e and a duly certi ied C<A was e"ecuted. 1n '88C, the Qnion claimed that the !lant acilities built and set u! by Acyrlic should be considered as an e"tension or e"!ansion o 1ndo!hil !ursuant to (ec. ',c- o Art.' o the C<A to wit: 4his agreement shall a!!ly to all com!anies, acilities, and installations and to any e"tension and e"!ansion thereat. .. 4he union sough that Acrylic be considered !art o the bargaining unit. 4heir contention is that the articles o incor!oration o the two cor!oration establish that the two entities are engaged in the same kind o business, which is the manu acture and sale o yarns o various counts and kinds and o other materials o kindred character or nature. Furthermore, they em!hasi;e that the two cor!orations have !ractically the same incor!orators, directors and o icers. Also the two cor!oration have their acilities in the same com!ound. 4hat many o 1ndo!hilIs own machineries such as dyeing machines, reeler, broiler, were trans erred to and are now being used by the Acrylic !lant. 4hat services o a number o units, de!artments or sections o !rivate res!ondents are !rovided by Acrylic and that the em!loyees o 1ndo!hil are the same !ersons manning and servicing the units o Acrylic. 0. <oth !arties submitted the issue to Labor Arbiter Calica. Calica ruled in avor o 1ndo!hil and stated that Acrylic is not e"tension o 1ndo!hil, hence their C<A does not e"tend to the em!loyees o Acrylic. 5. Qnion sought to !ierce cor!orate veil alleging that the creation o Acrylic is a devise to evade the a!!lication o the C<A 1ndo!hil had with them ,or it sought to include the other union in its bargaining leverage-. ISS%E: &hether or not 4he doctrine o !iercing the veil o cor!orate entity a!!lies. &EL1: 3o. Legal cor!orate entity is disregarded only i it is sought to hold the o icers and stockholders directly liable or a cor!orate debt or obligation. Qnion does not seek to im!ose such claim against Acrylic. Mere act that businesses were related, that some o the em!loyees o 1ndo!hil are the same !ersons manning and !roviding or au"iliary services to the other com!any, and that !hysical !lants, o icers and acilities are situated in the same com!ound % not su icient to a!!ly doctrine. '$!IO: Acrylic is not an alter ego or an ad#unct or a business conduit o 1ndo!hil because it has a se!arate legitimate business !ur!ose. 1ndo!hil engages in the manu acture o yarns while Acrylic is to manu acture, buy, and sell at wholesale basis, barter, im!ort, e"!ort and otherwise deal in various kinds o yarns. 4wo cor!orations cannot be treated as single bargaining unit #ust because they have related businesses. 4he Qnion seeks to !ierce the veil o Acrylic alleging that the cor!oration is a device to evade the a!!lication o the C<A. @owever the CA held that said doctrine is only used on the e"istence o valid grounds. 1n the case at bar, the act that the business o 1ndo!hil and Acrylic are related that sometimes the em!loyees o 1ndo!hil are the same !ersons manning and !roviding or au"iliary services to the units o Acrylic, and that the !hysical !lants, o ices, and acilities are situated in the same com!ound. 1t is the (CIs considered o!inion that these acts are not su icient to #usti y the !iercing o the cor!oration veil o Acrylic. Furthermore, the legal entity is disregarded only i sought to hold the o icers and stockholders liable. 1n the instant case, the Qnion does not seek relie rom 1ndo!hil. #$SE L$30 1O#!'INE: 4he doctrine o !iercing the veil o cor!orate entity a!!lies when cor!orate iction is used to de eat !ublic convenience, #usti y wrong, !rotect raud or de end crime, or when it is made as a shield to con use the legitimate issues or where a cor!oration is the mere alter ego or business conduit o a !erson, or where the cor!oration is so organi;ed and controlled and its a airs are so conducted as to make it merely an instrumentality, agency, conduit or ad#unct o another cor!oration.

047 N$/L% v. O)le $%!&O': Pat July **, '875, D.9. 3o. L%5755' !O"I#: >vasion o Liability/)bligation to >m!loyees "ONEN!E: Dutierre;, Jr., J. /$#!S: '. (e!tember 7, '87*: the 3ational Federation o Labor Qnion ,3AFLQ- iled a re$uest or conciliation be ore the <ureau o Labor 9elations ,<L9- re$uesting or the intervention in its dis!ute with management involving: Money claims 9e usal to conclude a collective agreement a ter such has been negotiated 9un%away sho! undertaken by management to bust the union *. (e!tember '0, '87*: Management unilaterally declared a tem!orary shutdown. +. (e!tember *+, '87*: management o Lawman 1ndustrial !romised the union that it will start the normali;ation o o!erations at Lawman e ective January '87+ .. )ctober '', '87*: the union iled its notice o strike 0. January 5, '87+: Lawman ailed to resume o!erations alleging !oor business conditions 5. 3AFLQ iled a com!laint or un air labor !ractice against the management o Lawman sometime Gecember '87* ,3AFLQ vs. Lawman- !ending be ore the Metro Manila <ranch o the 3L9C. 6. March '6, '87+: the Minister o Labor and >m!loyment issued the )rder: All em!loyees a ected by the e"tended shutdown which is highly irregular, are ordered to return to work and management is directed to acce!t all returning workers under the same terms and conditions !revailing !revious to the illegal shutdown. Management is urther directed to !ay severance com!ensation including all un!aid wages !revious to the shutdown and a ter March '0, '87+ in the event that the com!any cannot resume o!erations. Pending the determination o the charges on illegal lockout runaway%sho! and the !ending money claims against the com!any, Lawman 1ndustrial is hereby en#oined rom trans erring ownershi! or otherwise e ecting any encumbrance or any o its e"isting assets in avor o any third !arty without a !rior clearance rom this ) ice and timely notice to the union. 4he com!any is likewise !rohibited rom terminating the em!loyment o any o its em!loyees !ending the outcome o this dis!ute. 4his order automatically en#oins a strike or lockout. 7. May *C, '87+: res!ondent iled a motion or reconsideration alleging that it had su ered losses shown by its F(, and in ormed the Ministry to e ect a shutdown e ective on (e!tember 7, '87* and to circulari;e a memorandum on 3ovember *, '87* announcing the cessation o o!erations 4he com!any alleged urther that it had no more !lant and building because they were allegedly re!ossessed by the Pioneer 4e"turi;ing Cor!oration or the ailure o res!ondent to !ay rentals as evidenced by the letter o Mr. >ugenio 4an dated August 'C, '87* stating that res!ondent is given i teen ,'0- days to settle its accounts, otherwise an action or re!ossession and e#ectment would be instituted against it. 8. <ut the actual !artial shutdown began in August '87*. 1t a!!ears moreover that at night, machines were dismantled, hauled out and then installed at 3o. .+ >ngineering 9oad, Araneta Qniversity com!ound, Malabon and the name o Lawman was changed to L1<9A DA9M>34(. Qnder that name, new a!!licants or em!loyment were called even as the com!any continued to manu acture the same !roducts but under the name o L1<9A DA9M>34(. &hen this was discovered by the workers, L1<9A DA9M>34( was changed to G)LP@13 DA9M>34(. 'C. June 5, '87+: 3AFLQ submitted a !osition !a!er alleging that it was certi ied by the <L9 as the sole and e"clusive bargaining agent o all the rank and ile em!loyees o the said actory. 4he management agreed as ollows: &age increase, P'.CC or the irst year? P'.CC or the second year and P'.CC or the third year o the contract. Hacation and sick leaves were also granted and other ringe bene its. 4he collective bargaining agreement was su!!osed to be e ective (e!tember '87*. ''. July +', '87.: the !ublic res!ondent modi ied its earlier order and des!ite a inding that the !rivate res!ondent com!any was guilty o un air labor !ractice, the !ublic res!ondent did not order the reinstatement o the em!loyees concerned Abecause the com!any has declared that it had already ceased its o!erations com!letely.M 1t is this order or non%reinstatement which is now be ore us. ISS%E: '. &hether or not the em!loyees should be reinstated. &EL1: '. =es, because a ter inding that Lawman 1ndustrial Cor!oration had trans erred its business o!erations to Libra

Darments >nter!rises, which later changed its name to Gol!hin Darments >nter!rises, the !ublic res!ondent cannot deny reinstatement to the !etitioners sim!ly because Lawman 1ndustrial Cor!oration has ceased its o!erations. '$!IO: '. 1t is clear rom the records o this case that the com!any bargained in bad aith with the union when !ending the negotiation o their collective agreement, the com!any declared a tem!orary cessation o its o!erations which in reality was an illegal lockout. >vidently, the com!any also maintained run%away sho! when it started trans erring its machine irst to Libra and then to Gol!hin Darments. Failure on the !art o the com!any to com!ly with the re$uirements o notice and due !rocess to the em!loyees and the Labor Ministry one month be ore the intended RclosureI o the irm is clearly against the law. 4here is also evidence on the record that even a ter the alleged Rshutdown the com!any was still o!erating in the name o Lawman 1ndustrial although !roduction was being carried out by another irm called Libra Darments ,later Gol!hin Darments-. 4he evident bad aith, raud and deceit committed by the com!any to the !re#udice o both the union and the em!loyees who have e"isting wage claims leads us to a irm the unionIs !osition that the veil o cor!orate iction should be !ierced in order to sa eguard the right to sel %organi;ation and certain vested rights which had accrued in avor o the union. #$SE L$30 1O#!'INE: 1t is very obvious rom the above indings that the second cor!oration seeks the !rotective shield o a cor!orate iction to achieve an illegal !ur!ose. As enunciated in the case o Cla!arols vs. Court o 1ndustrial 9elations its veil in the !resent case should, there ore, be !ierced as it was deliberately and maliciously designed to evade its inancial obligations to its em!loyees. 1t is an established !rinci!le that when the veil o cor!orate iction is made as a shield to !er!etrate a raud or to con use legitimate issues ,here, the relation o em!loyer%em!loyee-, the same should be !ierced.

C.7 GILL$9'EE !'$NSI! v. /E''E' )ctober *8, '857 D.9. 3o. L%*+78+ !O"I#: >vasion o Liability on Contract "ONEN!E:Angeles, J.

$%!&O': =ayie Lanting A seller may not make use o a cor!orate entity as a means o evading the obligation o his covenant. &here the Cor!oration is substantially the alter ego o one o the !arties to the covenant or the restrictive agreement, it can be en#oined rom com!eting with the covenantee.

/$#!S '. Jose M. Hillarama was an o!erator o a bus trans!ortation, under the business name o Hilla 9ey 4ransit, !ursuant to certi icates o !ublic convenience ,CPC- granted him by the Public (ervice Commission ,P(C-. *. )n January 7, '808: he sold the two certi icates o !ublic convenience to the Pangasinan 4rans!ortation Com!any, 1nc. ,Pantranco- with the condition: that Hillarama :shall not or a !eriod o 'C years rom the date o this sale, a!!ly or any 4PQ service identical or com!eting with the buyer.: +. March 5, '808,+ months a ter the sale-: a cor!oration called Hilla 9ey 4ransit, 1nc. was organi;ed, with the wi e o Jose M. Hillarama as one o the incor!orators and who was subse$uently elected as treasurer o the Cor!oration. .. A month a ter its registration with the (>C, Hilla 9ey 4ransit, 1nc. bought 0 CPCs and .8 buses rom Halentin Fernando, or P*.8, CCC.CC, o which P'CC, CCC.CC was !aid u!on the signing o the contract? P0C, CCC.CC was !ayable u!on the inal a!!roval o the sale by the P(C? P.8, 0CC.CC one year a ter the inal a!!roval o the sale? and the balance o P0C, CCC.CC :shall be !aid by the <Q=>9 to the di erent su!!liers o the (>LL>9.:. 4he !arties immediately a!!lied with the P(C or its a!!roval 0. <e ore the P(C could take inal action on the said a!!lication, * o the 0 CPCs were levied u!on !ursuant to a writ o e"ecution issued by the CF1 in avor o >usebio Ferrer, #udgment creditor, against Halentin Fernando, #udgment debtor. Guring the !ublic sale conducted, Ferrer was the highest bidder, and a certi icate o sale was issued in his name. 5. Ferrer then sold the said CPCs to Pantranco, and they #ointly submitted their contract o sale to the P(C or a!!roval. 6. 4he P(C issued an order that !ending resolution o the a!!lications, Pantranco shall have the authority to !rovisionally o!erate the service under the * CPC( that were the sub#ect o the contract between Ferrer and Pantranco. 7. Hilla 9ey 4ransit, 1nc. took issue with the ruling o the P(C and elevated the matter to the (u!reme Court. 4he Court decreed that until the issue on the ownershi! o the dis!uted certi icates shall have been inally settled by the !ro!er court, the Hilla 9ey 4ransit, 1nc. should be the one to o!erate the lines !rovisionally. 8. 3ovember ., '808: Hilla 9ey 4ransit iled a com!laint or annulment o the sheri /s sale o the * CPCs to Ferrer and the subse$uent sale to Pantranco. 1t !rayed that all the orders o the P(C relative to the dis!ute over the CPCs in $uestion be annulled. 'C. Pantranco iled a third%!arty com!laint against Jose M. Hillarama, alleging that Hillarama and Hilla 9ey 4ransit are one and the same, and that Hillarama and/or the Hilla 9ey 4ransit, 1nc. is $uali ied rom o!erating the CPCs by virtue o the agreement entered into between Hillarama and Pantranco. ISS%E: Goes the sti!ulation between Hillarama and Pantranco, as contained in the deed o sale, that the ormer : shall not or a !eriod o 'C years rom the date o this sale, a!!ly or any 4PQ service identical or com!eting with the buyer.: bind Hilla 9ey 4ransit, 1nc.2 &EL1: =es. Court ound that the inances o Hilla%9ey, 1nc. were managed as i they were the !rivate unds o Hillarama and in such a way and e"tent that Hillarama a!!eared to be the actual owner o the business without regard to the rights o the stockholders. Hillarama even admitted that he mingled the cor!orate unds with his own money. 4hese circumstances negate Hillarama/s claim that he was only a !art%time Deneral Manager, and show beyond doubt that the cor!oration is his alter ego. 4hus, the restrictive clause with Pantranco a!!lies.

'$!IO: Q!on the oregoing considerations, &e are o the o!inion, and so hold, that the !re!onderance o evidence have shown that the Hilla 9ey 4ransit, 1nc. is an alter ego o Jose M. Hillarama, and that the restrictive clause in the contract entered into by the latter and Pantranco is also en orceable and binding against the said Cor!oration. Q!on the oregoing considerations, )ur conclusion is that the sti!ulation !rohibiting Hillarama or a !eriod o 'C years to :a!!ly: or 4PQ service along the lines covered by the certi icates o !ublic convenience sold by him to Pantranco is valid and reasonable. @aving arrived at this conclusion, and considering that the !re!onderance o the evidence have shown that Hilla 9ey 4ransit, 1nc. is itsel the alter ego o Hillarama, &e hold, as !rayed or in Pantranco/s third !arty com!laint, that the said Cor!oration should, until the e"!iration o the '%year !eriod abovementioned, be en#oined rom o!erating the line sub#ect o the !rohibition. #$SE L$30 1O#!'INE: 4he doctrine that a cor!oration is a legal entity distinct and se!arate rom the members and stockholders who com!ose it is recogni;ed and res!ected in all cases which are within reason and the law. &hen the iction is urged as a means o !er!etrating a raud or an illegal act or as a vehicle or the evasion o an e"isting obligation, the circumvention o statutes, the achievement or !er ection o a mono!oly or generally the !er!etration o knavery or crime, the veil with which the law covers and isolates the cor!oration rom the members or stockholders who com!ose it will be li ted to allow or its consideration merely as an aggregation o individuals. 4he rule is that a seller or !romisor may not make use o a cor!orate entity as a means o evading the obligation o his covenant.

049 #E$SE v #O%'! O/ $""E$LS )ctober '7, '868, D9 U L%++'6* !O"I#: Closed Cor!orations "ON!EN!E: Duerrero, J. /$#!S

$%!&O': Jade Cor!orationsI se!arate and distinct identity Piercing the veil o cor!orate identity

'. (ometime in June '8C7, Forrest L. Cease and 0 other American citi;ens organi;ed the 4iaong Milling and Plantation Com!any. 4he com!any ac$uired various !ro!erties but were bought out by Forrest L. Cease together with his children >rnesto, Cecilia, 4eresita, <en#amin, Florence and another amily member named <oni acia 4irante. *. 4he charter o the com!any la!sed in June '807 but there were no records o its li$uidation. )n '+ August '807, Forrest L. Cease died. +. @is * children, <en#amin and Florence wanted an actual division o the shares among the children while the others wanted reincor!oration. >rnesto, 4eresita, Cecila and stockholder <oni acia 4irante !roceeded to incor!orate themselves into the F.L. Cease Plantation Com!any and registered it with the (ecurities and >"change Commission on 8 Gecember '808. .. <en#amin and Florence initiated (!ecial Proceeding U +78+ in the Court o First 1nstance o 4ayabas or the settlement o the estate o Forrest L. Cease on *' A!ril '85C. )n '8 May '85C, they iled Civil Case U 5+*5 against >rnesto, 4eresita, Cecilia together with stockholder <oni acia asking that the 4iaong Milling be declared identical to the F. L. Cease Plantation and that its !ro!erties be divided among its children as his intestate heirs. 0. 4he Civil Case was resisted by >rnesto, 4eresita, Cecilia and <oni acia by iling a bond to remain in !ossession o the com!any. 5. )n *' May '85', on the eve o the e"!iry o the +%year li$uidation !eriod, the board o li$uidators o the 4iaong Milling e"ecuted an assignment and conveyance o !ro!erties and trust agreement in avor o F.L. Cease Plantation as trustee o the 4iaong Milling. Q!on motion o <en#amin and Florence, Judge Manolo Maddela rendered his #udgment in avor o <en#amin and Florence and declared that: 4he assets and !ro!erties o 4iaong Milling, now a!!earing under the name o F.L. Cease Plantation is the estate also o the deceased Forrest L. Cease, and should be divided share and share alike to his 5 children in accordance with 9ule 58 o the 9ules o Court. 4he 9esolution to sell dated '* )ctober '808 and the 4rans er o Conveyance with 4rust Agreement is set aside or it is im!ro!er, illegal and there ore, null and void. F.L. Cease Plantation is removed as trustee o the 4iaong Milling and ordered to deliver and convey all !ro!erties and assets o 4iaong Milling to whomsoever be a!!ointed as 9eceiver. (!ecial Proceedings U +78+ is terminated and dismissed. 6. >rnesto, 4eresita, Cecilia and <oni acia a!!ealed the decision. <en#amin and Florence moved to dismiss the a!!eal on the ground that #udgment was interlocutory and not a!!ealable. 4he #udge dismissed the a!!eal. 7. >rnesto, 4eresita, Cecilia and <oni acia brought the case to the (u!reme Court but the case was remanded to the Court o A!!eals. 4he Court o A!!eals dismissed the a!!eal on 8 Gecember '86C. 8. >rnesto, 4eresita, Cecilia and <oni acia a!!ealed to the (u!reme Court because, according to them, the Court o A!!ealerred in: @earing and deciding over (!ecial Proceeding U +78+ and Civil Case U 5+*5 A irming that the 4iaong Milling is also the !ro!erty o the estate o Forrest L. Cease A irming that the decision o the CF1 on *6 Gecember '858 is interlocutory and non%a!!ealable. ISS%E: &here or not the 4iaong Milling and its !ro!erties are also the !ro!erties o the estate o Forrest L. Cease &EL1: 4he !etition was dismissed. 4iaong Milling and its !ro!erties are also the !ro!erties o the deceased Forrest L. Cease.

'$!IO: 9ecords showed that although the original incor!orators o the 4iaong Milling were aliens, riends and third%!arties, it develo!ed into a close amily cor!oration. 4he <oard o Girectors and (tockholders belong to one amily headed by Forrest L. Cease. )nly members o his amily bene ited rom the cor!oration. 4he cor!oration never had any account with any banking institution, or o any account was carried in a bank on its behal , it was in the name o Forrest L. Cease. 4he o!eration o the cor!oration is merged with those o the ma#ority stockholders. Forrest L. Cease used 4iaong Milling as his instrumentality and or the e"clusive bene its o his amily. 4he cor!oration is only a business conduit and an e"tension o his !ersonality P this one and the same thing this the assets o the cor!oration are also the estate o Forrest L. Cease. 4he business o the cor!oration is largely, i not wholly, the !ersonal venture o Forrest L. Cease. 4here was no !roo (howing that his children were subscribers or !urchases o the stocks they own. 4heir !artici!ation as nominal shareholders came about rom Forrest L. CeaseIs gratuitous dole out o his own shares to the bene it o his children and his amily. #$SE L$30 1O#!'INE: 4he doctrine o disregarding or !iercing the veil o cor!orate iction P Denerally, a cor!oration is invested by law with !ersonality se!arate and distinct rom that o the !ersons com!osing it. Gue to this attribute, a cor!oration may not be made to answer or acts or liabilities o its stockholders or vice versa. 4his (e!arate and distinct !ersonality is merely a iction created by law or convenience and to !romote the ends o #ustice. 4he veil o cor!orate entity may be !ierced when it is used as to shield a !ublic convenience, to #usti y a wrong, to de end a crime, to !rotect or !er!etuate a raud, to con use legitimate issues, to circumvent the law, or to !er!etuate dece!tion or as an alter ego, ad#unct or business conduit or the sole bene it o the stockholders. 1ISSEN!IN40#ON#%''IN4 O"INION: 3/A

060 1EL"&E' !'$1ES v #$ 5an-ar* 27 1988; 4.'. No. L979269 !o)ic: #lo+e #or)oration+ "onente: 5-+tice 4-tierreJ 5r.

$%!&O': Srystelle 4he Gel!her 4rades Cor!oration is a business conduit o the Pachecos. &hat they really did was to invest their !ro!erties and change the nature o their ownershi! rom unincor!orated to incor!orated orm by organi;ing Gel!her 4rades Cor!oration to take control o their !ro!erties and at the same time save on inheritance ta"es.

/$#!S '. 1n '86., Gel in Pacheco and his sister, Pelagia Pacheco, were the owners o *6,'58 s$uare meters o real estate 1denti ied as Lot. 3o. 'C80, Malinta >state, in the Munici!ality o Polo ,now Halen;uela-, Province o <ulacan ,now Metro Manila- which is covered by 4rans er Certi icate o 4itle 3o. 4%.*.C o the <ulacan land registry. *. )n A!ril +, '86., the said co%owners leased to Construction Com!onents 1nternational 1nc. the same !ro!erty and !roviding that during the e"istence or a ter the term o this lease the lessor should he decide to sell the !ro!erty leased shall irst o er the same to the lessee and the letter has the !riority to buy under similar conditions. +. )n August +, '86., lessee Construction Com!onents 1nternational, 1nc. assigned its rights and obligations under the contract o lease in avor o @ydro Pi!es Phili!!ines, 1nc. with the signed con ormity and consent o lessors Gel in Pacheco and Pelagia Pacheco. 4he contract o lease, as well as the assignment o lease were annotated at the back o the title, as !er sti!ulation o the !arties. .. )n January +, '865, a deed o e"change was e"ecuted between lessors Gel in and Pelagia Pacheco and de endant Gel!her 4rades Cor!oration whereby the ormer conveyed to the latter the leased !ro!erty ,4C4 3o.4%.*.C- together with another !arcel o land also located in Malinta >state, Halen;uela, Metro Manila ,4C4 3o. .*6+- or *,0CC shares o stock o de endant cor!oration with a total value o P',0CC,CCC.CC. 0. A certain >duardo 3eria, a certi ied !ublic accountant and son%in%law o the late Pelagia Pacheco testi ied that Gel!her 4rades Cor!oration is a amily cor!oration? that the cor!oration was organi;ed by the children o the two s!ouses ,s!ouses Pelagia Pacheco and <en#amin @ernande; and s!ouses Gel in Pacheco and Pilar Angeles- who owned in common the !arcel o land leased to @ydro Pi!es Phili!!ines in order to !er!etuate their control over the !ro!erty through the cor!oration and to avoid ta"es? that in order to accom!lish this end, two !ieces o real estate were trans erred to the cor!oration? that the leased !ro!erty was trans erred to the cor!oration by virtue o a deed o e"change o !ro!erty? that in e"change or these !ro!erties, Pelagia and Gel in ac$uired *,0CC unissued no !ar value shares o stock which are e$uivalent to a 00N ma#ority in the cor!oration because the other owners only owned *,CCC shares4he !etitioners contend that there was actually no trans er o ownershi! o the sub#ect !arcel o land since the Pachecos remained in control o the !ro!erty. 4he trans er o ownershi!, i anything, was merely in orm but not in substance. 1n reality, !etitioner cor!oration is a mere alter ego or conduit o the Pacheco co%owners? hence the cor!oration and the co%owners should be deemed to be the same, there being in substance and in e ect an 1dentity o interest.: 5. 4he !etitioners maintain that the Pachecos did not sell the !ro!erty. 4hey argue that there was no sale and that they e"changed the land or shares o stocks in their own cor!oration. :@ence, such trans er is not within the letter, or even s!irit o the contract. 4here is a sale when ownershi! is trans erred or a !rice certain in money or its e$uivalent ,Art. '.57, Civil Code- while there is a barter or e"change when one thing is given in consideration o another thing ,Art. '5+7, Civil Code-.: 6. )n the other hand, the !rivate res!ondent argues that Gel!her 4rades Cor!oration is a cor!orate entity se!arate and distinct rom the Pachecos? hat !etitioner Gel in Pacheco, having treated Gel!her 4rades Cor!oration as such a se!arate and distinct cor!orate entity, is not a !arty who may allege that this se!arate cor!orate e"istence should be disregarded. 1t maintains that there was actual trans er o ownershi! interests over the leased !ro!erty when the same was trans erred to Gel!her 4rades Cor!oration in e"change or the latter/s shares o stock. 7. )n the ground that it was not given the irst o!tion to buy the leased !ro!erty !ursuant to the !roviso in the lease agreement, res!ondent @ydro Pi!es Phili!!ines, 1nc., iled an amended com!laint or reconveyance o Lot. 3o. 'C80

in its avor under conditions similar to those whereby Gel!her 4rades Cor!oration ac$uired the !ro!erty rom Pelagia Pacheco and Gel!hin Pacheco. 8. 94C: ruled in avour o the !lainti ,@ydro Pi!e Phils. 1nc.'C. CA: a irmed the 94CIs decision. ''. @ence, this !resent action. ISS%E: &hether or not the :Geed o >"change: o the !ro!erties e"ecuted by the Pachecos on the one hand and the Gel!her 4rades Cor!oration on the other was meant to be a contract o sale which, in e ect, !re#udiced the !rivate res!ondent/s right o irst re usal over the leased !ro!erty included in the :deed o e"change.: &EL1:NO. 4he :Geed o >"change: o !ro!erty between the Pachecos and Gel!her 4rades Cor!oration cannot be considered a contract o sale. 4here was no trans er o actual ownershi! interests by the Pachecos to a third !arty. 4he Pacheco amily merely changed their ownershi! rom one orm to another. 4he ownershi! remained in the same hands. @ence, the !rivate res!ondent has no basis or its claim o a light o irst re usal under the lease contract. '$!IO: A ter incor!oration, one becomes a stockholder o a cor!oration by subscri!tion or by !urchasing stock directly rom the cor!oration or rom individual owners thereo . 1n the case at bar, in e"change or their !ro!erties, the Pachecos ac$uired *,0CC original unissued no !ar value shares o stocks o the Gel!her 4rades Cor!oration. Conse$uently, the Pachecos became stockholders o the cor!oration by subscri!tion :4he essence o the stock subscri!tion is an agreement to take and !ay or original unissued shares o a cor!oration, ormed or to be ormed.: 1t is signi icant that the Pachecos took no !ar value shares in e"change or their !ro!erties. 1t is to be stressed that by their ownershi! o the *,0CC no !ar shares o stock, the Pachecos have control o the cor!oration. 4heir e$uity ca!ital is 00N as against .0N o the other stockholders, who also belong to the same amily grou!. 1n e ect, the Gel!her 4rades Cor!oration is a business conduit o the Pachecos. &hat they really did was to invest their !ro!erties and change the nature o their ownershi! rom unincor!orated to incor!orated orm by organi;ing Gel!her 4rades Cor!oration to take control o their !ro!erties and at the same time save on inheritance ta"es. 4he records do not !oint to anything wrong or ob#ectionable about this :estate !lanning: scheme resorted to by the Pachecos. :4he legal right o a ta"!ayer to decrease the amount o what otherwise could be his ta"es or altogether avoid them, by means which the law !ermits, cannot be doubted.: 4he :Geed o >"change: o !ro!erty between the Pachecos and Gel!her 4rades Cor!oration cannot be considered a contract o sale. 4here was no trans er o actual ownershi! interests by the Pachecos to a third !arty. 4he Pacheco amily merely changed their ownershi! rom one orm to another. 4he ownershi! remained in the same hands. @ence, the !rivate res!ondent has no basis or its claim o a light o irst re usal under the lease contract.

#$SE L$30 1O#!'INE: A no%!ar value share does not !ur!ort to re!resent any stated !ro!ortionate interest in the ca!ital stock measured by value, but only an ali$uot !art o the whole number o such shares o the issuing cor!oration. 4he holder o no%!ar shares may see rom the certi icate itsel that he is only an ali$uot sharer in the assets o the cor!oration. <ut this character o !ro!ortionate interest is not hidden beneath a alse a!!earance o a given sum in money, as in the case o !ar value shares. 4he ca!ital stock o a cor!oration issuing only no%!ar value shares is not set orth by a stated amount o money, but instead is e"!ressed to be divided into a stated number o shares, such as, ',CCC shares. 4his indicates that a shareholder o 'CC such shares is an ali$uot sharer in the assets o the cor!oration, no matter what value they may have, to the e"tent o 'CC/',CCC or '/'C. 4hus, by removing the !ar value o shares, the attention o !ersons interested in the inancial condition o a cor!oration is ocused u!on the value o assets and the amount o its debts.

1ISSEN!IN40#ON#%''IN4 O"INION: 3/A

061 "&ILI""INE N$!ION$L 8$ND )etitioner $%!&O': 9evy Medrick d9. 3eri v+. 'I!'$!!O 4'O%" IN#. 'I$!!O P3<%1FL P subsidiary com!any o P3< IN!E'N$!ION$L IN#. and 1$1$S$N 4ENE'$L P3< P attorney in act o P3<%1FL ME'#&$N1ISE re+)ondent+. D.9. 3o. '.*5'5 % July +', *CC' !O"I#: Piercing the Cor!orate Heil as a 9emedy "ONEN!E: Sa!unan, J. Facts: '. )n May *8, '885 P3<%1FL, a subsidiary com!any o P3<, organi;ed and doing business in @ongkong, e"tended a letter o credit in avor o the res!ondents in the amount o Q( V +CC,CCC.CC secured by real estate mortgages constituted over . !arcel o land in Makati City and was later on increased and decreased to Q( V ',.*',+'5.'7. *. 9es!ondents made re!ayments o the loan incurred by remitting those amounts to their loan account with P3<%1FL in @ongkong. +. As o A!ril +C, '887, their outstanding obligations stood at Q( V',.86,*6..6C. .. P3<%1FL, through its attorney%in% act P3<, noti ied the res!ondents o the oreclosure o all the real estate mortgages. 0. 4he sub#ect !ro!erties were sold at !ublic auction on May *6, '888 at the Makati City @all. 5. )n May *0, '888, res!ondents iled a com!laint or in#unction with !rayer or the issuance o a writ o !reliminary in#unction and/or tem!orary restraining order be ore the the 94C o Makati. 6. 94C o Makati issued a 6*hour tem!orary restraining order. ISS%E: &hether or not P3< is !rivy to the contract o loan entered between P3<%1FL and !rivate res!ondent, being that P3<%1FL is a subsidiary com!any o P3<. &EL1: 3o. 4he contract $uestioned is one entered into between res!ondent and P3<%1FL, not P3<. Petitioner is an agent with limited authority and s!eci ic duties under a s!ecial !ower o attorney incor!orated in the real estate mortgage. 1t is not !rivy to the loan contracts entered into by res!ondents and P3<%1FL. '$!IO: '. A cor!oration as a !ersonality distinct and se!arate rom its individual stockholders or members, and is not a ected by the !ersonal rights, obligations and transactions o the latter. *. 4he mere act that a cor!oration owns all o the stocks o another cor!oration, taken alone is not su icient to #usti y their being treated as one entity. +. A subsidiary/s se!arate e"istence may be res!ected, and the liability o the !arent cor!oration as well as the subsidiary will be con ined to those arising in their res!ective business i used to !er orm legitimate unctions.

#$SE L$30 1O#!'INE: 4he doctrine o !iercing the cor!orate veil is an e$uitable doctrine develo!ed to address situations where the se!arate cor!orate !ersonality o a cor!oration is abused or used or wrong ul !ur!ose.

062 %M$LI v. #$ D.9. 3o. 7805'? (e!tember '+, '88C !O"I#: Piercing the cor!orate veil "ONEN!E: 9>DALAG), J.

$%!&O': 9osa Cecilia S. Al a ara Piercing the veil o cor!orate entity is not the !ro!er remedy in order that the oreclosure !roceeding may be declared a nullity under the circumstances obtaining in the case.

/$#!S '. Mauricia Castillo was the administratri" over a !arcel o land ,in Lucena- le t by Feli!e Castillo. 4he land was mortgaged to the G<P and was about to be oreclosed. 4herea ter, (antiago 9ivera ,her ne!hew- !ro!osed to them the conversion into subdivision the . !arcels o land ad#acent to the mortgaged !ro!erty to raise the necessary und. *. 4he !ro!osal was acce!ted by the Castillos. 4hus, a Memorandum o Agreement was e"ecuted between (lobec 9ealty and Gevelo!ment, 1nc., ,(lobec- re!resented by its !resident ,9ivera- and the Castillos. 1n this agreement, 9ivera obliged himsel to !ay the Castillos the sum o P6CS immediately a ter the e"ecution o the agreement and to !ay the additional amount o P.C)S a ter the !ro!erty has been converted into a subdivision. 9ivera, armed with the agreement, a!!roached Mr. Cervantes, President o de endant <ormaheco, and !ro!osed to !urchase rom <ormaheco * tractors. +. <ormaheco and (lobec e"ecuted a (ales Agreement over ' unit o Cater!illar 4ractor, on an installment basis. .. As security o the un!aid balance, (lobec obtained rom 1nsurance Cor!oration o the Phil. ,1CP- a surety bond, with 1CP as surety and (lobec as !rinci!al, in avor o <ormaheco. 0. 1t was in turn secured by an Agreement o Counter%Duaranty with 9eal >state Mortgage e"ecuted by 9ivera as !resident o (lobec and the Castillos, and 1CP as mortgagee. ,1CP re$uired that the Castillos mortgage to them the . !arcels o land5. Gue to violation o the terms and conditions o the Counter%Duaranty Agreement, the !ro!erties o the Castillos were oreclosed by 1CP. 1CP was also the highest bidder and a Certi icate o (ale and 4C4s over the !ro!erties were issued. 6. (aid !ro!erties were not redeemed. 7. )n A!ril 'C, '860, 1CP sold to Phil. Machinery Parts Manu acturing Co. ,PM Parts- the . !arcels o land. 8. PM Parts, through its President, Mr. Cervantes, sent a letter to the !lainti Mauricia Castillo re$uesting her and her children to vacate the !ro!erty. Mrs. Castillo re used to vacate. 'C. )n (e!tember *8, '865, the heirs o the late Feli!e Castillo, !articularly !lainti <uena lor M. Castillo Qmali as the a!!ointed administratri" ,Mauricia already died- iled an action or annulment o title be ore the C.F.1. o Wue;on. ''. Petitioners seek to !ierce the veil o cor!orate entity o <ormaheco, 1CP and PM Parts, alleging that these cor!orations em!loyed raud in causing the oreclosure and subse$uent sale o the real !ro!erties belonging to !etitioners. '*. 4C: 1n avor o !lainti s, transactions were null X void or being ictitious, s!urious, X without consideration. '+. CA: 9eversed the 4CIs ruling. ISS%E: &hether or not there was a valid oreclosure o the mortgaged !ro!erties. &hether or not there was necessity to !ierce the veil o cor!orate e"istence. &EL1: <oth no, the doctrine o !iercing the veil o cor!orate iction is not a!!licable in the case.

'$!IO: '. 4he surety bond e"!ressly !rovides that 1CP shall not be liable or any claim not iled in writing within +C days rom the e"!iration o the bond. 4he court categorically stated that: Ano evidence was !resented to show that <ormaheco demanded !ayment rom 1CP nor was there any action taken by <ormaheco on the bond !osted by 1CP to guarantee the !ayment o !lainti s obligation.M 4he ailure o <ormaheco to noti y 1CP in writing about (lobec/s su!!osed de ault released 1CP rom liability under its surety bond. *. 1CP could not validly oreclose the real estate mortgage e"ecuted by !etitioners since it never incurred any liability under the surety bond. ,Payment by 1CP was not established.+. Qnder the doctrine o !iercing the veil o cor!orate entity, when valid grounds e"ist, the legal iction that a cor!oration is an entity with a #uridical !ersonality se!arate and distinct rom its members or stockholders may be disregarded. 1n such cases, the cor!oration will be considered as a mere association o !ersons. 4he members or stockholders o the cor!oration will be considered as the cor!oration, that is, liability will attach directly to the o icers and stockholders. The octrine applies when the corporate fiction is use to efeat public convenience, !ustify wrong, protect frau , or efen crime , or when it is ma e as a shiel to confuse the legitimate issues or where a corporation is the mere alter ego or business con uit of a person, or where the corporation is so organi"e an controlle an its affairs are so con ucte as to make it merely an instrumentality, agency, con uit or a !unct of another corporation. .. 4he doctrine o !iercing the veil o cor!orate iction is not a!!licable in this case. 0. 4he mere act that the businesses o two or more cor!orations are interrelated is not a #usti ication or disregarding their se!arate !ersonalities, absent su icient showing that the cor!orate entity was !ur!osely used as a shield to de raud creditors and third !ersons o their rights. 5. 1n the irst !lace, the legal cor!orate entity is disregarded only i it is sought to hold the o icers and stockholders directly liable or a cor!orate debt or obligation. #ssuming that petitioners were in ee efrau e by private respon ents in the foreclosure of the mortgage properties, this fact alone is not, un er the circumstances, sufficient to !ustify the piercing of the corporate fiction, since petitioners o not inten to hol the officers an $or members of respon ent corporations personally liable therefor. Petitioners are merely seeking the declaration o the nullity o the oreclosure sale, which relie may be obtained without having to disregard the a oresaid cor!orate iction attaching to res!ondent cor!orations. (econdly, !etitioners ailed to establish by clear and convincing evidence that !rivate res!ondents were !ur!osely ormed and o!erated, and therea ter transacted with !etitioners, with the sole intention o de rauding the latter. 6. 1t must be noted that Modesto 3. Cervantes served as Hice%President o <ormaheco and, later, as President o PM Parts. 1t cannot be said that PM Parts had no knowledge o the several transactions e"ecuted between <ormaheco and !etitioners. 1n addition, Atty. de Du;man, who is the >"ec. HP o <ormaheco, was also the legal counsel o 1CP and PM Parts. @ence, the de ense o good aith may not be resorted to by PM Parts which is charged with knowledge o the true relations e"isting between the !arties. Accordingly, the 4C4s issued in its name, as well as the certi icate o sale, must be declared null and void since they cannot be considered ree o the taint o bad aith. #$SE L$30 1O#!'INE: Qnder the doctrine o !iercing the veil o cor!orate entity, when valid grounds e"ist, the legal iction that a cor!oration is an entity with a #uridical !ersonality se!arate and distinct rom its members or stockholders may be disregarded. 1n such cases, the cor!oration will be considered as a mere association o !ersons.

C0+ 18" v+. #$ August '5, *CC' D.9. 3o. '*5*CC !O"I#: Piercing the Cor!orate veil? remedy "ON!EN!E: Sa!unan, J.

$%!&O': Arthur Archie 4iu Cor!oration Law? APiercing the Heil o Cor!orate FictionM Goctrine? %hen the notion of legal entity is use to efeat public convenience, !ustify wrong, protect frau , or efen crime, the law will regar the corporation as an association of persons or in case of two corporations, merge them into one

/$#!S '. Marindu$ue Mining obtained rom the Phili!!ine 3ational <ank ,P3<- various loan accommodations. 4o secure the loans, Marindu$ue Mining e"ecuted on )ctober 8, '867 a Geed o 9eal >state Mortgage and Chattel Mortgage in avor o P3<. *. covered all the miningIs real !ro!erties +. As o 3ovember '87C, Loans e"tended by P3< amounted to P . billion .. in '87', Marinud$ue Mining e"ecuted a second mortage in avor o G<P and P3< 0. 4he mortgage also covered all o Marindu$ue Mining/s chattels, as well as assets o whatever kind, nature and descri!tion which Marindu$ue Mining may subse$uently ac$uire in substitution or re!lenishment or in addition to the !ro!erties covered by the !revious Geed o 9eal and Chattel Mortgage dated )ctober 6, '867. A!!arently, Marindu$ue Mining had also obtained loans totaling P* <illion rom G<P, e"clusive o interest and charges. 5. between '87* to '87+, Marindu$ue Mining !urchased and caused to be delivered construction materials and other merchandise rom 9emington 1ndustrial (ales Cor!oration ,9emington- worth P8*',600.80. 6. in '87., Marindu$ue mining e"ecuted in avor o P3< and G<P an Amendment to Mortgage 4rust Agreement, they included all other real and !ersonal !ro!erties ac$uired by the com!any 7. Mariundu$ue mining ailed to settle the loans and obigations, P3< and G<P oreclosed the !ro!erties and declared as highest bidders. Pursuant to Proclamation 0C, they trans erred all their rights and interests over Marindu$ue mining to the government. 8. 4he !urchases rom 9emington remained un!aid as o August ', '87. thus 9emington iled a com!laint or the sum o money against Marindu$ue Mining. 'C. 9emington/s original com!laint was amended to include P3< and G<P as co%de endants in view o the oreclosure, they later included 3onoc mining as it is the assignee to all the !ro!erties o Marinu$ue mining ''. '875, 9emington iled a third amended com!laint including the Maricalum Mining Cor!oration ,Maricalum Miningand 1sland Cement Cor!oration ,1sland Cement- as co%de endants. 9emington asserted that Marindu$ue Mining, P3<, G<P, 3onoc Mining, Maricalum Mining and 1sland Cement must be treated in law as one and the same entity by disregarding the veil o cor!orate iction: Code endants are owned by G<P and P3<. ,'- 4hey hurried the oreclosure as to make it sus!icious. ,*- 4he !ersonnel, key o icers and rank%and% ile workers and em!loyees o co%de endants 3M1C, Maricalum and 1sland Cement creations o co%de endants P3< and G<P were the !ersonnel o co%de endant MM1C such that . . . !ractically there has only been a change o name or all legal !ur!ose and intents ,+- 4he !laces o business not to mention the mining claims and !ro#ect !remises o co%de endants 3M1C, Maricalum and 1sland Cement likewise used to

be the !laces o business, mining claims and !ro#ect !remises o co%de endant MM1C '*. 94C: rendered decision in avor o Plainti , CA a irmed the decision

ISS%E: &hether or not 9emington has a cause o action against G<P or P3< nor against all co%de endants &EL1: 3o. '$!IO: % 4his Court has disregarded the se!arate !ersonality o the cor!oration where the cor!orate entity was used to esca!e liability to third !arties. 1n this case, however, we do not ind any raud on the !art o Marindu$ue Mining and its trans erees to warrant the !iercing o the cor!orate veil. % P3< and G<P are mandated to oreclose on the mortgage when the !ast due account had incurred arrearages o more than *CN o the total outstanding obligation. (ection ' o Presidential Gecree 3o. +70 ,4he Law on Mandatory Foreclosure% P3< and G<P did not only have a right, but the duty under said law, % Court o A!!eals made re erence to two !rinci!les in cor!oration law. 4he irst !ertains to transactions between cor!orations with interlocking directors resulting in the !re#udice to one o the cor!orations. 4his rule does not a!!ly in this case, however, since the cor!oration allegedly !re#udiced ,9emington- is a third !arty, not one o the cor!orations with interlocking directors ,Marindu$ue Mining and G<P% 4he second !rinci!le invoked by res!ondent court involves :directors " " " who are creditors: which is also ina!!licable herein. @ere, the creditor o Marindu$ue Mining is G<P, not the directors o Marindu$ue Mining. % 3either is there bad aith in any o the Co%de endants % the doctrine o !iercing the veil o cor!orate iction a!!lies only when such cor!orate iction is used to de eat !ublic convenience, #usti y wrong, !rotect raud or de end crime.4o disregard the se!arate #uridical !ersonality o a cor!oration, the wrongdoing must be clearly and convincingly established. 1t cannot be !resumed. 1n this case, the Court inds that 9emington ailed to discharge its burden o !roving bad aith on the !art o Marindu$ue Mining and its trans erees in the mortgage and oreclosure o the sub#ect !ro!erties to #usti y the !iercing o the cor!orate veil. #$SE L$30 1O#!'INE: % the doctrine o !iercing the veil o cor!orate iction a!!lies only when such cor!orate iction is used to de eat !ublic convenience, #usti y wrong, !rotect raud or de end crime. 4o disregard the se!arate #uridical !ersonality o a cor!oration, the wrongdoing must be clearly and convincingly established 1ISSEN!IN40#ON#%''IN4 O"INION:

064 4ENE'$L #'E1I! #O'"O'$!ION =no; "EN!$ #$"I!$L /IN$N#E #O'"O'$!ION> )etitioner v+. $LSONS 1EGELO"MEN! and INGES!MEN! #O'"O'$!ION and ### EK%I!E #O'"O'$!ION re+)ondent+. D.9. 3o. '0.860. January *8, *CC6 !O"I#: A!iercing the veil o cor!orate ictionM "ONEN!E: Darcia

$%!&O': Chedelle Florido A cor!oration is an arti icial being vested by law with a !ersonality distinct and se!arate rom those o the !ersons com!osing it as well as rom that o any other entity to which it may be related. 4he irst conse$uence o the doctrine o legal entity o the se!arate !ersonality o the cor!oration is that a cor!oration may not be made to answer or acts and liabilities o its stockholders or those o legal entities to which it may be connected or vice versa. 4he notion o se!arate !ersonality may be disregarded under the doctrineJA!iercing the veil o cor!orate ictionMJas in act the court will o ten look at the cor!oration as a mere collection o individuals or an aggregation o !ersons undertaking business as a grou!, disregarding the se!arate #uridical !ersonality o the cor!oration uni ying the grou!. Another ormulation o this doctrine is that when two ,*business enter!rises are owned, conducted and controlled by the same !arties, both law and e$uity will, when necessary to !rotect the rights o third !arties, disregard the legal iction that two cor!orations are distinct entities and treat them as identical or one and the same.

/$#!S '. A ter its incor!oration in '806 as a inance and investment com!any, !etitioner Deneral Credit Cor!oration ,DCC-, then known as Commercial Credit Cor!oration ,CCC-, established CCC ranchise com!anies in di erent urban centers o the country. *. As early as '86., DCC had a!!lied or and was able to secure license rom the then Central <ank ,C<- o the Phili!!ines and the (ecurities and >"change Commission ,(>C- to engage in $uasi%banking activities. +. 9es!ondent CCC >$uity Cor!oration ,>WQ14=-, organi;ed ,in 3ovember '88.- by DCC or the !ur!ose o taking over the o!erations and management o the various ranchise com!anies. .. 9es!ondent Alsons Gevelo!ment and 1nvestment Cor!oration ,AL()3(- and Conrado, 3icasio, >ditha and Ladislawa, all surnamed Alcantara, and Al redo de <or#a ,ALCA34A9A(-, each owned shares in the DCC ranchise com!anies ,CCC Gavao and CCC Cebu-. 0. 1n Gecember '87C, AL()3( and the ALCA34A9A(, or a consideration o 4wo Million ,P*,CCC,CCC.CC- Pesos, sold their shareholdingsJa total o 'C',80+ shares, more or lessJin the CCC ranchise com!anies to >WQ14=. 5. )n January *, '87', >WQ14= issued AL()3( et al., a AbearerM !romissory note or P*,CCC,CCC.CC with a one%year maturity date ,'7N interest !er annum, with !rovisions or damages and litigation costs in case o de ault-. 6. . years later, the ALCA34A9A( assigned its rights and interests over the bearer note to AL()3( which became the holder thereo ,but even be ore the e"ecution o the assignment deal, letters o demand or interest !ayment were already

sent to >WQ14=, through its President &il redo Labayen who !leaded inability to !ay the sti!ulated interest, >WQ14= no longer then having assets or !ro!erty to settle its obligation nor being e"tended inancial su!!ort by DCC-. 7. )n January '., '875, AL()3( ,u!on ailing to collect rom >WQ14= and DCC- iled a com!laint or a sum o money against >WQ14= and DCC. 8. *. Answering with a cross%claim against DCC, >WQ14= stated by way o s!ecial and a irmative de enses that it ,>WQ14=-: a- was !ur!osely organi;ed by DCC or the latter to avoid C< 9ules and 9egulations on G)(91 ,Girectors, ) icers, (tockholders and 9elated 1nterest- limitations, and that it acted merely as intermediary or bridge or loan transactions and other dealings o DCC to its ranchises and the investing !ublic? and b- is solely de!endent u!on DCC or its unding re$uirements, to settle, among others, e$uity !urchases made by investors on the ranchises? hence, DCC is solely and directly liable to AL()3(, DCC having ailed to !rovide K >WQ14= the necessary unds to meet its obligations to AL()3(. 'C. DCC iled its A3(&>9 to Cross%claim, stressing that it is a distinct and se!arate entity rom >WQ14= and alleging, in essence that the business relationshi!s with each other were always at armIs length. ''. AL()3(I evidences: a- >WQ14=%issued bearer P3 and over 5C other documents b- letter%re!ly o then DCC Pres. D. Hillanueva to >WQ14= Pres. &il redo Labayen ,in said letter, Mr. Hillanueva e"!lained that the DCC <oard denied the AlcantarasI re$uest to be !aid out o such !roceeds, but nonetheless authori;ed >WQ14= to !ay them interest out o >WQ14=Is o!eration income, in !re erence over what was due DCC-. '*. >WQ14= !resented its President and ado!ted the testimony o AL()3(I witnesses and the documentary e"hibits testi ied by each o them. '+. DCC called only &il redo Labayen to testi y. 1t stuck to its underlying de ense o se!arateness and !resented documentary evidence detailing the organi;ational structures o both DCC and >WQ14=. And in a bid to negate the notion that it was conducting its business illegally, DCC !resented C< and (>C%issued licenses authoring it to engage in inancing and $uasi%banking activities. 1t also adduced evidence to !rove that it was never a !arty to any o the actionable documents AL()3( and its !redecessors%in%interest had in their !ossession and that the 3ovember *6, '870 deed o assignment o rights over the !romissory note was unen orceable. 94C P >WQ14= was only an instrumentality o DCC. Judgment in avor o AL()3( ,>WQ14= and DCC ordered to #ointly and severally !ay AL()3( * Million !esos !lus interests-. CA P a irmed 94C. ISS%E: &hether or not the !iercing o the veil o cor!orate iction has basis and was !ro!er. &EL1: =es. '$!IO: &hether the se!arate !ersonality o the cor!oration should be !ierced hinges on obtaining acts, a!!ro!riately !leaded or !roved. @owever, any !iercing o the cor!orate veil has to be done with caution, albeit the Court will not hesitate to disregard the cor!orate veil when it is misused or when necessary in the interest o #ustice. 4he CA ound valid grounds to !ierce the cor!orate veil o !etitioner DCC, there being #usti iable basis or such action. &hen the a!!ellate court s!oke o a #usti ying actor, the re erence was to what the trial court said in its decision, namely: the e"istence o Acertain circumstances YwhichZ, taken together, gave rise to the ineluctable conclusion that K Yres!ondentZ >WQ14= is but an instrumentality or ad#unct o Y!etitionerZ DCC.M Per the CourtIs count, the trial court enumerated no less than *C documented circumstances and transactions, which, taken as a !ackage, indeed strongly su!!orted the conclusion that res!ondent >WQ14= was but an ad#unct, an instrumentality or business conduit o !etitioner DCC. Foremost o what the trial court re erred to as Acertain circumstancesM are the commonality o directors, o icers and stockholders and even sharing o o ice between !etitioner DCC and res!ondent >WQ14=? certain inancing and management arrangements between the two, allowing the !etitioner to handle the unds o the latter? the virtual domination i not control wielded by the !etitioner over the inances, business !olicies and !ractices o res!ondent >WQ14=? and the establishment o res!ondent >WQ14= by the !etitioner to circumvent C< rules. 4hru the testimony o >WQ14=Is own President K that more than 8CN o the stockholders o K >WQ14= were also stockholders o K DCC K.. Gisclosed likewise is the act that when Y>WQ14=Is PresidentZ Labayen sold the shareholdings o >WQ14= in said ranchise com!anies, !ractically the entire !roceeds thereo were surrendered to DCC, and not received by >WQ14=.

 As a irmed by >WQ14=Is President, K the unds invested by >WQ14= in the CCC ranchise com!anies actually came rom CCC Phils. or DCC ,>"hibit A=%0M-K. that, as disclosed by the AuditorIs re!ort or '87*, !ast due receivables alone o DCC e"ceeded P'C',CCC,CCC.CC mostly to DCC a iliates es!ecially CCC >WQ14=. K? that YC<IsZ 9e!ort o >"amination dated July '., '866 shows that K >WQ14= which has a !aid%u! ca!ital o only P0CC,CCC.CC was the biggest borrower o DCC with a total loan o P5.6C Million. 3ot only did K DCC cause the incor!oration o K >WQ14=, but, the latter had grossly inade$uate ca!ital or the !ursuit o its line o business to the e"tent that its business a airs were considered as DCCIs own business endeavors. AL()3( has likewise shown K that the bonuses o the o icers and directors o K >WQ14= was based on its total inancial !er ormance together with all its a iliatesK both irms were sharing one and the same o ice when both were still o!erational K and that the directors and e"ecutives o K >WQ14= never acted inde!endently K but took their orders rom K DCC. 4he evidence has also indubitably established that K >WQ14= was organi;ed by K DCC or the !ur!ose o circumventing YC<Z rules and regulations and the Anti%Qsury Law ,as o March +', '866, DCC latter violated YC<Z rules and regulations by: ,a- using as a conduit its non%$uasi bank a iliates K. ,b- issuing without recourse acilities to enable DCC to e"tend credit to a iliates like K >WQ14= which go beyond the single borrowerIs limit without the need o showing outstanding balance in the book o accounts-. DCC did not adduce any evidence, let alone rebut the testimonies and documents !resented by AL()3(, to establish the !revailing circumstances adverted to that !rovided the #usti ying occasion to !ierce the veil o cor!orate iction between DCC and >WQ14=. As the relationshi!s binding herein Yres!ondent >WQ14= and !etitioner DCCZ have been that o A!arentsubsidiary cor!orationsM the oregoing !rinci!les and doctrines ind suitable a!!licability in the case at bar? and, it having been satis actorily and indubitably shown that the said relationshi!s had been used to !er orm certain unctions not characteri;ed with legitimacy, this Court K eels am!ly #usti ied to A!ierce the veil o cor!orate entityM and disregard the se!arate e"istence o the !ercent ,sic- and subsidiary the latter having been so controlled by the !arent that its se!arate identity is hardly discernible thus becoming a mere instrumentality or alter ego o the ormer. DCC was the entity which initiated and bene ited immensely rom the raudulent scheme !er!etrated in violation o the law. #$SE L$30 1O#!'INE: Authorities are agreed on at least three ,+- basic areas where !iercing the veil, with which the law covers and isolates the cor!oration rom any other legal entity to which it may be related, is allowed. 4hese are: '- de eat o !ublic convenience, as when the cor!orate iction is used as vehicle or the evasion o an e"isting obligation? *- raud cases or when the cor!orate entity is used to #usti y a wrong, !rotect raud, or de end a crime? or +- alter ego cases, where a cor!oration is merely a arce since it is a mere alter ego or business conduit o a !erson, or where the cor!oration is so organi;ed and controlled and its a airs are so conducted as to make it merely an instrumentality, agency, conduit or ad#unct o another cor!oration.

066 9 4arrett v. So-thern 'ail;a* ,May 7, '808, '6+ F.(u!! >.d. 4enn!O"I#: Parent P (ubsidiary 9elationshi! "ONEN!E: 9obert L. 4aylor, Gistrict Judge

$%!&O': Ge (ilva, Genison Note: Lenoir Car &orks em!loyed Darrett. 4he latter was in#ured. Meanwhile, (outhern 9ailway ac$uired the entire ca!ital stock o Lenoir. Darrett now claims com!ensation under the Federal >m!loyerIs Liability Act against (outhern 9ailway.

/$#!S: '. &.@. Darrett ,!lainti - was em!loyed as a wheel moulder by Lenoir Car &orks, a 4ennessee cor!oration. *. Plainti Darrett claims in#uries rom silicosis ,!neumoconiosis characteri;ed by massive ibrosis o the lungs resulting in shortness o breath- contracted rom silica dust !ermeating the oundry. +. Plainti contends that all directors and o icers o Lenoir are em!loyees o (outhern 9ailway and that de endant owns all the stock o Lenoir e"ce!t ive $uali ying shares. Furthermore, !lainti contends that all the !ro its o Lenoir went to (outhern. .. Ge endant (outhern 9ailway contends that although Lenoir sells the ma#ority o its !roducts to (outhern or its a iliates, it does not sell to them e"clusively? that Lenoir maintains its o ices and business in Lenoir City? that the management o Lenoir is vested in a manager? that Lenoir makes se!arate collective bargaining agreements with its em!loyees and there is no interchange o seniority between o!erations o Lenoir and the railroad, or vice versa. ISS%E: &hether Lenoir Car &orks is o!erated as a sham or (outhern, or as the instrumentality, or as an ad#unct o its o!eration, rendering (outhern liable to the !lainti . &EL1: 3o, the control o (outhern 9ailway over Lenoir Car &orks was not such as to constitute the latter an ad#unct o (outhern. '$!IO: '. 4he Court held that the acts set orth !rovided the relation between the two com!anies. 4he Court inds the e"istence o two distinct o!erations. 4here is no evidence that (outhern dictated the management o Lenoir. 1n act, the evidence indicates that @enry Marius ,manager o Lenoir- was in ull control o the o!eration. @e established !rices. @e handled all negotiations in collective bargaining agreements. *. Lenoir !aid local ta"es, had local counsel, maintained &orkmen/s Com!ensation. 4here is no evidence that Lenoir was run solely or the bene it o (outhern. 1n act a substantial !art o its re$uirements in the ield o o!eration o Lenoir were bought elsewhere. Lenoir sold substantial $uantities to other com!anies. 1t o!erated no rolling stock and had nothing to do with the trans!ortation business. +. Lenoir Car &orks was not !er orming what have been called non%delegable duties o the railroad. 1t was not an o!erator o a terminal, !er ormed no switching or trans!ortation unctions at all. 1t was a manu acturer and !lainti was one o its em!loyees. 1t was hence not an :agent: o (outhern in the sense used in some o the cases cited by the !lainti , since it !er ormed no common carrier o!erations. .. 4he Court urther held that under the indicia o control, only two concur in the case at bar, namely, the ownershi! o most o the ca!ital stock o Lenoir by (outhern, and !ossibly subscri!tion by (outhern to the ca!ital stock o

Lenoir. 0. Com!laint: G1(M1((>G.

#$SE L$30 1O#!'INE: 4he general rule is that stock ownershi! alone by one cor!oration o the stock o another does not thereby render the dominant cor!oration lia.le 2or the tort+ o2 the +-.+idiar* -nle++ the se!arate cor!orate e"istence o the subsidiary is a mere sham, or unless the control o the subsidiary is such that it is but an instrumentality or ad#unct o the dominant cor!oration. 1ISSEN!IN40#ON#%''IN4 O"INION:

C05 DO""EL ="&ILS> G. E$!#O )ctober 'C, '8.5, D.9. 3o. L%.656+ !O"I#:PA9>34%(Q<(1G1A9= 9>LA41)3(@1P "ON!EN!E: @1LAG), J. /$#!S

$%!&O': Delene Duevara

'. Plainti is a cor!oration duly is duly licensed to engage in business as a merchant and commercial broker in the Phili!!ines, the ca!ital stock o which is divided into ',CCC shares o P'CC each. 4he So!!el 1ndustrial Car and >$ui!ment com!any, a cor!oration organi;ed and e"isting under the laws o the (tate o Pennsylvania, Qnited (tates o America, and not licensed to do business in the Phili!!ines, owned 880 shares out o the total ca!ital stock o the !lainti and the remaining 0 shares are owned by each o icer o the !lainti cor!oration. *. Plainti transacted business in the Phili!!ines in the ollowing manner: &hen a local buyer was interested in the !urchase o railway materials, machinery, and su!!lies, it asked or !rice $uotations rom !lainti . Plainti then cabled or the $uotation desired or So!!el 1ndustrial Car and >$ui!ment Com!any So!!el 1ndustrial Car and >$ui!ment Com!any answered by cable $uoting its cost !rice, which was later ollowed by a letter o con irmation. )n the basis o these $uotations, orders were !laced by the local !urchasers. A cable was then sent to So!!el 1ndustrial Car and >$ui!ment com!any giving instructions to shi! the merchandise to Manila orwarding the customer/s order. 4he bills o lading were usually made to :order: and indorsed in blank with notation to the e ect that the buyer be noti ied o the shi!ment o the goods covered in the bills o lading? commercial invoices were issued by So!!el 1ndustrial Car and >$ui!ment Com!any in the names o the !urchasers and certi icates o insurance were likewise issued in their names, or in the name o So!!el 1ndustrial Car and >$ui!ment Com!any but indorsed in blank and attached to dra ts drawn by So!!el 1ndustrial Car and >$ui!ment Com!any on the !urchasers, which were orwarded through oreign banks to local banks. he !urchasers secured the shi!!ing !a!ers by arrangement with the banks, and thereu!on received and cleared the

shi!ments. 1 the merchandise were o >uro!ean origin, and i there was not su icient time to orward the documents necessary or clearance, through oreign banks to local banks, to the !urchasers, the So!!el 1ndustrial Car and >$ui!ment com!any did, in many cases, send the documents directly rom >uro!e to !lainti with instructions to turn these documents over to the !urchasers. 1n many cases, where sales was e ected on Manila, duty !aid, !lainti advanced the sums re$uired or the !ayment o the duty, and these sums were in every case reimbursed to !lainti by So!!el 1ndustrial Car and >$ui!ment Com!any. 4he !rice were !ayable by dra ts agreed u!on in each case and drawn by So!!el 1ndustrial Car and >$ui!ment Com!any on res!ective !urchasers through local banks, and !ayments were made to the banks by the !urchasers on !resentation and delivery to them o the above% mentioned shi!!ing documents or co!ies thereo . Plainti received by way o com!ensation a !ercentage o the !ro its on the above transactions as in the !lainti /s contract with So!!el 1ndustrial Car and >$ui!ment Com!any and su ered its corres!onding share in the losses resulting rom some o the transactions. +. Plainti /s share in the !ro its o the transactions is only to P'+*, *C'.+C out o the P+, 66*,.C+.7*. 4he !lainti !aid the sum o P0, *77.C0 as commercial brokerIs . N ta" or the P'+*, *C'.+C it obtained. .. 4he de endant Collector o 1nternal 9evenue, re!resented by =atco, demanded the sum o P5., '**.0' as the merchants/ sales ta" o 'N !er cent on the amount o P+, 66*,.C+.7*, re!resenting the total gross value o the sales. 0. 4he !lainti !aid under !rotest said sum o P5., '**.0'. 4he de endant re used to return to the sum o P5., '**.0' or any !art thereo notwithstanding demands by !lainti . ISS%E: &hether So!!el ,Phils- is a domestic cor!oration distinct and se!arate rom So!!el 1ndustrial Car and >$ui!ment com!any &EL1: 3). So!!el ,Phils- is a mere branch or subsidiary o So!!el 1ndustrial Car and >$ui!ment com!any. '$!IO: '.&e ind that, in so ar as the sales involved herein are concerned, So!!el ,Phili!!ines-, 1nc., and So!!el 1ndustrial Car and >$ui!ment com!any are to all intents and !ur!oses one and the same? or, to use another mode o e"!ression, that, as regards those transactions, the ormer cor!oration is a mere branch, subsidiary or agency o the latter. 4o our mind, this is conclusively borne out by the act, among others, that: 4he amount o the so%called :+hare in the )ro2it+: o So!!el ,Phili!!ines-, 1nc., was -lti(atel* le2t to the +ole -n.ridled control o2 Do))el Ind-+trial #ar and EC-i)(ent #o()an* . 3o grou! o businessmen could be e"!ected to organi;e a mercantile cor!oration % the ultimate end o which could only be !ro it % i the amount o that !ro it were to be sub#ected to such a unilateral control o another cor!oration, unless indeed the ormer has !reviously been designed by the incor!orators to serve as a mere subsidiary, branch or agency o the latter. Do))el Ind-+trial #ar and EC-i)(ent #o()an* (ade -+e o2 it+ o;ner+hi) o the overwhelming ma#ority % 99.6< 9 o2 the ca)ital +tocA o2 the local cor)oration to control the o!erations o So!!el ,Phils- to such an e"tent that it had the inal say even as to how much should be allotted to said local entity in the so%called sharing in the !ro its. &e can not overlook the act that in the !ractical working o cor!orate organi;ations o the class to which these two entities belong, the holder or holders o the controlling !art o the ca!ital stock o the cor!oration, !articularly where the control is determined by the virtual ownershi! o the totality o the shares, dominate not only the selection o the <oard o Girectors but, more o ten than not, also the action o that <oard. A!!lying this to the instant case, we can not conceive how the Phili!!ine cor!oration could e ectively go against the !olicies, decisions, and desires o the American cor!oration with regards to the scheme which was devised through the instrumentality o the !etitionerIs contract with So!!el 1ndustrial Car and >$ui!ment com!any, as well as all the other details o the system which was ado!ted in order to avoid !aying the ' !er cent merchants sales ta". 3either can we conceive how the Phili!!ine cor!oration could avoid ollowing the directions o the American cor!oration held 88.0 !er cent o the ca!ital stock o the Phili!!ine cor!oration. 1n the !resent instance, we note that Do))el ="hili))ine+> Inc. ;a+ re)re+ented in the "hili))ine+ .* it+ ?re+ident Gice9"re+ident.? 4his act necessarily leads to the in erence that the cor!oration had at least a Hice% President, and !resumably also a President, who were not resident in the Phili!!ines but in America, where the !arent cor!oration is domiciled. 1 So!!el ,Phili!!ines-, 1nc., had been intended to o!erate as a regular domestic cor!oration in the Phili!!ines, where it was ormed, the record and the evidence do not disclose any reason why all its o icers should not reside and !er orm their unctions in the Phili!!ines. "lainti22 ;a+ char,ed .* the $(erican cor)oration ;ith the co+t even o2 the latterL+ ca.le C-otation+ 9 2ro(

o-,ht that a))ear+ 2ro( the evidence thi+ can onl* .e co()rehended .* con+iderin, )lainti22 a+ +-ch a +-.+idiar* .ranch or a,enc* o2 the )arent entit* , in which case it would be !er ectly understandable that or convenient accounting !ur!oses and the easy determination o the !ro its or losses o the !arent cor!oration/s Phili!!ines should be charged against the Phili!!ine o ice and set o against its recei!ts, thus se!arating the accounts o said branch rom those which the central organi;ation might have in other countries. 4he re erence to !lainti by local banks, under a standing instruction o the !arent cor!oration, o un!aid dra ts drawn on Phili!!ine customers by said !arent cor!oration, whenever said customers dishonored the dra ts, and the act that the American cor!oration had !reviously advised said banks that )lainti22 in tho+e ca+e+ ;a+ ?2-ll* e()o;ered to in+tr-ct =the .anA+> ;ith re,ard to the di+)o+ition o2 the dra2t+ and doc-(ent+? in the a.+ence o2 an* other +ati+2actor* eI)lanation nat-rall* ,ive ri+e to the in2erence that )lainti22 ;a+ a +-.+idiar* .ranch or a,enc* o2 the $(erican concern rather than an inde!endent cor!oration acting as a broker. For, without such !ositive e"!lanation, this delegation o !ower is indicative o the relations between central and branch o ices o the same business enter!rise, with the latter acting under instructions already given by the ormer. Far rom disclosing a real se!aration between the two entities, !articularly in regard to the transactions in $uestion, the evidence reveals such commingling and interlacing o their activities as to render even incom!rehensible certain accounting o!erations between them, e"ce!t u!on the basis that the Phili!!ine cor!oration was to all intents and !ur!oses a mere subsidiary, branch, or agency o the American !arent entity.

*. S%Phil was a mere branch or dummy o S%Q(A, and was there ore liable or merchant sales ta". 4o allow otherwise would be to sanction a circumvention o our ta" laws and !ermit a ta" evasion o no mean !ro!ortion and the conse$uent commission o a grave in#ustice to the Dovernment. Moreover, it would allow the ta"!ayer to do by indirection what the ta" laws !rohibit to be done directly.

067 Liddell F #o. Inc. v. !he #ollector o2 Internal $%!&O': Myk 'even-e Liddell X Co., 1nc. was engaged in im!orting and retailing +C June '85' D.9. 3o. L%8576 )ldsmobile and Chevrolet cars and DMC and Chevrolet !O"I#: 4he Cor!orate >ntity: Parent%(ubsidiary trucks. 9elationshi! "ONEN!E: <eng;on, C.J. /$#!S '. N$!%'E O/ !&E #$SE: A!!eal rom the decision o the Court o 4a" A!!eals im!osing ta" de iciency liability on Liddell X Co., 1nc. *. ' February '8.5 a. Liddell X Co., 1nc. was established in the Phili!!ines. b. Authori;ed ca!ital [ P'CC,CCC / ',CCC shares [ P'CC each i. Frank Liddell subscribed and !aid [ '85 shares at P'8,5CC ii. Sur;, Garras, Man;ano, and (errano [ ' share E$#&. iii. 4)4AL PA1G 13 CAP14AL: *CC shares [ P*C,CCC +. +' January '8.6 a. Geclared 8CN stock dividend. i. Frank LiddellIs holding [ increased to ',85C shares ii. Sur;, Garras, Man;ano, and (errano [ increased to 'C shares E$#&. b. A resolution was !assed increasing the authori;ed ca!ital to P',CCC,CCC which was later on a!!roved by the (>C. i. Frank LiddellIs holding [ increased to .,85C shares ,!aid P+CC,CCC or his +, CCC share increase.. *. May '8.6 ,AD9>>M>34 was re erred to in the case as >B@1<14 Aa. Liddell, Sur;, Garras, Man;ano, and (errano e"ecuted an agreement wherein Liddell trans erred shares o stocks to various em!loyees o Liddell X Co., 1nc. b. .CN o the earnings available or dividends accrued to Frank Liddell although at the time o the e"ecution o aid instrument, Frank Liddell owned all o the shares in said cor!oration. c. .0N accrued to the em!loyees, !arties thereto? Sur; '*%'/*N? Garras '*%'/*N? A. Man;ano '*%'/*N and

Julian (errano 6%'/*N. d. 4he agreement was also made retroactive to '8.5. e. Frank Liddell reserved the right to rea!!ortion the .0N dividends !ertaining to the em!loyees in the uture or the !ur!ose o including such other aith ul and e icient em!loyees as he may subse$uently designate. 0. * agreements were orged between them su!!lementing the !revious agreement. a. >B@1<14 < % contains the em!loyees/ de inition in detail o the manner by which they sought to !revent their share%holdings rom being trans erred to others who may be com!lete strangers to the business on Liddell X Co. b. >B@1<14 C % dated May '+, '8.7, the .0N given by Frank Liddell to his em!loyees was rea!!ortioned as ollows: C. Sur; J '*,N? >. J. Garras J '*N? A. Man;ano J l*N? J. (errano J +%'/*N? D. &. Sernot J *N. 5. 8 March '8.7 a. Annual meeting o stockholders b. Geclared 'CCN stock dividend c. A resolution was !assed increasing the authori;ed ca!ital to P+,CCC,CCC which was later on a!!roved by the (>C. d. Frank Liddell subscribed to and !aid *CN o the increase o P.CC,CCC e. @e !aid *0N thereo in the amount o P'CC,CCC. . 4he balance o the P+,CCC,CCC was debited to his account and credited to (ubscribed Ca!ital (tock on '' Gecember '8.7. 6. 7 March '8.8 a. (tock dividends were issued by the com!any in accordance with the agreements made on May '8.6 and June '8.7. 4he stocks o the com!any stood as ollows: Name Frank Liddell 1rene Liddell Mercedes Hecin Charles Sur; >.J. Garras Angel Man;ano Julian (errano >. @asim D. &. Sernot No. of Shares ' ' ',**0 ',**0 ','0C 6'C 0CC 0CC #mount &er Cent 6*.CCN .C'N .C'N 5..0N 5..0N 5.C5N +.6.N *.5.N *.5.N 'CC.CCN

'+,577 P',+57,7CC 'CC 'CC '**,0CC '**,0CC ''0,CCC 6',CCC 0C,CCC 0C,CCC

'8,CCC P',8CC,CCC

7. '0 3ovember '8.8 a. <ased on a resolution o a s!ecial meeting o the <)G o the com!any stock dividends were rea!!ortioned in this manner: No. of Name #mount &er Cent Shares Frank Liddell 1rene Liddell Mercedes Hecin Charles Sur; >.J. Garras Angel Man;ano Julian (errano >. @asim '8,6+7 P',86+,7CC ' ' *,*'0 *,*'0 ',7'C ',6CC 7+C 'CC 'CC **',0CC **',0CC '7',CCC '6C,CCC 7+,CCC 50.68'N .CC+N .CC+N 6.+7'N 6.+7'N 5.C+'N 0.56CN *.66CN

D. &. Sernot

',.8C

'.8,CCC

..86CN

+C,CCC P+,CCC,CCC 'CC.CCCN 8. ** 3ovember '8.7 amended the !ur!ose clause o its Articles o 1ncor!oration limiting its business activities to im!ortation o automobiles and trucks. 'C. *C Gecember '8.7 a. Liddell Motors, 1nc. was organi;ed and registered with the (>C. b. Authori;ed stock ca!ital [ P'CC,CCC c. P*C,CCC was subscribed and !aid or as ollows: i. 1rene Liddell ,wi e o Frank- [ '8,885 shares ii. Marcial P. Lichauco, >. S. <romwell, H. >. del 9osario and >smenia (ilva [ ' share E$#&. ''. <y the end o '8.7, Sur;, Man;ano, and Sernot resigned rom Liddell X Co. and were em!loyed by Liddell Motors, 1nc. as 4reasurer, Deneral (ales Manager or cars, and Deneral (ales Manager or 4rucks, res!ectively. '*. January '8.8 a. Liddell X Co., 1nc. sto!!ed retailing cars and trucks and conveyed them to Liddell Motors, 1nc. which in turn sold the vehicles to the !ublic with a stee! mark%u!. b. Liddell X Co. 1nc. !aid ta"es on the basis o its sales to Liddell Motors, 1nc. considering said sales as its original sales. '+. 4he Collector o 1nternal 9evenue ,C19- reviewed the transactions made between the * com!anies and determined that Liddell Motors was actually the alter ego o Liddell X Co., 1nc. '.. 4he C19 im!osed sales ta" de iciency amounting to P',+'6,5*8.5'. a. 4his is based on the gross selling !rice o Liddell Motors, 1nc. to the general !ublic rom January ', '8.8 to (e!tember '0, '80C, without deducting rom the selling !rice, the ta"es already !aid by Liddell X Co. in its sales to the Liddell Motors 1nc. '0. 4he Court o 4a" A!!eals u!held the decision o the C19. '5. 4AS> 3)4>: 4he law in orce at the time o its incor!oration the sales ta" on original sales o cars !rogressive. i.e. 'CN o the selling !rice o the car i it did not e"ceed P0CCC, and '0N o the !rice i more than P0CCC but not more than P6CCC, etc. ISS%E: &hether or not Liddell X Co. 1nc., and the Liddell Motors, 1nc. are ,!ractically- identical cor!orations, the latter being merely the alter ego o the ormer. &EL1: =es. '$!IO: '. Frank Liddell com!lete control over Liddell X Co., 1nc. based on the ollowing acts: a. From the time o its organi;ation 87N o the ca!ital stock belonged to him. b. 4he *CN !aid%u! subscri!tion with which the com!any began its business was !aid by him. c. 4he subse$uent subscri!tions to the ca!ital stock were made by him and !aid with his own money. d. (ti!ulations and conditions a!!ear in the irst agreement: i. ,'- that Frank Liddell had the authority to designate in the uture the em!loyee who could receive earnings o the cor!oration? to a!!ortion among the stock holders the share in the !ro its? ii. ,*- that all certi icates o stock in the names o the em!loyees should be de!osited with Frank Liddell duly indorsed in blank by the em!loyees concerned? iii. ,+- that each em!loyee was re$uired to sign an agreement with the cor!oration to the e ect that, u!on his death or u!on his retirement or se!aration or any cause whatsoever rom the cor!oration, the said cor!oration should, within a !eriod o si"ty days there or, have the absolute and e"clusive o!tion to !urchase and ac$uire the whole o the stock interest o the em!loyees so dying, resigning, retiring or se!arating. *. Frank Liddell as owned Liddell Motors, 1nc. based on the ollowing acts: a. @e su!!lied the original ca!ital unds. i. @is wi e ailed to su iciently !rove that she had the ca!acity to be the sole incor!orator o Liddell Motors, 1nc. 1. @er income in the Q( and savings could not be enough to cover the amount o subscri!tion and o!erate the business. *. 4he alleged sale o her !ro!erty in )regon was never shown to have been saved or

de!osited so as to be still available at the time o the organi;ation o the Liddell Motors, 1nc. +. 1ncome ta" records showed that she had to inde!endent income o her own. @er salary and bonuses rom the com!any ended u! in the account o Frank Liddell. ii. >vidence also showed that she did not !artici!ate in the o!erations o the com!any. +. Liddell Motors, 1nc. and Liddell X Co., 1nc. are one and the same. a. Most o the business transactions o Liddell X Co. were made through Liddell Motors, 1nc. Liddell Motors secured the cars, trucks, s!are !arts rom Liddell X Co. 1nc. and then sold them to the !ublic. b. 4he movement o sales rom the two com!anies to the !ublic would take !lace on the same day. c. 4he (C said that the cars and trucks merely touched the hands o Liddell Motors, 1nc. as a matter o ormality. d. Guring the irst hal o '8.8: i. Liddell X Co. issued ten ,'C- checks !ayable to Frank Liddell which were de!osited by Frank Liddell in his !ersonal account with the Phili!!ine 3ational <ank. ii. @e issued in avor o Liddell Motors, 1nc. si" ,5- checks drawn against his !ersonal account with the same bank. iii. 4he (C concluded that the checks issued by Frank Liddell to the Liddell Motors, 1nc. were signi icantly or the most !art issued on the same day when Liddell X Co. 1nc. issued the checks or Frank Liddell and or the same amounts. .. 4he court recogni;ed the act that one or more cor!orations are owned and controlled by a single stockholder is not o itsel su icient ground or disregarding se!arate cor!orate entities. 0. 1t is law ul to obtain a cor!oration charter, even with a single substantial stockholder, to engage in a s!eci ic activity, and such activity may co%e"ist with other !rivate activities o the stockholder. 1 the cor!oration is a substantial one, conducted law ully and without raud on another, its se!arate identity is to be res!ected. 5. 4he activities and engagements o the com!anies were the medium to reduce the !rice and ta" liability. 6. Let us illustrate: a car with engine motor no. *'*+7' a. (old by Liddell X Co. 1nc. to Liddell Motors, 1nc. on January '6, '8.7 or P.,0.5,CCC.CC including ta". b. the !rice o the car was P.,'++,CCC.*+ c. the ta" !aid being P.'+.** at 'CN. d. 4he car was sold ,on the same day- by Liddell Motors, 1nc. to P.H. Luistro or P00CC, no more sales ta" was !aid. e. 1n this !rice o P00CC was included the P.'+.+* re!resenting ta"es !aid by Liddell X Co. 1nc. in the sale to Liddell Motors, 1nc. . Geducting P.'+.+* re!resenting ta"es !aid by Liddell X Co., 1nc. the !rice o P00CC, the balance o P0,C76.57 would have been the net selling !rice o Liddell X Co., 1nc. to the general !ublic ,had Liddell Motors, 1nc. not !artici!ated and intervened in the sale-, and '0N sales ta" would have been due.

g. 1n this transaction, P+.8.57 in the orm o ta"es was evaded. 7. 4o allow a ta"!ayer to deny ta" liability on the ground that the sales were made through another and distinct cor!oration when it is !roved that the latter is virtually owned by the ormer or that they are !ractically one and the same is to sanction a circumvention o our ta" laws. #$SE L$30 1O#!'INE: 1t is o course acce!ted that the mere act that one or more cor!orations are owned and controlled by a single stockholder is not o itsel su icient ground or disregarding se!arate cor!orate entities. Authorities 'C su!!ort the rule that it is law ul to obtain a cor!oration charter, even with a single substantial stockholder, to engage in a s!eci ic activity, and such activity

may co%e"ist with other !rivate activities o the stockholder. 1 the cor!oration is a substantial one, conducted law ully and without raud on another, its se!arate identity is to be res!ected.

C07 E%!IGO v. #O%'! O/ !$X $""E$LS January *7, '85', D.9. 3o. L%'+*C+ !O"I#: Parent%(ubsidiary 9elationshi! "ONEN!E: DQ41>99>O GAH1G, J.

$%!&O': Jelena (M%not the mall. 4a" Court decided that (M was organi;ed to evade ta"es, (C ound no ta"ed to be evaded, so the 0CN surcharge is im!ro!er. (M and =utivo may be treated as one entity to !ay or ta"es.

/$#!S '.=utivo (ons @ardware Co. ,=utivo-, a domestic cor!oration incor!orated under Phili!!ine laws in '8'5, was engaged in the im!ortation and sale o hardware su!!lies and e$ui!ment. *. A ter the irst world war, it resumed its business and bought a number o cars and trucks rom Deneral Motors Cor!oration ,DM-, an American Cor!oration licensed to do business in the Phili!!ines. +. DM !aid sales ta" !rescribed by the 4a" Code on the basis o its selling !rice to =utivo but =utivo !aid no urther sales ta" on its sales to the !ublic. .. )n June '+, '8.5, the (outhern Motors 1nc, ,(M- was organi;ed to engage in the business o selling cars, trucks and s!are !arts. )ne o the subscribers o stocks during its incor!oration was =u She 4hai, =u She (iong and @u Sho Jin, ,sons of 'u Tiong 'ee, one of 'utivos foun ers - as well as =u >ng Poh, and &ashington (yci! , sons of 'u Tiong Sin an #lbino Sycip, respectively, also foun ers of 'utivo-. 0. A ter (MIs incor!oration and until the withdrawal o DM rom the Phili!!ines, the cars and trucks !urchased by =utivo rom DM were sold by =utivo to (M which the latter sold to the !ublic. 5. =utivo was a!!ointed im!orter or Hisayas and Mindanao by the Q( manu acturer o cars and trucks sold by DM. =utivo !aid the sales ta" !rescribed on the basis o selling !rice to (M. (M !aid no sales ta" on its sales to the !ublic. 6. An assessment was made u!on =utivo or de iciency sales ta". 4he Collector o 1nternal 9evenue, contends that the ta"able sales were the retail sales by (M to the !ublic and not the sales at wholesale made by =utivo to the latter inasmuch as SM and E-tivo ;ere one and the +a(e cor)oration the 2or(er .ein, a +-.+idiar* o2 the latter . 7. 4he assessment was dis!uted by !etitioner. A ter reinvestigation, a second assessment was made, sustaining the validity o the irst assessment. =utivo contested the second assessment, alle,in, that: =1> there i+ no valid ,ro-nd to di+re,ard the cor)orate )er+onalit* o2 SM and to hold that it i+ an adB-nct o2 )etitioner; ,*- assuming the se!arate !ersonality o (M may be disregarded, the sales ta" already !aid by =utivo should irst be deducted rom the selling !rice o (M in com!uting the sales ta" due on each vehicle? and ,+- the surcharge has been erroneously im!osed by res!ondent. ISS%E: Could the se!arate cor!orate !ersonality o (M and =utivo be disregarded2 &EL1: =>(, when the cor!oration is the :mere alter ego or business conduit o a !erson, it may be disregarded.: (outhern Motors being but a mere instrumentality, or ad#unct o =utivo, the Court o 4a" A!!eals correctly disregarded the technical de ense o se!arate cor!orate entity in order to arrive at the true ta" liability o =utivo. '$!IO: '. 4he C4A was not #usti ied in inding that (M was organi;ed to de raud the Dovernment. (M was organi;ed in June '8.5, rom that date until June +C, '8.6, DM was the im!orter o the cars and trucks sold to =utivo, which in turn was sold to (M. DM, as im!orter was the one solely liable or sales ta"es. 3either =utivo nor (M was sub#ect to the sales ta"es. =utivoIs liability arose only until July ', '8.6 when it became the im!orter. @ence, there was no ta" to evade. *. 4he intention to minimi;e ta"es, when used in the conte"t o raud, must be !roved to e"ist by clear and convincing evidence amounting to more than mere !re!onderance, and cannot be #usti ied by a mere s!eculation. 4his is because raud is never lightly to be !resumed. +. Pursuant to (ection '7+ o the 3ational 1nternal 9evenue Code the 0CN surcharge should be added to the de iciency sales ta" :in case a alse or raudulent return is will ully made.: Although the sales made by (M are in substance by =utivo this does not necessarily establish raud nor the will ul iling o a alse or raudulent return. .. @owever, the res!ondent court is correct that (M was actually owned and controlled by !etitioner. Consideration o various circumstances indicate that =utivo treated (M merely as its de!artment or ad#unct: a. 4he ounders o the cor!oration are closely related to each other by blood and a inity. b. 4he ob#ect and !ur!ose o the business is the same? both are engaged in sale o vehicles, s!are !arts, hardware su!!lies and e$ui!ment. c. 4he accounting system maintained by =utivo shows that it maintained high degree o control over (M accounts. d. (everal corres!ondences have re erence to =utivo as the head o ice o (M. (M may even reely use orms or stationery o =utivo. e. All cash collections o (MIs branches are remitted directly to =utivo. . 4he controlling ma#ority o the <oard o Girectors o =utivo is also the controlling ma#ority o (M. g. 4he !rinci!al o icers o both cor!orations are identical. <oth cor!orations have a common com!troller in the !erson o (imeon (y, who is a brother%in%law o =utivoIs !resident, =u She 4hai. h. =utivo, inanced !rinci!ally the business o (M and actually e"tended all the credit to the latter not only in the orm o starting ca!ital but also in the orm o credits e"tended or the cars and vehicles allegedly sold by =utivo to (M.

#$SE L$30 1O#!'INE: 1t is an elementary and undamental !rinci!le o cor!oration law that a cor!oration is an entity se!arate and distinct rom its stockholders and rom other cor!oration !etitions to which it may be connected. @owever, :when the notion o legal entity is used to de eat !ublic convenience, #usti y wrong, !rotect raud, or de end crime,: the law will regard the cor!oration as an association o !ersons, or in the case o two cor!orations merge them into one.

069 "hividec v #$ and Gioleta 8orre+ D.9. 3o. 70*55 January +C, '88C !O"I#: Parent%(ubsidiary 9elationshi! "ONEN!E: Cru;, J.

$%!&O': Golina, Chad

/$#!S '. Hioleta M. <orres, !rivate res!ondent herein, was in#ured in an accident that was later held by the trial and res!ondent courts to be due to the negligence o Phividec 9ailways, 1nc. ,P91-. *. )n May *0, '868, !etitioner Phili!!ine Heterans 1nvestment Gevelo!ment Cor!oration ,P@1H1G>C- sold all its rights and interests in the P91 to the Phili!!ine (ugar Commission ,P@1L(QC)M-. 4wo days later, P@1L(QC)M caused the creation o a wholly%owned subsidiary, the Panay 9ailways, 1nc., to o!erate the railway assets ac$uired rom P@1H1G>C. +. <orres iled a com!laint or damages against Phividec 9ailways 1nc. and Panay 9ailways 1nc. Panay disclaimed liability on the ground that in the Agreement concluded between P@1H1G>C and P@1L(QC)M, it was !rovided that: AG. &ith the e"ce!tion o the Liabilities and Contracts s!eci ied in Anne"es . and 0 o the !receding !aragra!h, P@1H1G>C hereby holds P@1L(QC)M harmless rom and against any action, claim or liability that may arise out o or result rom acts or omissions, contracts or transactions !rior to the turn%over.M .. 94C o 1loilo held that Phividec 9ailways 1nc. is negligent and liable to the !rivate res!ondent or damages. 0. CA a irmed decision o 94C. 5. Petitioner argues that P@1H1G>C and Phividec 9ailways 1nc. are entirely distinct and se!arate cor!orations although the latter is its subsidiary. 4he trans er o the shares o stock o P91 to P@1L(QC)M did not divest P91 o its #uridical !ersonality or o its ca!acity to direct its own a airs and conduct its own business under the control o its own board o directors. ISS%E: &hether or not P@1H1G>C can be held liable to the !lainti or damages2

&EL1: =es. P@1H1G>C and P91 regarded as one and the same entity. '$!IO: '. 1t is clear rom the evidence o record that by virtue o the agreement between P@1H1G>C and P@1L(QC)M, !articularly the sti!ulation e"em!ting the latter rom any :claim or liability arising out o any act or transaction: !rior to the turn%over, P@1H1G>C had e"!ressly assumed liability or any claim against P91. (ince the accident ha!!ened be ore that agreement and P91 ceased to e"ist a ter the turn%over, it should ollow that P@1H1G>C cannot evade its liability or the in#uries sustained by the !rivate res!ondent. *. <esides, P@1H1G>C/( act o selling P91 to P@1L(QC)M shows that P@H1G>C had com!lete control o P91/s business. 4his circumstance renders a!!licable the rule cited by third%!arty !lainti %a!!ellee ,Costan v. Manila >lectric, *. F *nd +7+- that i a !arent% holding com!any ,P@1H1G>C in the !resent case- assumes com!lete control o the o!erations o its subsidiary/s business, the se!arate cor!orate e"istence o the subsidiary must be disregarded, such that the holding com!any will be res!onsible or the negligence o the em!loyees o the subsidiary as i it were the holding com!any/s own em!loyees.

#$SE L$30 1O#!'INE: A cor!oration which is merely an ad#unct, business conduit or alter ego o another cor!oration, the iction o se!arate and distinct cor!orate entities should be disregarded.

1ISSEN!IN40#ON#%''IN4 O"INION:

070 L$ #$M"$N$ #O//EE /$#!O'E IN#. v. D$IS$&$N May *0, '80+, D.9. 3o. L%0566 !O"I#: Parent%(ubsidiary 9elationshi! "ONEN!E: 9eyes, J.

$%!&O': 9hona <urce Gisregarding cor!orate entity? industrial dis!utes? actories o!erating under one management? e ect o one o them being a registered cor!oration

/$#!S '. Petitioner 4an 4ong was engaged in the business o buying and selling gaugau under the trade name La #a()ana 4a-,a- "acAin,. ,since '8+**. Later on, 4an 4ong and his amily members, as sole incor!orators and stockholders, organi;ed a amily cor!oration known as La #a()ana #o22ee /actor* #o. Inc. ,'80C+. Prior to this or on July '', '8.8, 4an 4ong had entered into a collective bargaining agreement with the Phili!!ine Legion o )rgani;ed &orkers, known as PL)& or short, to which the union o 4an 4ong/s em!loyees was then a iliated. .. 4an 4ong/s em!loyees later ormed their own organi;ation known as Kaisahan Ng Mga Manggagawa Sa (a Campana (KKM), one o the herein res!ondents, and a!!lied or registration in the Ge!artment o Labor as an inde!endent entity. Pending consideration o this a!!lication, the Ge!artment gave the new organi;ation legal standing by issuing it a !ermit as an a iliate to the Sali!unan 3g Mga Manggagawa. 0. )n July '8, '80', res!ondent Saisahan !resented a demand or higher wages and more !rivileges, the demand being addressed to La Cam!ana Daugau and the Co ee Factory. Note: 4he Saisahan has 55 members, which are workers rom both La Cam!ana Daugau Packing and La Cam!ana Co ee Factory Co., 1nc 5. 4he demand was not granted? (ettlement through the mediation o the Conciliation (ervice o the Ge!artment o Labor gave no result? 4he said Ge!artment then certi ied the dis!ute to the Court o 1ndustrial 9elations. 6. &hile the case was !ending in the industrial court, the (ecretary o Labor revoked the !ermit o the *alipunan Ng +ga *aisahang +anggagawa as a labor union? 4he !ermit o its a iliate, res!ondent *aisahan, was also sus!ended. 7. Following the revocation o the Saisahan/s !ermit, :La Cam!ana Daugau and Co ee Factory: ,obviously the combined name o La Cam!ana Daugau Packing and La Cam!ana Co ee Factory Co., 1nc,- and the PL)&, iled se!arate motions or the dismissal o the case on several grounds. )ne o which states that A the action is directed against two di erent entities with distinct !ersonalities, with :La Cam!ana (tarch Factory: and the :La Cam!ana Co ee Factory, 1nc.: 8. 4he Court o 1ndustrial 9elations denied the said motions and held that there is only one management or the business o gaugau and co ee with whom the laborers are dealing regarding their work. 'C. Contention o 4an 4ong and La Cam!ana Co ee Factory, 1nc: 4he Court o 1ndustrial 9elations has no #urisdiction to take cogni;ance o the case, because,:,'- that the !etitioner La Cam!ana Co ee Factory, 1nc. has only '. em!loyees, only 0 o whom are members o the res!ondent union and there ore the absence o the #urisdictional number ,+C- as !rovided by sections ' and . o Commonwealth Act 3o. 'C+? and, ,*- that the sus!ension o res!ondent union/s !ermit by the (ecretary o Labor has the e ect o taking away the union/s right to collective bargaining under section * o Commonwealth Act 3o. *'+ and conse$uently, its !ersonality to sue or and in behal o its members.: ISS%E: &hether or not the industrial court has #urisdiction to try the case against La Cam!ana Co ee Factory, 1nc. as the latter has only '. em!loyees, only 0 o whom are members o the res!ondent union 3ote: Jurisdictional number o laborers re$uired or a union to sue in their behal &EL1: =es. Although the co ee actory has only '. laborers and only ive o these are members o the labor union, yet as the gaugau actory has more than the #urisdiction number ,+'- re$uired by law and the two actories are o!erating under one single management, the industrial court has #urisdiction to try the case as against the La Cam!ana Co ee Factory, 1nc. '$!IO: '. 4he contention o !etitioners that there is absence o #urisdictional number loses orce when it is noted that, as ound by the industrial court, La Cam!ana Daugau Packing and La Cam!ana Co ee Factory Co. 1nc., are o!erating under one single management, that is, as one business though with two trade names. 4rue, the co ee actory is a cor!oration and, by legal iction, an entity e"isting se!arate and a!art rom the !ersons com!osing it, that is, 4an 4ong and his amily. <ut it is settled that this iction o law, which has been introduced as a matter o convenience and to subserve the ends o #ustice cannot be invoked to urther an end subversive o that !ur!ose. *. 4an 4ong a!!ears to be the owner o the gaugau actory. And the co ee actory, though an incor!orated business, is in reality owned e"clusively by 4an 4ong and his amily. As ound by the Court o industrial 9elations, the two actories have but one o ice, one management and one !ayroll, e"ce!t a ter July '6, the day the case was certi ied to the Court o 1ndustrial 9elations, when the !erson who was discharging the o ice o cashier or both branches o the business began !re!aring se!arate !ayrolls or the two. +. And above all, it should not be overlooked that, as also ound by the industrial court, the laborers o the gaugau actory and the co ee actory were interchangeable, that is, the laborers rom the gaugau actory were sometimes trans erred to the co ee actory and vice%versa. 1n view o all these, the attem!t to make the two actories a!!ears as two se!arate businesses, when in reality they are but one, is but a device to de eat the ends o the law and should not be !ermitted to

!revail.

#$SE L$30 1O#!'INE: ,isregar ing Corporate -ntity. J 4he doctrine that a cor!oration is a legal entity e"isting se!arate and a!art rom the !erson com!osing it is a legal theory introduced or !ur!oses o convenience and to subserve the ends o #ustice. 4he conce!t cannot, there ore, be e"tended to a !oint beyond its reason and !olicy, and when invoked in su!!ort o an end subversive o this !olicy, will be disregarded by the courts. 4hus, in an a))ro)riate ca+e and in 2-rtherance o2 the end+ o2 B-+tice a cor)oration and the individ-al or individ-al+ o;nin, all it+ +tocA+ and a++et+ ;ill .e treated a+ identical the cor)orate entit* .ein, di+re,arded ;here -+ed a+ a cloaA or cover 2or 2ra-d or ille,alit* . ,'+ Am. Jur., '5C%'5'.$ +-.+idiar* or a-Iiliar* cor)oration ;hich i+ created .* a )arent cor)oration (erel* a+ an a,enc* 2or the latter (a* +o(eti(e+ .e re,arded a+ identical ;ith the )arent cor)oration e+)eciall* i2 the +tocAholder+ or o22icer+ o2 the t;o cor)oration+ are +-.+tantiall* the +a(e or their +*+te( o2 o)eration -ni2ied.

071 Mc$rth-r v. !i(e+ "rintin, #o. 0' 3.&. *'5/ February C0, '78* !O"I#: Liability o Cor!oration or PromoterIs Contracts "ONEN!E: Mitchell, J.

$%!&O': <ea Mationg &hile a cor!oration is not bound by engagements made on its behal by its !romoters be ore its organi;ation, it may, a ter it is organi;ed, make such engagements its contracts by ado!ting them as its own? and this it may do in the same manner as it might make similar original contracts.

/$#!S '. 4he com!laint alleges that on '778, the de endant contracted with !lainti or his services as advertising solicitor or one year? that in A!ril, '78C, it discharged him, in violation o the contract. 4he action is to recover damages or the breach o the contract. *. 4he answer sets u! two de enses: ,'- 4hat !lainti /s em!loyment was not or any stated time, but only rom week to week? ,*- that he was discharged or good cause. +. Q!on the trial there was evidence reasonably tending to !rove that in (e!tember, '778, one C.A. 3imocks and others were engaged as !romoters in !rocuring the organi;ation o the de endant com!any to !ublish a news!a!er? .. )n about (e!tember '*th, 3imocks, as such !romoter, made a contract with !lainti , in behal o the contem!lated com!any, or his services as advertising solicitor or the !eriod o one year rom and a ter )ctober 'st,%the date at which it was e"!ected that the com!any would be organi;ed? 0. 4hat the cor!oration was not, in act, organi;ed until )ctober '5th, but that the !ublication o the !a!er was commenced by the !romoters )ctober 'st, at which date !lainti , in !ursuance o his arrangement with 3imocks, entered u!on the discharge o his duties as advertising solicitor or the !a!er? that a ter the organi;ation o the com!any he continued in its em!loyment in the same ca!acity until discharged, the ollowing A!ril? 5. 4hat de endant/s board o directors never took any ormal action with re erence to the contract made in its behal by 3imocks, but all o the stockholders, directors, and o icers o the cor!oration knew o this contract at the time o its organi;ation, or were in ormed o it soon a terwards? 6. And none o them ob#ected to or re!udiated it, but, on the contrary, retained !lainti in the em!loyment o the com!any without any other or new contract as to his services. ISS%E: &hether or not the liability o the cor!oration, in such cases, is to be !laced on the grounds o its ado!tion o the contract o its !romoters, or u!on some other ground, such as e$uitable esto!!el. &EL1: 3)4 3>C>((A91L=, but it has been held that, while a cor!oration is not bound by engagements made on its behal by its !romoters be ore its organi;ation, it may, a ter its organi;ation, make such engagements its own contracts. And this it may do !recisely as it might make similar original contracts? '$!IO: 1t is not re$uisite that such ado!tion or acce!tance be e"!ress, but it may be in erred rom acts or ac$uiescence on !art o the cor!oration, or its authori;ed agents, as any similar original contract might be shown. 4he right o the cor!orate agents to ado!t an agreement originally made by !romoters de!ends u!on the !ur!oses o the cor!oration and the nature o the agreement. ) course, the agreement must be one which the cor!oration itsel could make, and one which the usual agents o the com!any have e"!ress or im!lied authority to make. 4hat the contract in this case was o that kind is very clear? and the acts and ac$uiescence o the cor!orate o icers, a ter the organi;ation o the com!any, ully #usti ied the #ury in inding that it had ado!ted it as its own. #$SE L$30 1O#!'INE: 4he act o the cor!oration in ado!ting such engagements is not a rati ication, which relates back to the date o the making o the contract by the !romoter, but is, in legal e ect, the making o a contract as o the date o the ado!tion. @ence, although the contract made in behal o the contem!lated cor!oration was, by its terms, not to be !er ormed within one year rom the date o the making thereo by the !romoter, it is not within the statute o rauds i it be !er ormed within one year rom the date o its ado!tion by the cor!oration a ter its organi;ation. &hile a cor!oration is not bound by engagements made on its behal by its !romoters be ore its organi;ation, it may, a ter it is organi;ed, make such engagements its contracts by ado!ting them as its own? and this it may do in the same manner as it might make similar original contracts. 1ISSEN!IN40#ON#%''IN4 O"INION: 3/A

072 #li2ton et al v+ !o(. $%!&O': Mercado, Christo!her Gann C. !O"I#: Liability o Cor!oration or PromoterIs Contract /$#!S 1. 4omb had an o!tion to buy all shares o a certain cor!oration, Hirginia Cor!oration. 2. @owever, the sold this o!tion to Cli ton or a sum o V*C,CCC. 3. <ut later 4omb and Cli ton have later agreed that in lieu o the !ayment o V*C,CCC, 4omb should receive V*C,CCC in stock o the &est Hirginia cor!oration which is not yet ormed, and is still to be incor!orated by its !romoters and incor!orators, amongst which is Cli ton. 4. &ith that, 4omb issued !romissory notes to Cli ton to cover the value o the shares which he would get rom the &est Hirginia Cor!oration, but with the understanding that he would not be liable on them. 5. )ther incor!orators and !romoters o the &est Hirginia Cor!oration did not know o this agreement between Cli ton and 4omb. 6. 4he &est Hirginia Cor!oration was organi;ed as agreed and took over the shares o the Hirginia Cor!oration, but 4omb did not get the agreed shares in the ormer cor!oration. 7. 4hus, 4omb brought this action or s!eci ic !er ormance against CL1F4)3 and the &>(4 H19D131A C)9P)9A41)3. 8. 4he &est Hirginia Cor!oration counterclaimed or the value o the notes, which the Gistrict Court granted. 9. 4hus, this case at bar. 10. 4he !lainti contends the cor!oration should be bound by its contract, as entered into by one o its !romoters, that is, Cli ton. 11. @e urther argued that the knowledge o Cli ton o the agreement should be im!uted to the cor!oration. ISS%E: &hether or not the &est Hirginia Cor!oration should be bound by the contract entered into by one o its !romoters &EL1: 3o. 4he agreement was a raud u!on the cor!oration and the other stockholders, and should not be en orced. 4he raudulent taint attending the transaction !revents the !lainti rom en orcing the alleged contract or the !ayment to him o the stock o the cor!oration, and !revents him also rom denying his liability u!on the notes. Any contract having or its ob#ect or which in e ect !er!etrates a raud u!on third !erson is illegal and void, and there ore unen orceable, either in e$uity or at law. '$!IO: 1n order or the cor!oration to be bound by the contract o their !romoters, it is necessary in all cases that the cor!oration should have ull knowledge o the acts, or at least should be !ut u!on such notice as would lead, u!on reasonable in$uiry, to the knowledge o the acts. 1 cor!orations could be held bound by all the secret undisclosed contracts o their !romoters, ew men would care to risk subscribing to their ca!ital stock. As a general rule, the knowledge o a mere !romoter is not be im!uted to the cor!oration. 4he only theory u!on which the Cli tonIs knowledge could be im!uted to the &est Hirginia Cor!oration would be u!on the assum!tion that he was an agent o the cor!oration. @owever, he cannot be an agent o the cor!oration at that time when it had not been ormed. <ut even i was assumed that he was an agent thereo , his knowledge could not be im!uted to the cor!oration, because o his !ersonal interest in the transaction. &here the agent contract with his !rinci!al and has a !ersonal interest in the matter antagonistic to the interest o the !rinci!al, the rule does not a!!ly, because in such case there is no reason to !resume that the agent will im!art in ormation which it is to his interest to su!!ress. 4here was nothing in the o!tion itsel which gave any notice that the original holder, 4omb, was to be !aid anything or it. Cli tonIs agreement to !ay V*C,CCC or it was a !ersonal obligation o his own. &hen he trans erred the o!tion to the cor!oration, ti would have been against his interest to have disclosed that there was an obligation on his !art to !ay or it the sum that had been !romised to 4omb. 1t cannot be !resumed, there ore, that he would have disclosed this act to the cor!oration, and certainly cannot be !resumed that he would have disclosed to it the secret arrangement which the !lainti alleges was had between them whereby 4omb was to receive stock o the cor!oration in !ayment or his interest in the o!tion. #$SE L$30 1O#!'INE: 1n order or the cor!oration to be bound by the contract o their !romoters, it is necessary in all cases that the cor!oration should have ull knowledge o the acts, or at least should be !ut u!on such notice as would lead, u!on reasonable in$uiry, to the knowledge o the acts. 1 cor!orations could be held bound by all the secret undisclosed contracts o their !romoters, ew men would care to risk subscribing to their ca!ital stock. As a general rule, the knowledge o a mere !romoter is not be im!uted to the cor!oration.

073. #a,a*an /i+hin, #o. v. SandiAo 76 "hil 223 ,Gecember *+, '8+6, D.9. 3o. L%.++0C!O"I#: PromoterIs Contracts Prior to 1ncor!oration:
Liability o Cor!oration or PromoterIs Contracts

$%!&O': Athe murdererM 4he trans er was made almost ive months be ore the incor!oration o the com!any.

"ON!EN!E: L$%'EL J. /$#!S '. Manuel 4abora is the registered owner o our !arcels o land in Cagayan. *. 4o guarantee the !ayment o a loan in the sum o P7, CCC, Manuel 4abora, on August '., '8*8, e"ecuted in avor o the Phili!!ine 3ational <ank a irst mortgage on the our !arcels o land above%mentioned. A second mortgage in avor o the same bank was in A!ril o '8+C e"ecuted by 4abora over the same lands to guarantee the !ayment o another loan amounting to P6, CCC. A third mortgage on the same lands was e"ecuted on A!ril '5, '8+C in avor o (everina <u;on to whom 4abora was indebted in the sum o P*, 8CCC. 4hese mortgages were registered and annotations thereo a!!ear at the back o trans er certi icate o title 3o. *'6. +. )n May +', '8+C, 4abora e"ecuted a !ublic document entitled :>scritura de 4rans!aso de Pro!iedad 1nmueble.M ,>"hibit A- 4he our !arcels o land owned by him was sold to the !lainti com!any, said to under !rocess o incor!oration, in consideration o one !eso ,P'- sub#ect to the mortgages in avor o the Phili!!ine 3ational <ank and (everina <u;on and, to the condition that the certi icate o title to said lands shall not be trans erred to the name o the !lainti com!any until the latter has ully and com!letely !aid 4abora/s indebtedness to the Phili!!ine 3ational <ank. .. 4he !lainti com!any iled its article incor!oration with the <ureau o Commerce and 1ndustry on )ctober **, '8+C. A year later, on )ctober *7, '8+', the .oard o2 director+ o2 +aid co()an* ado)ted a re+ol-tion a-thoriJin, it+ )re+ident 5o+e Gent-ra to +ell the 2o-r )arcel+ o2 land+ in C-e+tion to !eodoro SandiAo 2or "42 000. 0. >"hibit < is a deed o sale e"ecuted be ore a notary !ublic by the terms o which the !lainti sold ceded and trans erred to the de endant all its right, titles, and interest in and to the our !arcels o land described in trans er certi icate in turn obligated himsel to shoulder the three mortgages hereinbe ore re erred to. 5. >"hibit C is a !romisory note or P*0,+CC. drawn by the de endant in avor o the !lainti , !ayable a ter one year rom the date thereo . >"hibit G is a deed o mortgage e"ecuted be ore a notary !ublic in accordance with which the our !arcels o land were given a security or the !ayment o the !romissory note, >"hibit C. All these three instrument were dated February '0, '8+*. 6. 4he de endant having ailed to !ay the sum stated in the !romissory note, !lainti , on January *0, '8+., brought this action in the Court o First 1nstance o Manila. 9uled in avor o de endant. ISS%E: '- &)3 the contract herein can be en orced. *- &)3 !romoters could have acted as agent or a !ro#ected cor!oration &EL1: '- 3). 4he !lainti was not yet incor!orated when it entered into a contract o sale, >"hibit A. 4he contract itsel re erred to the !lainti as Auna sociedad en vias de incor!oracion.M 1t was not even a e facto cor!oration at the time. 3ot being in legal e"istence then, it did not !ossess #uridical ca!acity to enter into the contract. *- 3). 4hat which no legal e"istence could have no agent. '$!IO: 4he contract here ,>"hibit A- was entered into not between Manuel 4abora and a non%e"istent cor!oration but between the Manuel 4abora as owner o the our !arcels o lands on the one hand and the same Manuel 4abora, his wi e and others, as mere !romoters o a cor!orations on the other hand. For reasons that are sel %evident, these !romoters could not have acted as agent or a !ro#ected cor!oration since that which no legal e"istence could have no agent. @e succeeded in mortgaging to the Phili!!ine 3ational <ank the land herein. @e a!!eared to have met with inancial reverses. @e ormed a cor!oration com!osed o himsel , his wi e, and a ew others. From the articles o incor!oration, >"hibit *, it a!!ears that out o the P.7,6CC, amount o ca!ital stock subscribed, P.0,CCC was subscribed by Manuel 4abora himsel and P0CC by his wi e, 9u ina W. de 4abora? and out o the P.+,+CC, amount !aid on subscri!tion, P.*,'CC is made to a!!ear as !aid by 4abora and P*CC by his wi e. 4he de endant always regarded 4abora as the owner o the lands. @e dealt with 4abora directly. Jose Hentura, !resident o the !lainti cor!oration, intervened only to sign the contract, >"hibit <, in behal o the !lainti . >ven the Phili!!ine 3ational <ank, mortgagee o the our !arcels o land, always treated 4abora as the owner o the same. , See >"hibits > and F.-

A cor!oration should have a ull and com!lete organi;ation and e"istence as an entity be ore it can enter into any kind o a contract or transact any business, would seem to be sel evident. . . . A cor!oration, until organi;ed, has no being, ranchises or aculties. 3or do those engaged in bringing it into being have any !ower to bind it by contract, unless so authori;ed by the charter there is not a cor!oration nor does it !ossess ranchise or aculties or it or others to e"ercise, until it ac$uires a com!lete e"istence. ,Dent vs. Manu acturers and Merchant/s Mutual 1nsurance Com!any, 'C6 1ll., 50*, 507.I2 the )lainti22 cor)oration co-ld not and did not acC-ire the 2o-r )arcel+ o2 land here involved it 2ollo;+ that it did not )o++e++ an* re+-ltant ri,ht to di+)o+e o2 the( .* +ale to the de2endant !eodoro SandiAo.

#$SE L$30 1O#!'INE: A cor!oration, until organi;ed, has no li e and there ore no aculties. 1t is, as it were, a child in ventre sa mere. 4his is not saying that under no circumstances may the acts o !romoters o a cor!oration be rati ied by the cor!oration i and when subse$uently organi;ed. !here are o2 co-r+e eIce)tion+ ,Fletcher Cyc. o Cor!s., !ermanent edition, '8+', vol. 1, secs. *C6 et se..1ISSEN!IN40#ON#%''IN4 O"INION:

C5. 8%IL1E'HS 1%N!ILLE v. 1%NN $%!&O': 5$NN$ May *', '8*8, **8 S.=. 058 !O"I#: Cor!orate 9ights under PromoterIs Contracts Petitioner has a right to sue on contract entered into by one "ONEN!E: @)<()3 o its !romoters. /$#!S '. &.>. Gunn Manu acturing Com!any ,GQ33 Co.- manu actures machinery or making duntile %% a hollow building tile. *. <.@. (amuels o Paducah received advertisements that duntiles were ire!roo , moisture !roo , and chea!er than other construction materials o e$ual $uality. +. A ter some corres!ondece with GQ33 Co., Mr. Daston was sent to Paducah in A!ril '8*0. .. (amuels told Daston he was organi;ing a com!any to manu acture Guntiles. 4hey visited other !romoters o the !ro!osed cor!oration and a banker whom they e"!ected to get money rom. 0. (amuels wanted to organi;e the cor!ortion irst, but Daston wanted him o order the machinery irst. 5. )n A!ril *+, a ter talking it over with other !romoters in the city, (amuels signed a contract which contained the . !rovision: :&. >. Gunn Manu acturing Com!any agrees to urnish, ree o charge, an e"!erienced service man or a !eriod o ive days to insure !ro!er installation and instruct your orce.: 6. 4he order, signed by (amuel was acce!ted by the com!any. 4he machinery was delivered on June 5. 7. )n June '5, Mr. Aaron was sent to Paducah to work on the machinery and trained workers on how to o!erate it. @e stayed there 0 days to get it going, and then le t. 8. Meanwhile, )n June *C, the articles o incor!oration o the <uilders/ Guntile Com!any ,<GC- were iled by (amuels and
his associates.

'C. 1t turns out that the blocks made were in erior in $uality and !ractically valueless or building !ur!oses. ''. <GC wrote to GQ33 Co., and * months later, another man by the name o Mr. 4errel was sent. '*. Mr. 4errell ound that the machinery was not !ut u! right by Aaron, and that the latter gave the wrong ormula as to the mi"ing o ingredients. A ter 4errell set u! the machine and !ro!erly mi"ed material, the machinery !roduced good results. '+. Action was brought by <GC against GQ33 Co. to recover on the written contract made on A!ril *+ by (amuels. '.. 4rial court ruled in avor o manu acturer GQ33 Co. <GC a!!ealed. ISS%E: &hether the cor!oration ,<GC- has a right to sue u!on a contract made on its behal by one o its !romoters ,(amuelbe ore it was organi;ed.

&EL1: =es, the Cor!oration is held entitled to maintain suit on contract entered into by one o its !romotors or !urchase and
installation o machinery or its bene it.

'$!IO:
'. *. +. .. 0. 5. 6. 1t was clearly understood between (amuels and the other !romoters and Daston ,as agent o GQ33-, that the contract was made on behal o the cor!oration which (amuels !ro!osed to orm. &hen the cor!oration was ormed the incor!orators took over the whole thing, and rati ied all that had been done on its behal . 4he cor!oration was the real !arty in interest, and the action was !ro!erly brought in its name. (amuels did not make the contract or himsel , and he !ersonally did not sustain the damages. 4o deny the cor!oration the right to sue or damages or the breach o contract and the loss it sustained by reason o the irst agent/s negligence and im!ro!er acts would be to deny it all remedy or the breach o the contract. 4he cor!oration only sustained the damages resulting rom the breach o the contract. 4he orm o the transaction was due to the act that the manu acturer/s agent asked that the contract be !ut in this orm. Daston insisted that it would take time or the machinery to get there, and it is better to order it and then organi;e the cor!oration.

#$SE L$30 1O#!'INE:

ACor!oration has !ower to ado!t contract o its !romoters, and a ter such ado!tion may maintain suit on the contract.M A&here cor!oration ado!ted !romoter/s contract or !urchase o machinery, by taking over !lant and issuing !romoter stock in !ayment, cor!oration was real !arty in interest in suit against manu acturer on contractM

076. 'iJal Li,ht F Ice #o. v+ "S# 1978909928 M 4.'. No. L920993 !O"I#: Cor!orate 9ights under PromoterIs Contracts "ON!EN!E: Oaldivar, J.

$%!&O': twinkle A ranchise cannot take e ect until the grantee cor!oration is organi;ed, the ranchise may, nevertheless, be a!!lied or be ore the com!any is ully organi;ed. A grant o a ranchise is valid although the cor!oration is not created until a terwards. 4he subse$uent issuance o a certi icate o incor!oration, cures the de iciency.

/$#!S '. 4hese two cases, being interrelated, are decided together: Case D.9. 3o. L % *C88+ !etition to revoke Public (ervice CommissionIs ,Commission- cancelling and revoking the certi icate o !ublic convenience and necessity and or eiting the ranchise o said !etitioner. Case D.9. 3o. L%*'**' !etition to review CommissionIs granting o certi icate o !ublic convenience and necessity to res!ondent Morong >lectric Co., 1nc. * to o!erate an electric light, heat and !ower service in the munici!ality o Morong, 9i;al. *. Petitioner 9i;al Light X 1ce Co., 1nc. ,9L1C- is a domestic cor!oration with business address at Morong, 9i;al, granted by the Commission a certi icate o !ublic convenience and necessity or the installation, o!eration and maintenance o an electric light, heat and !ower service in the munici!ality o Morong, 9i;al. +. Gecember '8, '805, the Commission re$uired the !etitioner to a!!ear be ore it on February '7, '806 to show cause why it should not be !enali;ed or violation o the conditions o its certi icate o !ublic convenience and the regulations o the Commission, and or ailure to com!ly with the directives to raise its service voltage. .. <ut 9L1C ailed to a!!ear be ore the Commission. @ence, the Commission cancelled 9L1CIs certi ication. 0. 9L1C moved to reo!en the case on the ground that the manager was unaware o the hearing. And true enough, it was because Francisco ,the mngr- was ill. 4he Commission granted the motion. 5. Meanwhile, ins!ections had been made o !etitioner/s electric !lant and installations by the engineers o the Commission or . times ,'807, '808, '85C, and '85'- 4he ins!ection on '85' was made u!on the re$uest o the !etitioner who mani ested during the hearing on Gecember '0, '85C that im!rovements have been made on its service since the ins!ection on July '*%'+, '85C, and that, on the basis o the ins!ection re!ort to be submitted, it would agree to the submission o the case or decision without urther hearing. 6. &hen the case was called or hearing on July 0, '85', !etitioner ailed to a!!ear. 9es!ondent munici!ality was then allowed to !resent its documentary evidence, and therea ter the case was submitted or decision. <ut 9L1C iled a motion to reo!en on the ground that they were not urnished a co!y o the re!ort o which they will base their answer. 4he Commission gave the, 'C days to answer but to no avail. 7. 4he Commission ordered the cancellation and revocation o !etitioner/s certi icate o !ublic convenience and the or eiture o its ranchise on the ground that 9L1C had violated the conditions o its certi icate o !ublic convenience as well as the rules and regulations o the Commission and concluded that it cannot render the e icient, ade$uate and satis actory electric service re$uired by its certi icate and that it is against !ublic interest to allow it to continue its o!eration.: 8. 9L1C electric !lant burned. 4hey moved or reconsideration on the contention that it had im!rovements in the !lant !rior to the burning o the !lant. <ut was dismissed by the Commission. ,' st case'C. 9L1C o!!osed the a!!lication or certi icate o !ublic convenience o Morong >lectric Co., 1nc. because it has no legal ca!acity on May 5 '85* when the munici!al ranchise was granted and it was not inancially ca!able. )n the basis o the evidence adduced, the Commission, in its decision dated March '+, '85+, ound that there was absence o electric service in the munici!ality o Morong and that a!!licant Morong >lectric, a Fili!ino%owned cor!oration duly organi;ed and e"isting under the laws o the Phili!!ines, has the inancial ca!acity to maintain said service. 4hese circumstances, considered together with the denial o the motion or reconsideration iled by !etitioner, the Commission a!!roved the a!!lication o Morong >lectric and ordered the issuance in its avor o the corres!onding certi icate o !ublic convenience and necessity. ,*nd case- @ence this !etition or review. M$IN ISS%E0 #O'" 'EL$!E1: , ound in case U*- &)3 M)9)3D had #uridical !ersonality and legal e"istence when the munici!al ranchise was granted2 &EL1: 3). Morong >lectric did not yet have a legal !ersonality on May 5, '85* when a munici!al ranchise was granted to it is correct. 4he #uridical !ersonality and legal e"istence o Morong >lectric began only on )ctober '6, '85* when its certi icate o incor!oration, was issued by the (>C. <ut the act that Morong >lectric had no cor!orate e"istence on the day the ranchise was granted in its name does not render the ranchise invalid, because later Morong >lectric obtained its certi icate o incor!oration and then acce!ted the ranchise in accordance with the terms and conditions thereo . 1t cured the law.

'$!IO: Case U* ,more im!ortant case because it is more cor! related'. Petitioner/s contention that Morong >lectric did not yet have a legal !ersonality on May 5, '85* when a munici!al ranchise was granted to it is correct. 4he #uridical !ersonality and legal e"istence o Morong >lectric began only on )ctober '6, '85* when its certi icate o incor!oration, was issued by the (>C. <ut the act that Morong >lectric had no cor!orate e"istence on the day the ranchise was granted in its name does not render the ranchise invalid, because later Morong >lectric obtained its certi icate o incor!oration and then acce!ted the ranchise in accordance with the terms and conditions thereo . :&hile a ranchise cannot take e ect until the grantee cor!oration is organi;ed, the ranchise may, nevertheless, be a!!lied or be ore the com!any is ully organi;ed. A grant o a street ranchise is valid although the cor!oration is not created until a terwards because a !rivilege o this character is a mere license to the cor!oration until it acce!ts the grant and com!lies with its terms and conditions. 4he incor!oration o Morong >lectric on )ctober '6, '85* and its acce!tance o the ranchise as shown by its action in !rosecuting the a!!lication iled with the Commission or the a!!roval o said ranchise, not only !er ected a contract between the res!ondent munici!ality and Morong >lectric but also cured the de iciency !ointed out by the !etitioner in the a!!lication o Morong >lectric. 4hus, the Commission did not err in denying !etitioner/s motion to dismiss said a!!lication and in !roceeding to hear the same. *. Petitioner challenges the inancial ca!ability o Morong >lectric: 1n this connection it should be stated that on the basis o the evidence !resented on the matter, the Commission has ound the Morong >lectric to be : inancially $uali ied to install, maintain and o!erate the !ro!osed electric light, heat and !ower service.: 4his is essentially a actual determination which, in a number o cases, this Court has said it will not disturb unless !atently unsu!!orted by evidence. 1t may be worthwhile to mention that it was recommended that the re$uests o Morong >lectric ,'- or the withdrawal o its de!osit in the amount o P',CCC.CC with the 4reasurer o the Phili!!ines, and ,*- or the a!!roval o 9esolution 3o. '5C o the Munici!al Council o Morong, 9i;al, e"em!ting the o!erator rom making the additional P8,CCC.CC de!osit mentioned in its !etition and was granted. 4his re!ort removes any doubt as to the inancial ca!ability o Morong >lectric to o!erate and maintain an electric light, heat and !ower service. +. 3aturally, whatever conclusion or inding o act that the Commission arrived at regarding the $uality o !etitioner/s service are not borne out by the evidence !resented in this case but by evidence in the !revious case. , the conclusion, arrived at by the Commission a ter weighing the con licting evidence in the two related cases, is a conclusion o act which this Court will not disturb. And it has been held time and again that where the Commission has reached a conclusion o act a ter weighing the con licting evidence, that conclusion must be res!ected, and the (u!reme Court will not inter ere unless it clearly a!!ears that there is no evidence to su!!ort the decision o the Commission.: #$SE L$30 1O#!'INE: a ranchise is a contract, at least two com!etent !arties are necessary to the e"ecution thereo , and !arties are not com!etent e"ce!t they are in being. Qntil a cor!oration has come into being, in this #urisdiction, by the issuance o a certi icate o incor!oration by the (ecurities and >"change Commission ,(>C- it cannot enter into any contract as a cor!oration. A ranchise cannot take e ect until the grantee cor!oration is organi;ed, the ranchise may, nevertheless, be a!!lied or be ore the com!any is ully organi;ed. A grant o a ranchise is valid although the cor!oration is not created until a terwards. 4he subse$uent issuance o a certi icate o incor!oration, cures the de iciency. Not +o i()ortant )art ca+e N1: '. 4he Commission can only authori;e a division chie to hear and investigate a case iled be ore it i he is a lawyer. 4he hearing o icer is not a lawyer, but was not ob#ected on time, ,it is a !rocedural matter, there ore it was waived, and the decision rendered by him is valid-. *. 4he Commission based its decision on the ins!ection re!orts submitted by its engineers who conducted the ins!ection o !etitioner/s electric service u!on orders o the Commission. And counsel o 9L1C mani ested its waiver and decision to abide by the last ins!ection which ound that 9L1C had de iciencies and violations resulting to in inade$uacy in service. +. Petitioner invokes the :!rotection%o %investment rule: is untenable. 4he duty o the Commission to !rotect the investment o a !ublic utility o!erator re ers only to o!erators o good standing % those who com!ly with the laws, rules and regulations % and not to o!erators who are unconcerned with the !ublic interest and whose investments have ailed or deteriorated because o their own ault. .. Petitioner contends that the im!osition o a ine would have been su icient. (ection '5 ,n- o Commonwealth Act 3o. '.5, as amended, con ers u!on the Commission am!le !ower and discretion to order the cancellation and revocation o any certi icate o !ublic convenience issued to an o!erator who has violated, or has will ully and contumaciously re used to com!ly with, any order, rule or regulation o the Commission or any !rovision o law. 1t is the discretion o the Commission as long as there are evidence to su!!ort its action.

077 "ioneer In+-rance v #$ S%"'$ $%!&O': 3. Manalo ,July *7, '878 D.9. 7.'86? D.9. 7.'064he acts was co!ied rom digest U*. &ith all due res!ect to !O"I#: Cor!orate 9ights under PromoterIs Contracts digest U'' "ON!EN!E: DQ41>99>O J9., J., /$#!S '. Jacob (. Lim owned ,single !ro!rietorshi!- (outhern Air Lines ,(AL-. *. )n May '6, '850, Ja!an Gomestic Airlines ,JGA- and Lim entered into and e"ecuted a sales contract or the sale and !urchase o * GC%+A 4y!e aircra ts and ' set o necessary s!are !arts or the total agreed !rice o Q( V'C8,CCC.CC to be !aid in installments. <oth aircra ts came in June and July '850. +. )n May **, '850, Pioneer 1nsurance and (urety Cor!oration as surety e"ecuted and issued its (urety <ond 3o. 55+8 in avor o JGA, in behal o its !rinci!al, Lim, or the balance !rice o the aircra ts and s!are !arts. .. 1t a!!ears that <order Machinery and @eavy >$ui!ment Com!any, 1nc. ,<ormaheco-, Francisco and Modesto Cervantes ,Cervanteses- and ConstancioMaglana contributed some unds used in the !urchase o the above aircra ts and s!are !arts. 4he unds were su!!osed to be their contributions to a new cor!oration !ro!osed by Lim to e"!and his airline business. 0. 4hey e"ecuted * se!arate indemnity agreements in avor o Pioneer, one signed by Maglana and the other #ointly signed by Lim or (AL, <ormaheco and the Cervanteses ,sti!ulated that the indemnitors !rinci!ally agree and bind themselves #ointly and severally to indemni y and hold and save harmless Pioneer rom and against any/all damages, losses, costs, damages, ta"es, !enalties, charges and e"!enses o whatever kind and nature which Pioneer may incur in conse$uence o having become surety u!on the bond/note and to !ay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts o money which it or its re!resentatives should or may !ay or cause to be !aid or become liable to !ay on them o whatever kind and nature-. 5. )n June 'C, '850, Lim doing business under the name and style o (AL e"ecuted in avor o Pioneer a deed o chattel mortgage as security or the suretyshi! ,sti!ulated therein that Lim trans er and convey to the surety the two aircra ts-. 4he deed was duly registered with the ) ice o the 9egister o Geeds o the City o Manila and with the Civil Aeronautics Administration !ursuant to the Chattel Mortgage Law and the Civil Aeronautics Law. 6. Lim de aulted on his subse$uent installment !ayments. JGA re$uested !ayments rom the surety. Pioneer !aid a total sum o P*87,5*5.'*. 7. )n July '8, '855, Pioneer iled an action or #udicial oreclosure with an a!!lication or a writ o !reliminary attachment against Lim and res!ondents, the Cervanteses, <ormaheco and Maglana. 8. 1n their Answers, Maglana, <ormaheco and the Cervanteses iled cross%claims against Lim alleging that they were not !rivies to the contracts signed by Lim and, by way o counterclaim, sought or damages or being e"!osed to litigation and or recovery o the sums o money they advanced to Lim or the !urchase o the aircra ts in $uestion. CF1 % decision was rendered holding Lim liable to !ay Pioneer but dismissed Pioneer/s com!laint against all other de endants. CA % modi ied the trial court/s decision in that the !lainti Is com!laint against all the de endants was dismissed. 1n all other res!ects the trial court/s decision was a irmed. ISS%E: &)3 subscri!tion or stock in a !ro!osed cor!oration results in a !artnershi! with the other subscriber &EL1: 3) (uch a relation does not necessarily e"ist, or ordinarily !ersons cannot be made to assume the relation o !artners, as between themselves, when their !ur!ose is that no !artnershi! shall e"ist and it should be im!lied only when necessary to do #ustice between the !arties? th-+ one ;ho taAe+ no )art eIce)t to +-.+cri.e 2or +tocA in a )ro)o+ed cor)oration ;hich i+ never le,all* 2or(ed doe+ not .eco(e a )artner ;ith other +-.+cri.er+ ;ho en,a,e in .-+ine++ -nder the na(e o2 the )retended cor)oration +o a+ to .e lia.le a+ +-ch in an action 2or +ettle(ent o2 the alle,ed )artner+hi) and contri.-tion. A !artnershi! relation between certain stockholders and other stockholders, who were also directors, will not be im!lied in the absence o an agreement, so as to make the ormer liable to contribute or !ayment o debts illegally contracted by the latter.

'$!IO: 1t is there ore clear that the !etitioner never had the intention to orm a cor!oration with the res!ondents des!ite his re!resentations to them. 4his gives credence to the cross%claims o the res!ondents to the e ect that they were induced and lured by the !etitioner to make contributions to a !ro!osed cor!oration which was never ormed because the !etitioner reneged on their agreement. A!!lying there ore the !rinci!les o law earlier cited to the acts o the case, necessarily, no de acto !artnershi! was created among the !arties which would entitle the !etitioner to a reimbursement o the su!!osed losses o the !ro!osed cor!oration. 4he record shows that the !etitioner was acting on his own and not in behal o his other would%be incor!orators in transacting the sale o the air!lanes and s!are !arts. #$SE L$30 1O#!'INE: )ne who takes no !art e"ce!t to subscribe or stock in a !ro!osed cor!oration which is never legally ormed does not become a !artner with other subscribers who engage in business under the name o the !retended cor!oration, so as to be liable as such in an action or settlement o the alleged !artnershi! and contribution 1ISSEN!IN40#ON#%''IN4 O"INION:

077 3ell+ v. /a* FE,an $-thor: (arah 175-l*1916 143 4$ 732 Note: !o)ic: Personal liability o !romoter on !re% incor!oration contracts "onente: >vans /act+: '. Fay X >gan Com!any ,vendee- iled a suit against L.M. &ells et al.,,vendor- alleging that de endants bought rom !lainti machinery under the !artnershi! name Ficklen (!oke and @andle Com!any *. )n *+ March '8C8, de endants !romoted the organi;ation and authori;ed the !urchase o machinery rom !lainti . +. 4he contract o !urchase was signed :Ficklen (!oke X @andle Com!any, by L. M. &ells.: .. Ge endants received the machinery and on ** June '8C8, de endants e"ecuted notes signed :Ficklen (!oke X @andle Co., !er 9. S. Carruth, (ec.X 4reas.: 0. )n *5 August '8C8, de endantsI a!!lication was granted a charter and later !er ected an organi;ation o cor!oration. 5. Plainti sued or the amount due on the notes? charging de endants with liability on the notes. 6. 1t was disclosed at the trial that the machinery was destroyed by ire. 7. Ge endants alleged that it has no debt to !lainti invoking that the Ficklen (!oke X @andle Com!any was a cor!oration. I++-e: &hether or not de endant is !ersonally liable on the contract o !urchase made on behal o a cor!oration to be ormed. &eld: 3o. Plainti is esto! rom asserting a !ersonal liability against the de endants 'atio: D>3>9AL 99QL>: Promoters are !ersonally liable on their contracts made on behal o a cor!oration to be ormed. >BC>P41)3: 1 there is an e"!ress or im!lied agreement to the contrary. 1t must be noted that the act that the cor!oration when ormed has ado!ted or rati ied the contract does not release the !romoter rom res!onsibility unless a novation was intended. 1ndividual !romoters cannot esca!e liability where they buy machinery, receive them in their !ossession and authori;e one member to issue a note, in contem!lation o organi;ing a cor!oration which was not ormed. 4he agent is !ersonally liable or contracts i there is no !rinci!al. 4he making o !artial !ayments by the cor!oration, when later ormed, does not release the !romoters here rom liability because the cor!oration acted as a mere stranger !aying the debt o another, the acce!tance o which by the creditor does not release the debtors rom liability over the balance. @ence, there is no ado!tion or rati ication. #a+e La;0 1octrine: A !romoter, though he may assume to act on behal o the !ro#ected cor!oration and not or himsel , cannot be treated as an agent o the cor!oration, or it is not yet in e"istence? and he will be !ersonally liable on his contract, unless the other !arty agreed to look to some other !erson or und or !ayment.

C57. @ow X Associates, 1nc. v. <oss $%!&O': Ge Du;man, <ien )ct. +' '85+, *** F. (u!! 8+8 Ge endant erased the words :<oss @otels Co., 1nc.: rom !O"I#: Personal Liability o Promoter on Pre% the !lace or signature and below the line ty!ed the words 1ncor!oration Contracts :<y: >dwin A. <oss, Agent or a Minnesota Cor!oration "ONEN!E: @anson, J? /$#!S '. >arly in the year '85C the de endant and certain business associates, including >dwin 9. @unter, Jr. o Ges Moines, 1owa, became interested in o!erating a motor hotel to be built at the (outhdale (ho!!ing Center in >dina, Minnesota, a suburb o Minnea!olis. Motor Court (ystems, 1nc., a Minnesota cor!oration, which had a lease on this land with the (outhdale @olding Com!any, was to build and construct a motor hotel. *. 1n a!!ro"imately May o '85C, the !lainti was engaged and em!loyed by Motor Court (ystems, 1nc. to !re!are the !lans, drawings and s!eci ications or said motel. 1n a!!ro"imately June o '85C, an agreement was entered into between Motor Court (ystems, 1nc. and >dwin 9. @unter, on behal o a cor!oration to be ormed which would o!erate the new motor hotel. 4hese !lans were never reali;ed. +. 1n the early !art o '85', the lease held by Motor Court (ystems, 1nc. was terminated. )n or about A!ril *C, '85', the de endant together with Mr. @unter and re!resentatives o the owners o (outhdale (ho!!ing Center met in the o ices o (outhdale at >dina or the !ur!ose o entering into a lease between the !romoters o a new cor!oration to be ormed by the de endant and his associates and owners o (outhdale (ho!!ing Center. 4he !lainti was also !resent at that meeting and the architectural agreement now being sued on was signed during that meeting. .. At said meeting on A!ril *C, '85', a lease between <oss @otel Co., 1nc. and (outhdale @olding Com!any was negotiated and e"ecuted. <oss @otel Co., 1nc. was the obligor on that lease. 4his lease !rovided that a cor!oration would be organi;ed and that the lease would then be assigned to this new cor!oration. 6. !he 2ir+t )a,e o2 +-ch contract +tated that it ;a+ .et;een 8o++ &otel+ #o. Inc. and Stanle* 5. &o; F $++ociate+ Inc. and )lace+ 2or +i,nat-re in thi+ (anner. 5. A ter com!letion o the signing o the lease the de endant, Mr. <oss, and his associate, Mr. @unter, took the !re!ared contract to a back room out o the hearing o the !lainti and discussed it between themselves. $t that ti(e the de2endant era+ed the ;ord+ ?8o++ &otel+ #o. Inc.? 2ro( the )lace 2or +i,nat-re and .elo; the line t*)ed the ;ord+ ?8*: Ed;in $. 8o++ $,ent 2or a Minne+ota #or)oration to .e 2or(ed ;ho ;ill .e the O.li,or.? 6. 4he de endant and >dwin 9. @unter then took the contract back to (tanley J. @ow and showed it to him. Mr. <oss then said, :1s this all right2: or :1s this acce!table, this manner o signing2: or words to that e ect. (tanley @ow said :=es,: and the contracts were then signed by the de endant and (tanley J. @ow. 7. Plainti returned to )maha and com!lete !lans, working drawings, and s!eci ications or the construction o the motel were !re!ared by his o ices, and sums were e"!ended by the !lainti or engineering and consultation services. 8. 4he de endant and his associates caused an 1owa cor!oration to be ormed by the name o Minnea!olis%@unter @otel Co. Fi teen 4housand Gollars ,V'0,CCC.CC- o stock was issued with >dwin 9. @unter receiving ten !ercent ,'CN-, John C. @unter receiving ten !ercent ,'CN-, >li;abeth 4. &oodward receiving ive !ercent ,0N- and <oss @otels Com!any receiving the remaining seventy% ive !ercent ,60N-. 'C.1n )ctober o '85' the !lans were orwarded to Preston @aglin, a Minnea!olis contractor, whom the !arties had agreed to be general contractor so long as his bid was com!etitive with other general contractors. @aglin gave a !reliminary estimate o 3ine @undred (i"ty% ive 4housand Gollars ,V850,CCC.CC- which e"ceeded the !lanned budget? thus, urther attem!ts were made to reduce the cost o the construction. ''.1n 3ovember o '85', Preston @aglin !ro!osed to construct the building, with certain modi ications, or >ight @undred and Fi ty 4housand Gollars ,V70C,CCC.CC-.4he !lans or the motel were inally com!letely abandoned by the !romoters. '*.4he !lainti !er ormed said contract and !re!ared detailed !lans and s!eci ications which were com!leted on or about )ctober *C, '85', or a motor hotel and restaurant at 55th and France (treets, >dina, Minnesota? that the estimated cost o the said motor hotel and restaurant was V70C,CCC.CC and that a irm bid rom a general contractor or construction o said !ro#ect was received in the sum o V70C,CCC.CC? that therea ter, and or reasons unknown to the !lainti the de endant !roceeded no urther with the !ro#ect? that !ursuant to the !rovisions o said contract !lainti is entitled to !ayment o a ee o .\N o the said V70C,CCC.CC or !er ormance o architectural services or !re!aration and com!letion o s!eci ications and general working drawings, which amounts to V+7,*0C.CC, o which !lainti has received rom de endant the sum o V'.,0CC.CC on account, leaving a balance o V*+,60C.CC, which remains due and un!aid.

ISS%E: &hether the contract was an agreement that Ge endant was a !resent obligor. &EL1: =es, 4he de endant was the key !romoter and as such would be a !rimary actor in abandoning the !ro#ect. 4his would make the de endant liable. '$!IO: 4he words Awho will be the obligor,M are not enough to o set the rule that the !erson signing or the none"istent cor!oration is normally to be !ersonally liable. 1n this case, Ge endant was the !rinci!al !romoter, acting or himsel !ersonally and as President o <oss @otels, 1nc. 4he !romoters abandoned their !ur!ose o orming the cor!oration. 4his would make the !romoter liable to the !lainti unless the contract be construed to mean: '- that the !lainti agreed to look solely to the new cor!oration or !ayment, and *- that the !romoter did not have any duty toward the !lainti to orm the cor!oration and give the cor!oration the o!!ortunity to assume and !ay the liability. 1n all situations wherein the !romoter is not !ersonally bound, the contracting !arty is agreeing that the new cor!oration should assume the liability. 4he !hrase :content to take the risk o the ultimate incor!oration and assum!tion o his claim: is the key to the distinction. 1n some cases, the !romoters do not agree that this assum!tion will take !lace. A!!lying this law to the !resent case, the court would have to hold that even i the !lainti had agreed to look to the credit o the new cor!oration, the de endant would be liable. 4he de endant was the key !romoter and as such would be a !rimary actor in abandoning the !ro#ect. 4his would make the de endant liable. #$SE L$30 1O#!'INE: 4he !romoter though he may assume to act on behal o the !ro#ected cor!oration and not or himsel , will be !ersonally liable on his contract unless the other !arty agreed to look to some other !erson or und or !ayment. 1ISSEN!IN40#ON#%''IN4 O"INION:

C58 K%$DE' &ILL v. "$'' *0 (e!tember '85', +5. P.*d 'C05 !O"I#: PromoterIs Contracts Prior to 1ncor!oration % Personal Liability o Promoter on Pre%1ncor!oration Contracts "ONEN!E: Goyle

$%!&O': Ganna 4en. '-le: Promoters are !ersonally liable on their contracts EIce)tion: Contracting !arty looks solely to the cor!oration or !ayment ,non%intention to make the !romoters liable-

/$#!S '. Parr et al, while in the course o negotiations with Wuaker @ill 1nc. ,whose o ice is situated in 3ew =ork- or the ormer to !urchase nursery stock, undertook to organi;e a se!arate cor!oration to be known as the /,enver +emorial Nursery 0nc.1 4hus, ,enver +emorial Nursery 0nc. was named as the contracting !arty in the sales contract and as the maker o the !romissory note. *. 4wo orders or nursery stock were signed by Parr in behal o ,enver +emorial Nursery, 0nc. which, to the knowledge o Wuaker @ill, was not yet ormed. +. 4he nursery stock was delivered to Parr and was !lanted with the hel! o Wuaker @ill. .. A substitute order was sent to Wuaker @ill. 1t was similar to the !revious order, e"ce!t that it contained the name /+ountain 2iew Nurseries1, instead o 3,enver +emorial Nursery, 0nc.3 which never actually came into being. 0. <ecause o name con usion, the cor!oration was subse$uently called A +ountain 2iew Nurseries, 0nc.M 1ts articles were e"ecuted and subse$uently iled with the (ecretary o (tate. @owever, neither the ,enver +emorial Nursery, 0nc. nor the +ountain 2iew Nurseries, 0nc. ever unctioned as going concerns. 5. A ter +ountain 2iew Nurseries, 0nc. was ormed, a new note and contract was submitted to Parr et al, containing the name A+ountain 2iew Nurseries, 0nc.1 as contracting !arty. Wuaker @ill therea ter used the designation 3+ountain 2iew Nurseries1 in its transactions. 6. <ecause o +ountain 2iew Nurseries, 0nc.Is de unct inancial condition, Wuaker @ill now seeks to sub#ect Ge endants to !ersonal liability because the cor!oration was not ormed at the time the contract was made and Ge endants, as !romoters, were individually liable. 4hus, it is Wuaker @illIs contention that the general rule be a!!lied here. 4he general rule is that !romoters are !ersonally liable on their contracts, though made on behal o a cor!oration to be ormed. ISS%E: &hether or not !ersonal liability can be im!osed &EL1: 3o, there was no intent by Wuaker @ill to look to the !romoters or the !er ormance o the obligation. 4his is an e"ce!tion to the general rule that !romoters are !ersonally liable on their contracts, though made on behal o a cor!oration to be ormed. '$!IO: '. A well recogni;ed e"ce!tion to the general rule urged by Wuaker @ill is that i the contract is made on behal o the cor!oration and the other !arty agrees to look to the cor!oration and not to the !romoters or !ayment, the !romoters incur no !ersonal liability. *. Wuaker @ill, acting through its agent, was well aware o the act that the cor!oration was not ormed and nevertheless urged that the contract be made in the name o the !ro!osed cor!oration. 4here is but little evidence indicating intent on the !art o Wuaker @ill to look to the de endants or !er ormance or !ayment. +. 4he single act su!!orting !lainti /s theory is the obtaining o an individual balance sheet. )n the contrary, the entire transaction contem!lated the cor!oration as the contracting !arty. Personal liability does not arise under such circumstances. 4. The curious form of this transaction is un oubte ly e5plainable on the basis of the long istance ealing, the great rush to complete it, the heavy emphasis on completion of the sale rather than on securing payment or a means of payment. No effort was ma e to e5pressly obligate the efen ants an this present effort must be regar e as pure afterthought. #$SE L$30 1O#!'INE: Personal liability does not attach where the contracting !arty is shown to be looking solely to the cor!oration or !ayment, and not to the !romoters or o icers.

070 OL1 1OMINION #O""E' MININ4 $N1 SMEL!IN4 #OM"$NE v. $L8E'! S. 8I4ELO3 *C+ Mass '08 ,'8C8!O"I#: Fiduciary 9elationshi! between Cor!oration and Promoter "ONEN!E: 9ugg, J. /$#!S

$%!&O': Palomi$ue, >rnesto 111 C. 4he cor!oration brought a suit in e$uity seeking to recover secret !ro its made by the !romoter, who had sold certain mining !ro!erties belonging to him and an associate to the cor!oration.

'. <igelow and Lewisohn were the )ro(oter+ o )ld Gominion Co!!er.
*. <igelow and Lewisohn ramed a scheme or the ca!itali;ation o )ld Gominion or V+,60C,CCC. +. 4hey would sell to the cor!oration their !ro!erty worth V'M but having a market value o not over V*M or V+,*0C,CCC .. A ter that, they would sell to the general !ublic the remaining V0CC,CCC stocks at !ar value or cash, and all this without !roviding )ld Gominion with any inde!endent board o o icers while making a huge secret !ro it. 0. 4he transactions occurred while the cor!oration was under the absolute control and management o the !romoter and his associate. 5. 4he cor!oration seeks to recover a secret !ro it made by the !romoters in the sale o their own !ro!erty to the cor!oration, basing its claim on the general rule that a !romoter cannot law ully take a secret !ro it and will be held to account or it i he does. 6. 4he lower court has decided in avor o the cor!oration stating that such transaction creates a liability on the !art o the !romoters to account or the secret !ro its to )ld Gominion. 4he !romoter a!!ealed, raising a number o errors. 4he court a irmed, holding that as a iduciary, the !romoter owed certain duties regarding business transactions between himsel and the cor!oration, and that under the circumstances the recei!t o !ro its by the !romoter constituted a breach o those duties. 7. Fundamentally the action is to recover !ro its obtained by a breach o trust, as !romoters have duties as iduciaries to the com!any. A !romoter includes those who undertake to orm a cor!oration and to !rocure or it the rights, instrumentalities and ca!ital by which it is to carry out the !ur!oses set orth in its charter and to establish it as ully able to do its business. ISS%E: &)3 the cor!oration is in a !osition to assert its claim or the secret !ro its. &EL1: =es, a !romoter stands in a iduciary relation to the cor!oration in which he is interested, and that he is charged with all the duties o good aith which attach to other trusts. '$!IO: '. 1n this case, <igelow and Lewisohn subscribed or only '+CS out o '0CS shares. 4hey held all the shares issued at the time o rati ication, but not all which it was !ro!osed to issue as !art o their !romotion scheme. *. 4here is a liability o the !romoter to the cor!oration when urther original subscribers to ca!ital stock contem!lated as an essential !art o the scheme o !romotion came in a ter the transaction com!lained o , even though that transaction is known to all the then stockholders at the timeJwhich are the !romoters themselves and their re!resentatives. +. 1n the !resent case, the whole !urchase !rice was !aid in stock, issued be ore any stock was issued to the !ublic although a ter a substantial !ublic subscri!tion. 1n other words, it is the order in which the transaction is carried out, and not its substantial nature, which makes the di erence between liability and immunity o the !romoter. .. 1t is o no conse$uence whether in act the dummy directors know o the terms o sale and the breach o trust o the !romoters. 4he !oint is that the directors were selected with the !ur!ose that they should be the mere instruments o the !romoter and they carried out the will o their masters. 1 the assent o all stockholders is good in one case, by the same token it should be e$ually good in the other, and the breach o trust in one is e$ually a breach o trust in the other. 0. 4he starting !oint is that !romoters stand in a iduciary !osition toward the cor!oration, as well as when as !art o the scheme o !romotion, unin ormed stockholders are e"!ected to come in a ter the wrong has been !er!etrated, as when at the time there are stockholders to whom no disclosure was made. 5. Promoters have in their hands the creation and molding o the com!any, like clay in the hands o a !otter. 1t is not necessary to in$uire how ar he may be trustee also or shareholders and associates. 6. 1n the !resent case the in$uiry relates wholly to his obligation to the cor!oration. 4he iduciary relation must continue until the !romoter has com!letely established according to his !lan the being which he has undertaken to

create. 4he !rinci!le that one cannot right ully sell !ro!erty, belonging to him in his !rivate ca!acity, to himsel in a trust ca!acity is universal. #$SE L$30 1O#!'INE: 3otwithstanding this iduciary relation, the !romoter may sell !ro!erty to the com!any which he is !romoting. 1n order that the contract may be absolutely binding, the !romoter must !ursue one o . courses o action: ,'!rovide an inde!endent board o o icers and make a ull disclosure to the cor!oration through the board? ,*make a ull disclosure o all material acts to each original subscriber o shares ,+!rocure a rati ication o the contract by vote o the (@s o the established cor!oration ,.subscribe himsel in all the shares o the ca!ital stock contem!lated as !art o the !romotion scheme 1ISSEN!IN40#ON#%''IN4 O"INION: