Heirs of Fe Tan Uy vs.

International Exchange Bank

Ponente: Mendoza
Author: Diaz de Rivera
Doctrine/s:
(1)Before a director or officer of a corporation can be held personally
liable for corporate obligations, however, the following requisites must
concur: (1) the complainant must allege in the complaint that the
director or officer assented to patently unlawful acts of the corporation,
or that the officer was guilty of gross negligence or bad faith; and (2)
the complainant must clearly and convincingly prove such unlawful
acts, negligence or bad faith.
(2)Under a variation of the doctrine of piercing the veil of corporate
fiction, when two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when
necessary to protect the rights of third parties, disregard the legal
fiction that two corporations are distinct entities and treat them as
identical or one and the same.
Facts:
On several occasions, International Exchange Bank (iBank), granted loans to
Hammer Garments Corporation (Hammer). The loans were secured by a P 9
Million-Peso Real Estate Mortgage executed by Goldkey Development
Corporation (Goldkey) over several of its properties and a P 25 Million-Peso
Surety Agreement signed by Manuel Chua (Chua), Hammer and Goldkeys
CEO and President, and his wife, Fe Tan Uy (Uy).
Hammer had an outstanding obligation of P25,420,177.62 to iBank. Hammer
defaulted in the payment of its loans, prompting iBank to foreclose on
Goldkeys third-party Real Estate Mortgage. The mortgaged properties were
sold for P 12 million during the foreclosure sale, leaving an unpaid balance of
P 13,420,177.62. For failure of Hammer to pay the deficiency, iBank filed a
Complaint for sum of money against Hammer, Chua, Uy, and Goldkey. The
court a quo ruled in favor of iBank where: (1) it found Uy, as an officer and
stockholder of both Goldkey and Hammer, solidary liable to the deficiency
judgment; and (2) found Goldkey liable to the deficiency judgment against
Hammer pursuant to the alter ego theory disregarding the separate
corporate personality of Goldkey.
Issue/s:
(1)Whether Uy can be held liable to iBank for the loan obligation of
Hammer as an officer and stockholder of the said corporation. NO.

(2)Whether Goldkey can be held liable for the obligation of Hammer for
being a mere alter ego of the latter. YES.
Ratio:
(1)
There is no showing that Uy committed gross negligence.
In the absence of any of the requisites for making a corporate
officer, director or stockholder personally liable for the
obligations of a corporation, Uy, as a treasurer and stockholder
of Hammer, cannot be made to answer for the unpaid debts of
the corporation.
Basic is the rule in corporation law that a corporation is a juridical entity
which is vested with a legal personality separate and distinct from those
acting for and in its behalf and, in general, from the people comprising it.
Following this principle, obligations incurred by the corporation, acting
through its directors, officers and employees, are its sole liabilities. A
director, officer or employee of a corporation is generally not held personally
liable for obligations incurred by the corporation. Nevertheless, this legal
fiction may be disregarded if it is used as a means to perpetrate fraud or an
illegal act, or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.
Before a director or officer of a corporation can be held personally liable for
corporate obligations, however, the following requisites must concur: (1) the
complainant must allege in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or that the officer was
guilty of gross negligence or bad faith; and (2) the complainant must clearly
and convincingly prove such unlawful acts, negligence or bad faith.
In this case, it was not alleged, much less proven, that Uy committed an act
as an officer of Hammer that would permit the piercing of the corporate veil.
A reading of the complaint reveals that with regard to Uy, iBank did not
demand that she be held liable for the obligations of Hammer because she
was a corporate officer who committed bad faith or gross negligence in the
performance of her duties such that the lifting of the corporate mask would
be merited. What the complaint simply stated is that she, together with her
errant husband Chua, acted as surety of Hammer, as evidenced by her
signature on the Surety Agreement which was later found by the RTC to have
been forged.
Considering that the only basis for holding Uy liable for the payment of the
loan was proven to be a falsified document, there was no sufficient
justification for the RTC to have ruled that Uy should be held jointly and
severally liable to iBank for the unpaid loan of Hammer. At most, Uy could

have been charged with negligence in the performance of her duties as

treasurer of Hammer by allowing the company to contract a loan despite its
precarious financial position. The shortcomings of Uy are not sufficient to
justify the piercing of the corporate veil which requires that the negligence of
the officer must be so gross that it could amount to bad faith and must be
established by clear and convincing evidence.
(2)
Goldkey is liable for the obligation of Hammer for being
an alter ego of the latter.
Under a variation of the doctrine of piercing the veil of corporate fiction,
when two business enterprises are owned, conducted and controlled by the
same parties, both law and equity will, when necessary to protect the rights
of third parties, disregard the legal fiction that two corporations are distinct
entities and treat them as identical or one and the same.
While the conditions for the disregard of the juridical entity may vary, the
following are some probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, as laid down
in Concept Builders, Inc. v NLRC:
(1) Stock ownership by one or common ownership of both
corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records, and
(4) Methods of conducting the business.
Based on the following, it was apparent that Goldkey was merely an adjunct
of Hammer and, as such, the legal fiction that it has a separate personality
from that of Hammer should be brushed aside as they are, undeniably, one
and the same:
1. Both corporations are family corporations of Manuel Chua and his wife
Fe Tan Uy.
2. Hammer Garments and Goldkey share the same office and practically
transact their business from the same place.
3. Manuel Chua is the President and Chief Operating Officer of both
corporations. All business transactions of Goldkey and Hammer are
done at the instance of Manuel Chua who is authorized to do so by the
corporations.
4. The assets of Goldkey and Hammer are co-mingled. The real properties
of Goldkey are mortgaged to secure Hammer's obligation with creditor
hanks.

5. When Manuel Chua "disappeared", the Goldkey ceased to operate.

Dispositive Portion: WHEREFORE, the petitions are PARTLY GRANTED. The
August 16, 2004 Decision and the December 2, 2004 Resolution of the Court
of Appeals, in CA-G.R. CV No. 69817, are hereby MODIFIED. Fe Tan Uy is
released from any liability arising from the debts incurred by Hammer from
iBank. Hammer Garments Corporation, Manuel Chua Uy Po Tiong and
Goldkey Development Corporation are jointly and severally liable to pay
International Exchange Bank the sum of P13,420,177.62 representing the
unpaid loan obligation of Hammer as of December 12, 1997 plus interest.
Valley Golf Country Club, Inc. vs. Rosa O. vda. De Caram
Ponente: Tinga, J.
Author: Diaz de Rivera
Doctrine:
The right of a non-stock corporation such as Valley Golf to expel a member through
the forfeiture of the Golf Share may be established in the by-laws alone.

Facts:
Fermin Z. Caram, Jr. (Caram) subscribed to purchased and paid for in full one share
(Golf Share) in the capital stock of Valley Golf. However, Caram stopped and
defaulted paying his monthly dues. Thereafter, Caram died.
Valley Golf sent five (5) letters to Caram concerning his delinquent account: the
first, second and fifth letters were addressed to Caram while the third and fourt
letters were addressed to the estate of Caram. The Golf Share was sold at public
auction on fo The Golf Share was sold at public auction on 11 June 1987 for
P25,000.00 after the Board of Directors had authorized the sale in a meeting on 11
April 1987, and the Notice of Auction Sale was published in the 6 June 1987 edition
of the Philippine Daily Inquirer.[10]o r P25,000.00 after the Board of Directors had
authorized the sale and after the notice was published in the Philippine Daily
Inquirer. The heirs of Caram filed an action for reconveyance against Valley Golf
before the Securities and Exchange Commission to recover the Golf Share.
Issue:
Whether a non-stock corporation, such as Valley Golf, seize and dispose of the
membership share of a fully-paid member on account of its unpaid debts to the
corporation when it is authorized to do so under the corporate by-laws but not by
the Articles of Incorporation. YES, but it must done in accordance with substantial
justice (provide proper notice and/or hearing) in the absence of any provisions
regarding the manner of giving notice under the articles of incorporation or its bylaws.

Ratio:
The right of a non-stock corporation such as Valley Golf to expel a member through
the forfeiture of the Golf Share may be established in the by-laws alone. Section 91
of the Corporation Code provides:
SEC. 91. Termination of membership.Membership shall be terminated in the
manner and for the causes provided in the articles of incorporation or the
by-laws. Termination of membership shall have the effect of extinguishing all
rights of a member in the corporation or in its property, unless otherwise provided
in the articles of incorporation or the by-laws. (Emphasis supplied)
Generally in theory, a non-stock corporation has the power to effect the termination
of a member without having to constitute a lien on the membership share or to
undertake the elaborate process of selling the same at public auction. The articles
of incorporation or the by-laws can very well simply provide that the failure of a
member to pay the dues on time is cause for the board of directors to terminate
membership. Yet Valley Golf was organized in such a way that membership is
adjunct to ownership of a share in the club; hence the necessity to dispose of the
share to terminate membership.
It may be conceded that the actions of Valley Golf were, technically speaking, in
accord with the provisions of its by-laws on termination of membership, vaguely
defined as these are. Yet especially since the termination of membership in Valley
Golf is inextricably linked to the deprivation of property rights over the Golf Share,
the emergence of such adverse consequences make legal and equitable standards
come to fore.
The commentaries of Lopez advert to an SEC Opinion dated 29 September 1987
which we can cite with approval. Lopez cites:
[I]n order that the action of a corporation in expelling a member for cause
may be valid, it is essential, in the absence of a waiver, that there shall be a
hearing or trial of the charge against him, with reasonable notice to him and
a fair opportunity to be heard in his defense. (Fletcher Cyc. Corp., supra) If
the method of trial is not regulated by the by-laws of the association,
it should at least permit substantial justice. The hearing must be
conducted fairly and openly and the body of persons before whom it is heard
or who are to decide the case must be unprejudiced. (SEC opinion dated
September 29, 1987, Bacalaran-Sucat Drivers Association)
It is unmistakably wise public policy to require that the termination of membership
in a non-stock corporation be done in accordance with substantial justice. No

matter how one may precisely define such term, it is evident in this case that the
termination of Caram's membership betrayed the dictates of substantial justice.
In the case at bar, Valley Golf acted in clear bad faith when it sent the final notice to
Caram under the pretense they believed him to be still alive, when in fact they had
very well known that he had already died. The fact that the third and fourth letters
were directed at the estate of Caram stands as incontrovertible proof that Valley
Golf had known of Caram's death even prior to the auction sale. This reason alone,
evocative as it is of the absence of substantial justice in the sale of the Golf Share,
is sufficient to nullify the sale
Dispositive Portion:
petitioners.

WHEREFORE,

the

petition

is DENIED.

Costs

against