1

Torres v Benguet Consolidated

26 SCRA 242 Business Organization Corporation Law Domicile of a Corporation By

Laws Must Yield To a Court Order Corporation is an Artificial Being
In March 1960, Idonah Perkins died in New York. She left behind properties here and
abroad. One property she left behind were two stock certificates covering 33,002 shares of
stocks of the Benguet Consolidated, Inc (BCI). Said stock certificates were in the possession
of the Country Trust Company of New York (CTC-NY). CTC-NY was the domiciliary
administrator of the estate of Perkins (obviously in the USA). Meanwhile, in 1963, Renato
Tayag was appointed as the ancillary administrator (of the properties of Perkins she left
behind in the Philippines).
A dispute arose between CTC-NY and Tayag as to who between them is entitled to possess
the stock certificates. A case ensued and eventually, the trial court ordered CTC-NY to turn
over the stock certificates to Tayag. CTC-NY refused. Tayag then filed with the court a
petition to have said stock certificates be declared lost and to compel BCI to issue new stock
certificates in replacement thereof. The trial court granted Tayags petition.
BCI assailed said order as it averred that it cannot possibly issue new stock certificates
because the two stock certificates declared lost are not actually lost; that the trial court as
well Tayag acknowledged that the stock certificates exists and that they are with CTC-NY;
that according to BCIs by laws, it can only issue new stock certificates, in lieu of lost, stolen,
or destroyed certificates of stocks, only after court of law has issued a final and executory
order as to who really owns a certificate of stock.
ISSUE: Whether or not the arguments of Benguet Consolidated, Inc. are correct.
HELD: No. Benguet Consolidated is a corporation who owes its existence to Philippine laws.
It has been given rights and privileges under the law. Corollary, it also has obligations under
the law and one of those is to follow valid legal court orders. It is not immune from judicial
control because it is domiciled here in the Philippines. BCI is a Philippine corporation owing
full allegiance and subject to the unrestricted jurisdiction of local courts. Its shares of stock
cannot therefore be considered in any wise as immune from lawful court orders. Further, to
allow BCIs opposition is to render the court order against CTC-NY a mere scrap of paper. It
will leave Tayag without any remedy simply because CTC-NY, a foreign entity refuses to
comply with a valid court order. The final recourse then is for our local courts to create a
legal fiction such that the stock certificates in issue be declared lost even though in reality
they exist in the hands of CTC-NY. This is valid. As held time and again, fictions which the
law may rely upon in the pursuit of legitimate ends have played an important part in its
development.
Further still, the argument invoked by BCI that it can only issue new stock certificates in
accordance with its bylaws is misplaced. It is worth noting that CTC-NY did not appeal the
order of the court it simply refused to turn over the stock certificates hence ownership can
be said to have been settled in favor of estate of Perkins here. Also, assuming that there
really is a conflict between BCIs bylaws and the court order, what should prevail is the lawful

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court order. It would be highly irregular if court orders would yield to the bylaws of a
corporation. Again, a corporation is not immune from judicial orders.

Torres v CA

278 SCRA 793 Business Organization Corporation Law Transfer of Shares of Stocks
Corporate Records
Judge Manuel Torres, Jr. owns about 81% of the capital stocks of Tormil Realty &
Development Corporation (TRDC). TRDC is a small family owned corporation and other
stockholders thereof include Judge Torres nieces and nephews. However, even though
Judge Torres owns the majority of TRDC and was also the president thereof, he is only
entitled to one vote among the 9-seat Board of Directors, hence, his vote can be easily
overridden by minority stockholders. So in 1987, before the regular election of TRDC
officers, Judge Torres assigned one share (qualifying share) each to 5 outsiders for the
purpose of qualifying them to be elected as directors in the board and thereby strengthen
Judge Torres power over other family members.
However, the said assignment of shares were not recorded by the corporate secretary, Ma.
Christina Carlos (niece) in the stock and transfer book of TRDC. When the validity of said
assignments were questioned, Judge Torres ratiocinated that it is impractical for him to order
Carlos to make the entries because Carlos is one of his opposition. So what Judge Torres
did was to make the entries himself because he was keeping the stock and transfer book.
He further ratiocinated that he can do what a mere secretary can do because in the first
place, he is the president.
Since the other family members were against the inclusion of the five outsiders, they refused
to take part in the election. Judge Torres and his five assignees then decided to conduct the
election among themselves considering that the 6 of them constitute a quorum.
ISSUE: Whether or not the inclusion of the five outsiders are valid. Whether or not the
subsequent election is valid.
HELD: No. The assignment of the shares of stocks did not comply with procedural
requirements. It did not comply with the by laws of TRDC nor did it comply with Section 74 of
the Corporation Code. Section 74 provides that the stock and transfer book should be kept
at the principal office of the corporation. Here, it was Judge Torres who was keeping it and
was bringing it with him. Further, his excuse of not ordering the secretary to make the entries
is flimsy. The proper procedure is to order the secretary to make the entry of said
assignment in the book, and if she refuses, Judge Torres can come to court and compel her

3
to make the entry. There are judicial remedies for this. Needless to say, the subsequent
election is invalid because the assignment of shares is invalid by reason of procedural
infirmity. The Supreme Court also emphasized: all corporations, big or small, must abide by
the provisions of the Corporation Code. Being a simple family corporation is not an
exemption. Such corporations cannot have rules and practices other than those established
by law.

Philippine Stock Exchange v CA

287 SCRA 232 Business Organization Corporation Law Extent of Power of the
Securities and Exchange Commission
Puerto Azul Land, Inc. (PALI) is a corporation engaged in the real estate business. PALI was
granted permission by the Securities and Exchange Commission (SEC) to sell its shares to
the public in order for PALI to develop its properties.
PALI then asked the Philippine Stock Exchange (PSE) to list PALIs stocks/shares to
facilitate exchange. The PSE Board of Governors denied PALIs application on the ground
that there were multiple claims on the assets of PALI. Apparently, the Marcoses, Rebecco
Panlilio (trustee of the Marcoses), and some other corporations were claiming assets if not
ownership over PALI.
PALI then wrote a letter to the SEC asking the latter to review PSEs decision. The SEC
reversed PSEs decisions and ordered the latter to cause the listing of PALI shares in the
Exchange.
ISSUE: Whether or not it is within the power of the SEC to reverse actions done by the PSE.
HELD: Yes. The SEC has both jurisdiction and authority to look into the decision of PSE
pursuant to the Revised Securities Act and for the purpose of ensuring fair administration of
the exchange. PSE, as a corporation itself and as a stock exchange is subject to SECs
jurisdiction, regulation, and control. In order to insure fair dealing of securities and a fair
administration of exchanges in the PSE, the SEC has the authority to look into the rulings
issued by the PSE. The SEC is the entity with the primary say as to whether or not
securities, including shares of stock of a corporation, may be traded or not in the stock
exchange.

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HOWEVER, in the case at bar, the Supreme Court emphasized that the SEC may only
reverse decisions issued by the PSE if such are tainted with bad faith. In this case, there
was no showing that PSE acted with bad faith when it denied the application of PALI. Based
on the multiple adverse claims against the assets of PALI, PSE deemed that granting PALIs
application will only be contrary to the best interest of the general public. It was reasonable
for the PSE to exercise its judgment in the manner it deems appropriate for its business
identity, as long as no rights are trampled upon, and public welfare is safeguarded.

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte

Metropolitan Water District (LMWD), Tacloban City, petitioner, vs. COMMISSION
ON AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C. FLORES
and EMMANUEL M. DALMAN, and Regional Director of COA Region
VIII, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorari[1] to annul the Commission on Audits (COA) Resolution
dated 3 January 2000 and the Decision dated 30 January 2001 denying the Motion for
Reconsideration. The COA denied petitioner Ranulfo C. Felicianos request for COA to cease
all audit services, and to stop charging auditing fees, to Leyte Metropolitan Water District
(LMWD). The COA also denied petitioners request for COA to refund all auditing fees
previously paid by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the accounts of
LMWD. Subsequently, LMWD received a letter from COA dated 19 July 1999 requesting
payment of auditing fees. As General Manager of LMWD, petitioner sent a reply dated 12

5
October 1999 informing COAs Regional Director that the water district could not pay the
auditing fees.Petitioner cited as basis for his action Sections 6 and 20 of Presidential Decree
198 (PD 198)[2], as well as Section 18 of Republic Act No. 6758 (RA 6758). The Regional
Director referred petitioners reply to the COA Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director asking for
refund of all auditing fees LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution
dated 3 January 2000 denying his requests. Petitioner filed a motion for reconsideration on
31 March 2000, which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition were
resolutions of the Visayas Association of Water Districts (VAWD) and the Philippine
Association of Water Districts (PAWD) supporting the petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COAs audit jurisdiction over local
water districts in Davao City Water District v. Civil Service Commission and
Commission on Audit,[3] as follows:
The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to naught
petitioners contention that they are private corporations. It is clear therefrom that the power
to appoint the members who will comprise the members of the Board of Directors belong to
the local executives of the local subdivision unit where such districts are located. In contrast,
the members of the Board of Directors or the trustees of a private corporation are elected
from among members or stockholders thereof. It would not be amiss at this point to
emphasize that a private corporation is created for the private purpose, benefit, aim and end
of its members or stockholders. Necessarily, said members or stockholders should be given
a free hand to choose who will compose the governing body of their corporation. But this is
not the case here and this clearly indicates that petitioners are not private corporations.
The COA also denied petitioners request for COA to stop charging auditing fees as well as
petitioners request for COA to refund all auditing fees already paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion amounting to lack or
excess of jurisdiction by auditing LMWD and requiring it to pay auditing fees. Petitioner
raises the following issues for resolution:
1. Whether a Local Water District (LWD) created under PD 198, as amended, is a
government-owned or controlled corporation subject to the audit jurisdiction of
COA;
2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public
accountants from auditing local water districts; and

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3. Whether Section 18 of RA 6758 prohibits the COA from charging governmentowned and controlled corporations auditing fees.
The Ruling of the Court
The petition lacks merit.
The Constitution and existing laws [4] mandate COA to audit all government agencies,
including government-owned and controlled corporations (GOCCs) with original charters. An
LWD is a GOCC with an original charter. Section 2(1), Article IX-D of the Constitution
provides for COAs audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to
examine, audit, and settle all accounts pertaining to the revenue and receipts of, and
expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the
Government, or any of its subdivisions, agencies, or instrumentalities, including
government-owned and controlled corporations with original charters, and on a postaudit basis: (a) constitutional bodies, commissions and offices that have been granted fiscal
autonomy under this Constitution; (b) autonomous state colleges and universities; (c) other
government-owned or controlled corporations and their subsidiaries; and (d) such nongovernmental entities receiving subsidy or equity, directly or indirectly, from or through the
government, which are required by law or the granting institution to submit to such audit as a
condition of subsidy or equity. However, where the internal control system of the audited
agencies is inadequate, the Commission may adopt such measures, including temporary or
special pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep
the general accounts of the Government and, for such period as may be provided by law,
preserve the vouchers and other supporting papers pertaining thereto. (Emphasis supplied)
The COAs audit jurisdiction extends not only to government agencies or instrumentalities,
but also to government-owned and controlled corporations with original charters as well as
other government-owned or controlled corporations without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a
doctrine backed by a long line of cases culminating in Davao City Water District v. Civil
Service Commission[5] and just recently reiterated in De Jesus v. Commission on Audit.
[6]
Petitioner maintains that LWDs are not government-owned and controlled corporations
with original charters. Petitioner even argues that LWDs are private corporations. Petitioner
asks the Court to consider certain interpretations of the applicable laws, which would give a
new perspective to the issue of the true character of water districts.[7]
Petitioner theorizes that what PD 198 created was the Local Waters Utilities
Administration (LWUA) and not the LWDs. Petitioner claims that LWDs are created pursuant
to and not created directly by PD 198. Thus, petitioner concludes that PD 198 is not an
original charter that would place LWDs within the audit jurisdiction of COA as defined in
Section 2(1), Article IX-D of the Constitution. Petitioner elaborates that PD 198 does not
create LWDs since it does not expressly direct the creation of such entities, but only provides

7
for their formation on an optional or voluntary basis. [8] Petitioner adds that the operative act
that creates an LWD is the approval of the Sanggunian Resolution as specified in PD 198.
Petitioners contention deserves scant consideration.
We begin by explaining the general framework under the fundamental law. The
Constitution recognizes two classes of corporations. The first refers to private corporations
created under a general law. The second refers to government-owned or controlled
corporations created by special charters. Section 16, Article XII of the Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the interest of the common
good and subject to the test of economic viability.
The Constitution emphatically prohibits the creation of private corporations except by a
general law applicable to all citizens.[9] The purpose of this constitutional provision is to ban
private corporations created by special charters, which historically gave certain individuals,
families or groups special privileges denied to other citizens.[10]
In short, Congress cannot enact a law creating a private corporation with a special
charter. Such legislation would be unconstitutional. Private corporations may exist only under
a general law. If the corporation is private, it must necessarily exist under a general
law. Stated differently, only corporations created under a general law can qualify as private
corporations.Under existing laws, that general law is the Corporation Code, [11] except that the
Cooperative Code governs the incorporation of cooperatives.[12]
The Constitution authorizes Congress to create government-owned or controlled
corporations through special charters. Since private corporations cannot have special
charters, it follows that Congress can create corporations with special charters only if such
corporations are government-owned or controlled.
Obviously, LWDs are not private corporations because they are not created under the
Corporation Code. LWDs are not registered with the Securities and Exchange
Commission.Section 14 of the Corporation Code states that [A]ll corporations organized
under this code shall file with the Securities and Exchange Commission articles of
incorporation x x x. LWDs have no articles of incorporation, no incorporators and no
stockholders or members. There are no stockholders or members to elect the board
directors of LWDs as in the case of all corporations registered with the Securities and
Exchange Commission. The local mayor or the provincial governor appoints the directors of
LWDs for a fixed term of office. This Court has ruled that LWDs are not created under the
Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from the
coverage of the CSC are those corporations created pursuant to the Corporation
Code. Significantly, petitioners are not created under the said code, but on the
contrary, they were created pursuant to a special law and are governed primarily by
its provision.[13] (Emphasis supplied)

8
LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the
Constitution only government-owned or controlled corporations may have special charters,
LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs
are private corporations with a special charter is to admit that their existence is
constitutionally infirm.
Unlike private corporations, which derive their legal existence and power from the
Corporation Code, LWDs derive their legal existence and power from PD 198. Sections 6
and 25 of PD 198[14] provide:
Section 6. Formation of District. This Act is the source of authorization and power to
form and maintain a district. For purposes of this Act, a district shall be considered as
a quasi-public corporation performing public service and supplying public wants. As
such, a district shall exercise the powers, rights and privileges given to private
corporations under existing laws, in addition to the powers granted in, and subject to
such restrictions imposed, under this Act.
(a) The name of the local water district, which shall include the name of the city,
municipality, or province, or region thereof, served by said system, followed by the words
Water District.
(b) A description of the boundary of the district. In the case of a city or municipality, such
boundary may include all lands within the city or municipality. A district may include one or
more municipalities, cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or sewerage facilities
managed, operated by or under the control of such city, municipality or province to such
district upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is formed, which shall include
those purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of expiration of term of
office for each.
(f) A statement that the district may only be dissolved on the grounds and under the
conditions set forth in Section 44 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36
of this Title.
Nothing in the resolution of formation shall state or infer that the local legislative body has the
power to dissolve, alter or affect the district beyond that specifically provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof, desire to form a
single district, a similar resolution shall be adopted in each city, municipality and province.
xxx

9
Sec. 25. Authorization. The district may exercise all the powers which are expressly
granted by this Title or which are necessarily implied from or incidental to the powers
and purposes herein stated. For the purpose of carrying out the objectives of this Act, a
district is hereby granted the power of eminent domain, the exercise thereof shall, however,
be subject to review by the Administration.(Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers
on LWDs corporate powers. Section 6 of PD 198 provides that LWDs shall exercise the
powers, rights and privileges given to private corporations under existing laws. Without PD
198, LWDs would have no corporate powers. Thus, PD 198 constitutes the special enabling
charter of LWDs. The ineluctable conclusion is that LWDs are government-owned and
controlled corporations with a special charter.
The phrase government-owned and controlled corporations with original charters means
GOCCs created under special laws and not under the general incorporation law. There is no
difference between the term original charters and special charters. The Court clarified this
in National Service Corporation v. NLRC[15] by citing the deliberations in the Constitutional
Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to
now read as follows: including government-owned or controlled corporations WITH
ORIGINAL CHARTERS. The purpose of this amendment is to indicate that government
corporations such as the GSIS and SSS, which have original charters, fall within the ambit of
the civil service. However, corporations which are subsidiaries of these chartered agencies
such as the Philippine Airlines, Manila Hotel and Hyatt are excluded from the coverage of the
civil service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?
MR. FOZ. Just one question, Mr. Presiding Officer. By the term original charters, what
exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an act of Congress, or by
special law.
MR. FOZ. And not under the general corporation law.
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are
out.
MR. ROMULO. That is correct. (Emphasis supplied)

10
Again, in Davao City Water District v. Civil Service Commission,[16] the Court
reiterated the meaning of the phrase government-owned and controlled corporations with
original charters in this wise:
By government-owned or controlled corporation with original charter, We mean
government owned or controlled corporation created by a special law and not under
the Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No.
82819, February 8, 1989, 170 SCRA 79, 82), We held:
The Court, in National Service Corporation (NASECO) v. National Labor Relations
Commission, G.R. No. 69870, promulgated on 29 November 1988, quoting extensively
from the deliberations of the 1986 Constitutional Commission in respect of the intent
and meaning of the new phrase with original charter, in effect held that governmentowned and controlled corporations with original charter refer to corporations
chartered by special law as distinguished from corporations organized under our
general incorporation statute the Corporation Code. In NASECO, the company involved
had been organized under the general incorporation statute and was a subsidiary of the
National Investment Development Corporation (NIDC) which in turn was a subsidiary of the
Philippine National Bank, a bank chartered by a special statute. Thus, government-owned or
controlled corporations like NASECO are effectively, excluded from the scope of the Civil
Service. (Emphasis supplied)
Petitioners contention that the Sangguniang Bayan resolution creates the LWDs
assumes that the Sangguniang Bayan has the power to create corporations. This is a
patently baseless assumption. The Local Government Code[17] does not vest in the
Sangguniang Bayan the power to create corporations. [18] What the Local Government Code
empowers the Sangguniang Bayan to do is to provide for the establishment of a waterworks
system subject to existing laws. Thus, Section 447(5)(vii) of the Local Government Code
provides:
SECTION 447. Powers, Duties, Functions and Compensation. (a) The sangguniang bayan,
as the legislative body of the municipality, shall enact ordinances, approve resolutions and
appropriate funds for the general welfare of the municipality and its inhabitants pursuant to
Section 16 of this Code and in the proper exercise of the corporate powers of the
municipality as provided for under Section 22 of this Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation, maintenance, and
repair of an efficient waterworks system to supply water for the inhabitants; regulate the
construction, maintenance, repair and use of hydrants, pumps, cisterns and reservoirs;
protect the purity and quantity of the water supply of the municipality and, for this purpose,
extend the coverage of appropriate ordinances over all territory within the drainage area of
said water supply and within one hundred (100) meters of the reservoir, conduit, canal,
aqueduct, pumping station, or watershed used in connection with the water service; and
regulate the consumption, use or wastage of water;
x x x. (Emphasis supplied)

11
The Sangguniang Bayan may establish a waterworks system only in accordance with
the provisions of PD 198. The Sangguniang Bayan has no power to create a corporate entity
that will operate its waterworks system. However, the Sangguniang Bayan may avail of
existing enabling laws, like PD 198, to form and incorporate a water district. Besides, even
assuming for the sake of argument that the Sangguniang Bayan has the power to create
corporations, the LWDs would remain government-owned or controlled corporations subject
to COAs audit jurisdiction. The resolution of the Sangguniang Bayan would constitute an
LWDs special charter, making the LWD a government-owned and controlled corporation with
an original charter. In any event, the Court has already ruled in Baguio Water District v.
Trajano[19] that the Sangguniang Bayan resolution is not the special charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is still necessary for the final creation
of a district, this Court is of the opinion that said resolution cannot be considered as its
charter, the same being intended only to implement the provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC in order
that it may have an original charter. In short, petitioner argues that one special law cannot
serve as enabling law for several GOCCs but only for one GOCC. Section 16, Article XII of
the Constitution mandates that Congress shall not, except by general law,[20] provide for the
creation of private corporations. Thus, the Constitution prohibits one special law to create
one private corporation, requiring instead a general law to create private corporations. In
contrast, the same Section 16 states that Government-owned or controlled
corporations may be created or established by special charters. Thus, the
Constitution permits Congress to create a GOCC with a special charter. There is, however,
no prohibition on Congress to create several GOCCs of the same class under one special
enabling charter.
The rationale behind the prohibition on private corporations having special charters
does not apply to GOCCs. There is no danger of creating special privileges to certain
individuals, families or groups if there is one special law creating each GOCC. Certainly,
such danger will not exist whether one special law creates one GOCC, or one special
enabling law creates several GOCCs. Thus, Congress may create GOCCs either by special
charters specific to each GOCC, or by one special enabling charter applicable to a class of
GOCCs, like PD 198 which applies only to LWDs.
Petitioner also contends that LWDs are private corporations because Section 6 of PD
198[21] declares that LWDs shall be considered quasi-public in nature. Petitioners rationale is
that only private corporations may be deemed quasi-public and not public corporations. Put
differently, petitioner rationalizes that a public corporation cannot be deemed quasi-public
because such corporation is already public. Petitioner concludes that the term quasi-public
can only apply to private corporations. Petitioners argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs audit
jurisdiction depends on the governments ownership or control of a corporation. The nature of
the corporation, whether it is private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over government-owned and
controlled corporations with original charters, as well as government-owned or controlled
corporations without original charters. GOCCs with original charters are subject to COA preaudit, while GOCCs without original charters are subject to COA post-audit. GOCCs without
original charters refer to corporations created under the Corporation Code but are owned or

12
controlled by the government. The nature or purpose of the corporation is not material in
determining COAs audit jurisdiction. Neither is the manner of creation of a corporation,
whether under a general or special law.
The determining factor of COAs audit jurisdiction is government ownership or
control of the corporation. In Philippine Veterans Bank Employees Union-NUBE v.
Philippine Veterans Bank,[22] the Court even ruled that the criterion of ownership and
control is more important than the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B, Section 2(1) that
the Civil Service embraces all branches, subdivisions, instrumentalities, and agencies of the
Government, including government-owned or controlled corporations with original
charters. As the Bank is not owned or controlled by the Government although it does
have an original charter in the form of R.A. No. 3518,[23] it clearly does not fall under
the Civil Service and should be regarded as an ordinary commercial
corporation. Section 28 of the said law so provides. The consequence is that the relations
of the Bank with its employees should be governed by the labor laws, under which in fact
they have already been paid some of their claims. (Emphasis supplied)
Certainly, the government owns and controls LWDs. The government organizes LWDs
in accordance with a specific law, PD 198. There is no private party involved as co-owner in
the creation of an LWD. Just prior to the creation of LWDs, the national or local government
owns and controls all their assets. The government controls LWDs because under PD 198
the municipal or city mayor, or the provincial governor, appoints all the board directors of an
LWD for a fixed term of six years.[24] The board directors of LWDs are not co-owners of the
LWDs.LWDs have no private stockholders or members. The board directors and other
personnel of LWDs are government employees subject to civil service laws [25] and anti-graft
laws.[26]
While Section 8 of PD 198 states that [N]o public official shall serve as director of an
LWD, it only means that the appointees to the board of directors of LWDs shall come from
the private sector. Once such private sector representatives assume office as directors, they
become public officials governed by the civil service law and anti-graft laws. Otherwise,
Section 8 of PD 198 would contravene Section 2(1), Article IX-B of the Constitution declaring
that the civil service includes government-owned or controlled corporations with original
charters.
If LWDs are neither GOCCs with original charters nor GOCCs without original charters,
then they would fall under the term agencies or instrumentalities of the government and thus
still subject to COAs audit jurisdiction. However, the stark and undeniable fact is that the
government owns LWDs. Section 45[27] of PD 198 recognizes government ownership of
LWDs when Section 45 states that the board of directors may dissolve an LWD only on the
condition that another public entity has acquired the assets of the district and has assumed
all obligations and liabilities attached thereto. The implication is clear that an LWD is a public
and not a private entity.
Petitioner does not allege that some entity other than the government owns or controls
LWDs. Instead, petitioner advances the theory that the Water Districts owner is the District
itself.[28] Assuming for the sake of argument that an LWD is self-owned,[29] as petitioner
describes an LWD, the government in any event controls all LWDs. First, government
officials appoint all LWD directors to a fixed term of office. Second, any per diem of LWD

13
directors in excess of P50 is subject to the approval of the Local Water Utilities
Administration, and directors can receive no other compensation for their services to the
LWD.[30] Third, the Local Water Utilities Administration can require LWDs to merge or
consolidate their facilities or operations.[31] This element of government control subjects
LWDs to COAs audit jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private entities
through the transfer of ownership of water facilities from local government units to their
respective water districts as mandated by PD 198. Petitioner is grasping at
straws. Privatization involves the transfer of government assets to a private entity. Petitioner
concedes that the owner of the assets transferred under Section 6 (c) of PD 198 is no other
than the LWD itself.[32] The transfer of assets mandated by PD 198 is a transfer of the water
systems facilities managed, operated by or under the control of such city, municipality or
province to such (water) district.[33] In short, the transfer is from one government entity to
another government entity. PD 198 is bereft of any indication that the transfer is to privatize
the operation and control of water systems.
Finally, petitioner claims that even on the assumption that the government owns and
controls LWDs, Section 20 of PD 198 prevents COA from auditing LWDs. [34] Section 20 of
PD 198 provides:
Sec. 20. System of Business Administration. The Board shall, as soon as practicable,
prescribe and define by resolution a system of business administration and accounting for
the district, which shall be patterned upon and conform to the standards established by the
Administration. Auditing shall be performed by a certified public accountant not in the
government service. The Administration may, however, conduct annual audits of the fiscal
operations of the district to be performed by an auditor retained by the
Administration. Expenses incurred in connection therewith shall be borne equally by the
water district concerned and the Administration.[35] (Emphasis supplied)
Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor
for that matter, from auditing LWDs. Petitioner asserts that this is the import of the second
sentence of Section 20 of PD 198 when it states that [A]uditing shall be performed by a
certified public accountant not in the government service.[36]
PD 198 cannot prevail over the Constitution. No amount of clever legislation can
exclude GOCCs like LWDs from COAs audit jurisdiction. Section 3, Article IX-C of the
Constitution outlaws any scheme or devise to escape COAs audit jurisdiction, thus:
Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in
any guise whatever, or any investment of public funds, from the jurisdiction of the
Commission on Audit.(Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the Constitution
precisely to annul provisions of Presidential Decrees, like that of Section 20 of PD 198, that
exempt GOCCs from COA audit. The following exchange in the deliberations of the
Constitutional Commission elucidates this intent of the framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee
report which reads: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE

14
GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY
INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION
ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took advantage of the absence
of a legislature in the past to obtain presidential decrees exempting themselves from
the jurisdiction of the Commission on Audit, one notable example of which is the
Philippine National Oil Company which is really an empty shell. It is a holding corporation by
itself, and strictly on its own account. Its funds were not very impressive in quantity but
underneath that shell there were billions of pesos in a multiplicity of companies. The PNOC
the empty shell under a presidential decree was covered by the jurisdiction of the
Commission on Audit, but the billions of pesos invested in different corporations underneath
it were exempted from the coverage of the Commission on Audit.
Another example is the United Coconut Planters Bank. The Commission on Audit has
determined that the coconut levy is a form of taxation; and that, therefore, these funds
attributed to the shares of 1,400,000 coconut farmers are, in effect, public funds. And that
was, I think, the basis of the PCGG in undertaking that last major sequestration of up to 94
percent of all the shares in the United Coconut Planters Bank. The charter of the UCPB,
through a presidential decree, exempted it from the jurisdiction of the Commission on Audit,
it being a private organization.
So these are the fetuses of future abuse that we are slaying right here with this additional
section.
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED
EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE
WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION
OF THE COMMISSION ON AUDIT.
THE PRESIDENT: May we know the position of the Committee on the proposed amendment
of Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we
will accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new amendment.
THE PRESIDENT: Commissioner de Castro is recognized.
MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople.
Is that not included in Section 2 (1) where it states: (c) government-owned or controlled
corporations and their subsidiaries? So that if these government-owned and controlled
corporations and their subsidiaries are subjected to the audit of the COA, any law exempting
certain government corporations or subsidiaries will be already unconstitutional.

15
So I believe, Madam President, that the proposed amendment is unnecessary.
MR. MONSOD: Madam President, since this has been accepted, we would like to reply to
the point raised by Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the
past, because the same provision was in the 1973 Constitution and yet somehow a law or a
decree was passed where certain institutions were exempted from audit. We are just
reaffirming, emphasizing, the role of the Commission on Audit so that this problem will never
arise in the future.[37]
There is an irreconcilable conflict between the second sentence of Section 20 of PD 198
prohibiting COA auditors from auditing LWDs and Sections 2(1) and 3, Article IX-D of the
Constitution vesting in COA the power to audit all GOCCs. We rule that the second sentence
of Section 20 of PD 198 is unconstitutional since it violates Sections 2(1) and 3, Article IX-D
of the Constitution.
On the Legality of COAs
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit services violate the
prohibition in Section 18 of RA 6758,[38] which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies.
In order to preserve the independence and integrity of the Commission on Audit (COA), its
officials and employees are prohibited from receiving salaries, honoraria, bonuses,
allowances or other emoluments from any government entity, local government unit,
government-owned or controlled corporations, and government financial institutions, except
those compensation paid directly by COA out of its appropriations and contributions.
Government entities, including government-owned or controlled corporations including
financial institutions and local government units are hereby prohibited from assessing or
billing other government entities, including government-owned or controlled corporations
including financial institutions or local government units for services rendered by its officials
and employees as part of their regular functions for purposes of paying additional
compensation to said officials and employees. (Emphasis supplied)
Claiming that Section 18 is absolute and leaves no doubt, [39] petitioner asks COA to
discontinue its practice of charging auditing fees to LWDs since such practice allegedly
violates the law.
Petitioners claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any kind of
compensation from any government entity except compensation paid directly by COA out
of its appropriations and contributions. Thus, RA 6758 itself recognizes an exception to

16
the statutory ban on COA personnel receiving compensation from GOCCs. In Tejada v.
Domingo,[40]the Court declared:
There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen
further the policy x x x to preserve the independence and integrity of the COA, by explicitly
PROHIBITING: (1) COA officials and employees from receiving salaries, honoraria, bonuses,
allowances or other emoluments from any government entity, local government unit, GOCCs
and government financial institutions, except such compensation paid directly by the
COA out of its appropriations and contributions, and (2) government entities, including
GOCCs, government financial institutions and local government units from assessing or
billing other government entities, GOCCs, government financial institutions or local
government units for services rendered by the latters officials and employees as part of their
regular functions for purposes of paying additional compensation to said officials and
employees.
xxx
The first aspect of the strategy is directed to the COA itself, while the second aspect is
addressed directly against the GOCCs and government financial institutions. Under the
first, COA personnel assigned to auditing units of GOCCs or government financial
institutions can receive only such salaries, allowances or fringe benefits paid directly
by the COA out of its appropriations and contributions.The contributions referred to
are the cost of audit services earlier mentioned which cannot include the extra
emoluments or benefits now claimed by petitioners. The COA is further barred from
assessing or billing GOCCs and government financial institutions for services rendered by its
personnel as part of their regular audit functions for purposes of paying additional
compensation to such personnel. x x x. (Emphasis supplied)
In Tejada, the Court explained the meaning of the word contributions in Section 18 of
RA 6758, which allows COA to charge GOCCs the cost of its audit services:
x x x the contributions from the GOCCs are limited to the cost of audit services which are
based on the actual cost of the audit function in the corporation concerned plus a reasonable
rate to cover overhead expenses. The actual audit cost shall include personnel services,
maintenance and other operating expenses, depreciation on capital and equipment and outof-pocket expenses. In respect to the allowances and fringe benefits granted by the GOCCs
to the COA personnel assigned to the formers auditing units, the same shall be directly
defrayed by COA from its own appropriations x x x. [41]
COA may charge GOCCs actual audit cost but GOCCs must pay the same directly to COA
and not to COA auditors. Petitioner has not alleged that COA charges LWDs auditing fees in
excess of COAs actual audit cost. Neither has petitioner alleged that the auditing fees are
paid by LWDs directly to individual COA auditors. Thus, petitioners contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and
the Decision dated 30 January 2001 denying petitioners Motion for Reconsideration are
AFFIRMED. The second sentence of Section 20 of Presidential Decree No. 198 is declared
VOID for being inconsistent with Sections 2 (1) and 3, Article IX-D of the Constitution. No
costs.

17
Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-22619

December 2, 1924

NATIONAL COAL COMPANY, plaintiff-appellee,

vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellant.
Attorney-General Villa-Real for appellant.
Perfecto J. Salas Rodriguez for appellee.

JOHNSON, J.:
This action was brought in the Court of First Instance of the City of Manila on the 17th day of
July, 1923, for the purpose of recovering the sum of P12,044.68, alleged to have been paid
under protest by the plaintiff company to the defendant, as specific tax on 24,089.3 tons of
coal. Said company is a corporation created by Act No. 2705 of the Philippine Legislature for
the purpose of developing the coal industry in the Philippine Islands and is actually engaged
in coal mining on reserved lands belonging to the Government. It claimed exemption from
taxes under the provision of sections 14 and 15 of Act No. 2719, and prayed for a judgment
ordering the defendant to refund to the plaintiff said sum of P12,044.68, with legal interest
from the date of the presentation of the complaint, and costs against the defendant.
The defendant answered denying generally and specifically all the material allegations of the
complaint, except the legal existence and personality of the plaintiff. As a special defense,
the defendant alleged (a) that the sum of P12,044.68 was paid by the plaintiff without
protests, and (b) that said sum was due and owing from the plaintiff to the Government of
the Philippine Islands under the provisions of section 1496 of the Administrative Code and
prayed that the complaint be dismissed, with costs against the plaintiff.
Upon the issue thus presented, the case was brought on for trial. After a consideration of the
evidence adduced by both parties, the Honorable Pedro Conception, judge, held that the
words "lands owned by any person, etc.," in section 15 of Act No. 2719 should be
understood to mean "lands held in lease or usufruct," in harmony with the other provision of
said Act; that the coal lands possessed by the plaintiff, belonging to the Government, fell
within the provisions of section 15 of Act No. 2719; and that a tax of P0.04 per ton of 1,016
kilos on each ton of coal extracted therefrom, as provided in said section, was the only tax
which should be collected from the plaintiff; and sentenced the defendant to refund to the
plaintiff the sum of P11,081.11 which is the difference between the amount collected under
section 1496 of the Administrative Code and the amount which should have been collected
under the provisions of said section 15 of Act No. 2719. From that sentence the defendant
appealed, and now makes the following assignments of error:

18
I. The court below erred in holding that section 15 of Act No. 2719 does not refer to coal
lands owned by persons and corporations.
II. The court below erred in holding that the plaintiff was not subject to the tax prescribed in
section 1496 of the Administrative Code.
The question confronting us in this appeal is whether the plaintiff is subject to the taxes
under section 15 of Act No. 2719, or to the specific taxes under section 1496 of the
Administrative Code.
The plaintiff corporation was created on the 10th day of March, 1917, by Act No. 2705, for
the purpose of developing the coal industry in the Philippine Island, in harmony with the
general plan of the Government to encourage the development of the natural resources of
the country, and to provided facilities therefor. By said Act, the company was granted the
general powers of a corporation "and such other powers as may be necessary to enable it to
prosecute the business of developing coal deposits in the Philippine Island and of mining,
extracting, transporting and selling the coal contained in said deposits." (Sec. 2, Act No.
2705.) By the same law (Act No. 2705) the Government of the Philippine Islands is made the
majority stockholder, evidently in order to insure proper government supervision and control,
and thus to place the Government in a position to render all possible encouragement,
assistance and help in the prosecution and furtherance of the company's business.
On May 14, 1917, two months after the passage of Act No. 2705, creating the National Coal
Company, the Philippine Legislature passed Act No. 2719 "to provide for the leasing and
development of coal lands in the Philippine Islands." On October 18, 1917, upon petition of
the National Coal Company, the Governor-General, by Proclamation No. 39, withdrew "from
settlement, entry, sale or other disposition, all coal-bearing public lands within the Province
of Zamboanga, Department of Mindanao and Sulu, and the Island of Polillo, Province of
Tayabas." Almost immediately after the issuance of said proclamation the National Coal
Company took possession of the coal lands within the said reservation, with an area of about
400 hectares, without any further formality, contract or lease. Of the 30,000 shares of stock
issued by the company, the Government of the Philippine Islands is the owner of 29,809
shares, that is, of 99 1/3 per centum of the whole capital stock.
If we understand the theory of the plaintiff-appellee, it is, that it claims to be the owner of the
land from which it has mined the coal in question and is therefore subject to the provisions of
section 15 of Act No. 2719 and not to the provisions of the section 1496 of the Administrative
Code. That contention of the plaintiff leads us to an examination of the evidence upon the
question of the ownership of the land from which the coal in question was mined. Was the
plaintiff the owner of the land from which the coal in question was mined? If the evidence
shows the affirmative, then the judgment should be affirmed. If the evidence shows that the
land does not belong to the plaintiff, then the judgment should be reversed, unless the
plaintiff's rights fall under section 3 of said Act.
The only witness presented by the plaintiff upon the question of the ownership of the land in
question was Mr. Dalmacio Costas, who stated that he was a member of the board of
directors of the plaintiff corporation; that the plaintiff corporation took possession of the land
in question by virtue of the proclamation of the Governor-General, known as Proclamation
No. 39 of the year 1917; that no document had been issued in favor of the plaintiff
corporation; that said corporation had received no permission from the Secretary of
Agriculture and Natural Resources; that it took possession of said lands covering an area of

19
about 400 hectares, from which the coal in question was mined, solely, by virtue of said
proclamation (Exhibit B, No. 39).
Said proclamation (Exhibit B) was issued by Francis Burton Harrison, then GovernorGeneral, on the 18th day of October, 1917, and provided: "Pursuant to the provision of
section 71 of Act No. 926, I hereby withdraw from settlement, entry, sale, or other
disposition, all coal-bearing public lands within the Province of Zamboanga, Department of
Mindanao and Sulu, and the Island of Polillo, Province of Tayabas." It will be noted that said
proclamation only provided that all coal-bearing public lands within said province and island
should be withdrawn from settlement, entry, sale, or other disposition. There is nothing in
said proclamation which authorizes the plaintiff or any other person to enter upon said
reversations and to mine coal, and no provision of law has been called to our attention, by
virtue of which the plaintiff was entitled to enter upon any of the lands so reserved by said
proclamation without first obtaining permission therefor.
The plaintiff is a private corporation. The mere fact that the Government happens to the
majority stockholder does not make it a public corporation. Act No. 2705, as amended by Act
No. 2822, makes it subject to all of the provisions of the Corporation Law, in so far as they
are not inconsistent with said Act (No. 2705). No provisions of Act No. 2705 are found to be
inconsistent with the provisions of the Corporation Law. As a private corporation, it has no
greater rights, powers or privileges than any other corporation which might be organized for
the same purpose under the Corporation Law, and certainly it was not the intention of the
Legislature to give it a preference or right or privilege over other legitimate private
corporations in the mining of coal. While it is true that said proclamation No. 39 withdrew
"from settlement, entry, sale, or other disposition of coal-bearing public lands within the
Province of Zamboanga . . . and the Island of Polillo," it made no provision for the occupation
and operation by the plaintiff, to the exclusion of other persons or corporations who might,
under proper permission, enter upon the operate coal mines.
On the 14th day of May, 1917, and before the issuance of said proclamation, the Legislature
of the Philippine Island in "an Act for the leasing and development of coal lands in the
Philippine Islands" (Act No. 2719), made liberal provision. Section 1 of said Act provides:
"Coal-bearing lands of the public domain in the Philippine Island shall not be disposed of in
any manner except as provided in this Act," thereby giving a clear indication that no "coalbearing lands of the public domain" had been disposed of by virtue of said proclamation.
Neither is there any provision in Act No. 2705 creating the National Coal Company, nor in the
amendments thereof found in Act No. 2822, which authorizes the National Coal Company to
enter upon any of the reserved coal lands without first having obtained permission from the
Secretary of Agriculture and Natural Resources.lawphi1.net
The following propositions are fully sustained by the facts and the law:
(1) The National Coal Company is an ordinary private corporation organized under Act No.
2705, and has no greater powers nor privileges than the ordinary private corporation, except
those mentioned, perhaps, in section 10 of Act No. 2719, and they do not change the
situation here.
(2) It mined on public lands between the month of July, 1920, and the months of March,
1922, 24,089.3 tons of coal.

20
(3) Upon demand of the Collector of Internal Revenue it paid a tax of P0.50 a ton, as taxes
under the provisions of article 1946 of the Administrative Code on the 15th day of December,
1922.
(4) It is admitted that it is neither the owner nor the lessee of the lands upon which said coal
was mined.
(5) The proclamation of Francis Burton Harrison, Governor-General, of the 18th day of
October, 1917, by authority of section 1 of Act No. 926, withdrawing from settlement, entry,
sale, or other dispositon all coal-bearing public lands within the Province of Zamboanga and
the Island of Polillo, was not a reservation for the benefit of the National Coal Company, but
for any person or corporation of the Philippine Islands or of the United States.
(6) That the National Coal Company entered upon said land and mined said coal, so far as
the record shows, without any lease or other authority from either the Secretary of
Agriculture and Natural Resources or any person having the power to grant a leave or
authority.
From all of the foregoing facts we find that the issue is well defined between the plaintiff and
the defendant. The plaintiff contends that it was liable only to pay the internal revenue and
other fees and taxes provided for under section 15 of Act No. 2719; while the defendant
contends, under the facts of record, the plaintiff is obliged to pay the internal revenue duty
provided for in section 1496 of the Administrative Code. That being the issue, an
examination of the provisions of Act No. 2719 becomes necessary.
An examination of said Act (No. 2719) discloses the following facts important for
consideration here:
First. All "coal-bearing lands of the public domain in the Philippine Islands shall not be
disposed of in any manner except as provided in this Act." Second. Provisions for leasing by
the Secretary of Agriculture and Natural Resources of "unreserved, unappropriated coalbearing public lands," and the obligation to the Government which shall be imposed by said
Secretary upon the lessee.lawphi1.net
Third. The internal revenue duty and tax which must be paid upon coal-bearing lands owned
by any person, firm, association or corporation.
To repeat, it will be noted, first, that Act No. 2719 provides an internal revenue duty and tax
upon unreserved, unappropriated coal-bearing public lands which may be leased by the
Secretary of Agriculture and Natural Resources; and, second, that said Act (No. 2719)
provides an internal revenue duty and tax imposed upon any person, firm, association or
corporation, who may be the owner of "coal-bearing lands." A reading of said Act clearly
shows that the tax imposed thereby is imposed upon two classes of persons only lessees
and owners.
The lower court had some trouble in determining what was the correct interpretation of
section 15 of said Act, by reason of what he believed to be some difference in the
interpretation of the language used in Spanish and English. While there is some ground for
confusion in the use of the language in Spanish and English, we are persuaded, considering
all the provisions of said Act, that said section 15 has reference only to persons, firms,

21
associations or corporations which had already, prior to the existence of said Act, become
the owners of coal lands. Section 15 cannot certainty refer to "holders or lessees of coal
lands' for the reason that practically all of the other provisions of said Act has reference to
lessees or holders. If section 15 means that the persons, firms, associations, or corporation
mentioned therein are holders or lessees of coal lands only, it is difficult to understand why
the internal revenue duty and tax in said section was made different from the obligations
mentioned in section 3 of said Act, imposed upon lessees or holders.
From all of the foregoing, it seems to be made plain that the plaintiff is neither a lessee nor
an owner of coal-bearing lands, and is, therefore, not subject to any other provisions of Act
No. 2719. But, is the plaintiff subject to the provisions of section 1496 of the Administrative
Code?
Section 1496 of the Administrative Code provides that "on all coal and coke there shall be
collected, per metric ton, fifty centavos." Said section (1496) is a part of article, 6 which
provides for specific taxes. Said article provides for a specific internal revenue tax upon all
things manufactured or produced in the Philippine Islands for domestic sale or consumption,
and upon things imported from the United States or foreign countries. It having been
demonstrated that the plaintiff has produced coal in the Philippine Islands and is not a lessee
or owner of the land from which the coal was produced, we are clearly of the opinion, and so
hold, that it is subject to pay the internal revenue tax under the provisions of section 1496 of
the Administrative Code, and is not subject to the payment of the internal revenue tax under
section 15 of Act No. 2719, nor to any other provisions of said Act.
Therefore, the judgment appealed from is hereby revoked, and the defendant is hereby
relieved from all responsibility under the complaint. And, without any finding as to costs, it is
so ordered.
Street, Malcolm, Avancea, Villamor, Ostrand and Romualdez, JJ., concur.

22

Sappari K. Sawadjaan v. CA (G.R. No. 141735)

PUBLISHED ON June 4, 2016
Facts:
Petitioner Sawadjaan was an appraiser/investigator in the Philippine Amanah Bank (PAB)
when on the basis of his report, a credit line was granted to Compressed Air Machineries
and Equipment Corporation (CAMEC) by virtue of the two parcels of land it offered as
collaterals. Meanwhile, Congress passed a law which created Al-Amanah Investment Bank
of the Philippines (AIIBP) and repealed the law creating PAB, transferring all its assets,
liabilities and capital accounts to AIIBP. Later, AIIBP discovered that the collaterals were
spurious, thus conducted an investigation and found petitioner Sawadjaan at fault. Petitioner
appealed before the SC which ruled against him. Petitioner moved for a new trial claiming he
recently discovered that AIIBP had not yet adopted its corporate by-laws and since it failed to
file within 60 days from the passage of its law, it had forfeited its franchise or charter and
thus has no legal standing to initiate an administrative case. The motion was denied.
Issue:
Whether or not the failure of AIIBP to file its by-laws within the period prescribed results to a
nullity of all actions and proceedings it has initiated.
Ruling: NO.
The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts
business, has shareholders, corporate officers, a board of directors, assets, and personnel.
It is, in fact, here represented by the Office of the Government Corporate Counsel, the
principal law office of government-owned corporations, one of which is respondent bank. At
the very least, by its failure to submit its by-laws on time, the AIIBP may be considered
a de facto corporation whose right to exercise corporate powers may not be inquired into
collaterally in any private suit to which such corporations may be a party.
Moreover, a corporation which has failed to file its by-laws within the prescribed period does
not ipso factolose its powers as such. The SEC Rules on Suspension/Revocation of the
Certificate of Registration of Corporations, details the procedures and remedies that may be
availed of before an order of revocation can be issued. There is no showing that such a
procedure has been initiated in this case.

23

Wilson P. Gamboa v. Finance Secretary Margarito Teves, et al., G.R. No. 176579, June
28, 2011
DECISION

CARPIO, J.:

I.

THE FACTS

This is a petition to nullify the sale of shares of stock of Philippine

Telecommunications Investment Corporation (PTIC) by the government of the Republic of
the Philippines, acting through the Inter-Agency Privatization Council (IPC), to Metro Pacific
Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company Limited (First Pacific), a
Hong Kong-based investment management and holding company and a shareholder of the
Philippine Long Distance Telephone Company (PLDT).

The petitioner questioned the sale on the ground that it also involved an indirect sale
of 12 million shares (or about 6.3 percent of the outstanding common shares) of PLDT
owned by PTIC to First Pacific. With the this sale, First Pacifics common shareholdings in
PLDT increased from 30.7 percent to 37 percent, thereby increasing the total common
shareholdings of foreigners in PLDT to about 81.47%. This, according to the petitioner,
violates Section 11, Article XII of the 1987 Philippine Constitution which limits foreign
ownership of the capital of a public utility to not more than 40%, thus:

Section 11. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall
be subject to amendment, alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines.
(Emphasis supplied)

II.

THE ISSUE

Does the term capital in Section 11, Article XII of the Constitution refer to the total
common shares only, or to the total outstanding capital stock (combined total of common
and non-voting preferred shares) of PLDT, a public utility?

24

III. THE RULING

[The Court partly granted the petition and held that the term capital in Section 11,
Article XII of the Constitution refers only to shares of stock entitled to vote in the election of
directors of a public utility, i.e., to the total common shares in PLDT.]

Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term capital in Section
11, Article XII of the Constitution refers only to common shares. However, if the preferred
shares also have the right to vote in the election of directors, then the term capital shall
include such preferred shares because the right to participate in the control or management
of the corporation is exercised through the right to vote in the election of directors. In
short, the term capital in Section 11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of directors.

To construe broadly the term capital as the total outstanding capital stock, including
both common and non-voting preferred shares, grossly contravenes the intent and letter of
the Constitution that the State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos. A broad definition unjustifiably disregards who
owns the all-important voting stock, which necessarily equates to control of the public utility.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the
election of directors. PLDTs Articles of Incorporation expressly state that the holders of
Serial Preferred Stock shall not be entitled to vote at any meeting of the stockholders
for the election of directors or for any other purpose or otherwise participate in any
action taken by the corporation or its stockholders, or to receive notice of any meeting of
stockholders. On the other hand, holders of common shares are granted the exclusive right
to vote in the election of directors. PLDTs Articles of Incorporation state that each holder of
Common Capital Stock shall have one vote in respect of each share of such stock held by
him on all matters voted upon by the stockholders, and the holders of Common Capital
Stock shall have the exclusive right to vote for the election of directors and for all
other purposes.

It must be stressed, and respondents do not dispute, that foreigners hold a majority
of the common shares of PLDT. In fact, based on PLDTs 2010 General Information Sheet
(GIS), which is a document required to be submitted annually to the Securities and
Exchange Commission, foreigners hold 120,046,690 common shares of PLDT whereas
Filipinos hold only 66,750,622 common shares. In other words, foreigners hold 64.27% of
the total number of PLDTs common shares, while Filipinos hold only 35.73%. Since holding
a majority of the common shares equates to control, it is clear that foreigners exercise
control over PLDT. Such amount of control unmistakably exceeds the allowable 40 percent
limit on foreign ownership of public utilities expressly mandated in Section 11, Article XII of
the Constitution.

25
As shown in PLDTs 2010 GIS, as submitted to the SEC, the par value of PLDT
common shares is P5.00 per share, whereas the par value of preferred shares is P10.00 per
share. In other words, preferred shares have twice the par value of common shares but
cannot elect directors and have only 1/70 of the dividends of common shares. Moreover,
99.44% of the preferred shares are owned by Filipinos while foreigners own only a
minuscule 0.56% of the preferred shares. Worse, preferred shares constitute 77.85% of the
authorized capital stock of PLDT while common shares constitute only 22.15%. This
undeniably shows that beneficial interest in PLDT is not with the non-voting preferred shares
but with the common shares, blatantly violating the constitutional requirement of 60 percent
Filipino control and Filipino beneficial ownership in a public utility.

In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60
percent of the dividends, of PLDT. This directly contravenes the express command in
Section 11, Article XII of the Constitution that [n]o franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to x x x corporations
x x x organized under the laws of the Philippines, at least sixty per centum of whose capital
is owned by such citizens x x x.

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of
shares exercises the sole right to vote in the election of directors, and thus exercise control
over PLDT; (2) Filipinos own only 35.73% of PLDTs common shares, constituting a minority
of the voting stock, and thus do not exercise control over PLDT; (3) preferred shares,
99.44% owned by Filipinos, have no voting rights; (4) preferred shares earn only 1/70 of the
dividends that common shares earn; (5) preferred shares have twice the par value of
common shares; and (6) preferred shares constitute 77.85% of the authorized capital stock
of PLDT and common shares only 22.15%. This kind of ownership and control of a public
utility is a mockery of the Constitution.

[Thus, the Respondent Chairperson of the Securities and Exchange Commission

was DIRECTED by the Court to apply the foregoing definition of the term capital in
determining the extent of allowable foreign ownership in respondent Philippine Long
Distance Telephone Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.]

26

CEASE VS CA
FACTS:
Forrest Cease and five (5) other American citizens formed Tiaong Milling and Plantation
Company. Eventually, the shares of the other original incorporators were bought out by
Cease with his children. The companys charter lapsed in June 1958. Forrest Cease died in
August 1959. There was no mention whether there were steps to liquidate the company.
Some of his children wanted an actual division while others wanted a reincorporation. Two of
his children, Benjamin and Florence, initiated Special Proceeding No. 3893 with CFI
Tayabas asking that the Tiaong Milling and Plantation Corporation be declared identical to
Forrest Cease and that its properties be divided among his children as intestate heirs.
Defendants opposed the same but the CFI ruled in favor of the plaintiffs. Defendants filed a
notice of appeal from the CFIs decision but the same was dismissed for being premature.
The case was elevated to the SC which remanded it to the Court of Appeals. The CA
dismissed the petition.
ISSUE: Whether or not the Court of Appeals erred in affirming the lower courts decision that
the subject properties owned by the corporation are also properties of the estate of Forrest
Cease
HELD: NO. The trial court indeed found strong support, one that is based on a wellentrenched principle of law which is the theory of "merger of Forrest L. Cease and The
Tiaong Milling as one personality", or that "the company is only the business conduit and
alter ego of the deceased Forrest L. Cease and the registered properties of Tiaong Milling
are actually properties of Forrest L. Cease and should be divided equally, share and share
alike among his six children, ... ", the trial court aptly applied the familiar exception to the
general rule by disregarding the legal fiction of distinct and separate corporate personality
and regarding the corporation and the individual member one and the same. In shredding
the fictitious corporate veil, the trial judge narrated the undisputed factual premise, thus:
While the records showed that originally its incorporators were aliens, friends or third-parties
in relation to another, in the course of its existence, it developed into a close family
corporation. The Board of Directors and stockholders belong to one family the head of which
Forrest L. Cease always retained the majority stocks and hence the control and
management of its affairs. It must be noted that as his children increase or become of age,
he continued distributing his shares among them adding Florence, Teresa and Marion until at
the time of his death only 190 were left to his name. Definitely, only the members of his
family benefited from the Corporation.
The corporation 'never' had any account with any banking institution or if any account was
carried in a bank on its behalf, it was in the name of Mr. Forrest L. Cease. There is truth in
plaintiff's allegation that the corporation is only a business conduit of his father and an
extension of his personality, they are one and the same thing. Thus, the assets of the
corporation are also the estate of Forrest L. Cease, the father of the parties herein who are
all legitimate children of full blood.
A rich store of jurisprudence has established the rule known as the doctrine of disregarding
or piercing the veil of corporate fiction.

27
GENERAL RULE: a corporation is vested by law with a personality separate and distinct
from the persons composing it as well as any other legal entity to which it may be related. By
virtue of this attribute, a corporation may not, generally, be made to answer for acts or
liabilities of its stockholders or those of the legal entities to which it may be connected, and
vice versa. This separate and distinct personality is, however, merely a fiction created by law
for convenience and to promote the ends of justice
EXCEPTIONS: Such rule may not be used or invoked for ends subversive of the policy and
purpose behind its creation or which could not have been intended by law to which it owes
its being. This is particularly true where the fiction is used to defeat public convenience,
justify wrong, protect fraud, defend crime, confuse legitimate legal or judicial issues,
perpetrate deception or otherwise circumvent the law
This is likewise true where the corporate entity is being used as an alter ego, adjunct, or
business conduit for the sole benefit of the stockholders or of another corporate. In any of
these cases, the notion of corporate entity will be pierced or disregarded, and the
corporation will be treated merely as an association of persons or, where there are two
corporations, they will be merged as one, the one being merely regarded as part or the
instrumentality of the other.
An indubitable deduction from the findings of the trial court cannot but lead to the conclusion
that the business of the corporation is largely, if not wholly, the personal venture of Forrest L.
Cease. There is not even a shadow of a showing that his children were subscribers or
purchasers of the stocks they own. Their participation as nominal shareholders emanated
solely from Forrest L. Cease's gratuitous dole out of his own shares to the benefit of his
children and ultimately his family.
If the Court sustained the theory of petitioners that the trial court acted in excess of
jurisdiction or abuse of discretion amounting to lack of jurisdiction in deciding the civil case
as a case for partition, Tiaong Milling and Plantation Company would have been able to
extend its corporate existence beyond the period of its charter which lapsed in June, 1958
under the guise and cover of F. L, Cease Plantation Company, Inc. as Trustee which would
be against the law, and as Trustee shall have been able to use the assets and properties for
the benefit of the petitioners, to the great prejudice and defraudation. of private respondents.
Hence, it becomes necessary and imperative to pierce that corporate veil.
The judgment appealed from is AFFIRMED.

28

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-17618

August 31, 1964

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
NORTON and HARRISON COMPANY, respondent.
Office of the Solicitor General for petitioner.
Pio Joven for respondent.
PAREDES, J.:
This is an appeal interposed by the Commissioner of Internal Revenue against the following
judgment of the Court of Tax Appeals:
IN VIEW OF THE FOREGOING, we find no legal basis to support the assessment in
question against petitioner. If at all, the assessment should have been directed against
JACKBILT, the manufacturer. Accordingly, the decision appealed from is reversed, and the
surety bond filed to guarantee payment of said assessment is ordered cancelled. No
pronouncement as to costs.
Norton and Harrison is a corporation organized in 1911, (1) to buy and sell at wholesale and
retail, all kinds of goods, wares, and merchandise; (2) to act as agents of manufacturers in
the United States and foreign countries; and (3) to carry on and conduct a general wholesale
and retail mercantile establishment in the Philippines. Jackbilt is, likewise, a corporation
organized on February 16, 1948 primarily for the purpose of making, producing and
manufacturing concrete blocks. Under date of July 27, 1948. Norton and Jackbilt entered
into an agreement whereby Norton was made the sole and exclusive distributor of concrete
blocks manufactured by Jackbilt. Pursuant to this agreement, whenever an order for
concrete blocks was received by the Norton & Harrison Co. from a customer, the order was
transmitted to Jackbilt which delivered the merchandise direct to the customer. Payment for
the goods is, however, made to Norton, which in turn pays Jackbilt the amount charged the
customer less a certain amount, as its compensation or profit. To exemplify the sales
procedures adopted by the Norton and Jackbilt, the following may be cited. In the case of the
sale of 420 pieces of concrete blocks to the American Builders on April 1, 1952, the
purchaser paid to Norton the sum of P189.00 the purchase price. Out of this amount Norton
paid Jackbilt P168.00, the difference obviously being its compensation. As per records of
Jackbilt, the transaction was considered a sale to Norton. It was under this procedure that
the sale of concrete blocks manufactured by Jackbilt was conducted until May 1, 1953, when
the agency agreement was terminated and a management agreement between the parties
was entered into. The management agreement provided that Norton would sell concrete
blocks for Jackbilt, for a fixed monthly fee of P2,000.00, which was later increased to
P5,000.00.
During the existence of the distribution or agency agreement, or on June 10, 1949, Norton &
Harrison acquired by purchase all the outstanding shares of stock of Jackbilt. Apparently,
due to this transaction, the Commissioner of Internal Revenue, after conducting an
investigation, assessed the respondent Norton & Harrison for deficiency sales tax and
surcharges in the amount of P32,662.90, making as basis thereof the sales of Norton to the
Public. In other words, the Commissioner considered the sale of Norton to the public as
the original sale and not the transaction from Jackbilt. The period covered by the

29
assessment was from July 1, 1949 to May 31, 1953. As Norton and Harrison did not conform
with the assessment, the matter was brought to the Court of Tax Appeals.
The Commissioner of Internal Revenue contends that since Jackbilt was owned and
controlled by Norton & Harrison, the corporate personality of the former (Jackbilt) should be
disregarded for sales tax purposes, and the sale of Jackbilt blocks by petitioner to the public
must be considered as the original sales from which the sales tax should be computed. The
Norton & Harrison Company contended otherwise that is, the transaction subject to tax is
the sale from Jackbilt to Norton.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted
and approved by this Honorable Court, without prejudice to the parties adducing other
evidence to prove their case not covered by this stipulation of facts. 1wph1.t
The majority of the Tax Court, in relieving Norton & Harrison of liability under the
assessment, made the following observations:
The law applicable to the case is Section 186 of the National Internal Revenue Code which
imposes a percentage tax of 7% on every original sale of goods, wares or merchandise,
such tax to be based on the gross selling price of such goods, wares or merchandise. The
term "original sale" has been defined as the first sale by every manufacturer, producer or
importer. (Sec. 5, Com. Act No. 503.) Subsequent sales by persons other than the
manufacturer, producer or importer are not subject to the sales tax.
If JACKBILT actually sold concrete blocks manufactured by it to petitioner under the
distributorship or agency agreement of July 27, 1948, such sales constituted the original
sales which are taxable under Section 186 of the Revenue Code, while the sales made to
the public by petitioner are subsequent sales which are not taxable. But it appears to us that
there was no such sale by JACKBILT to petitioner. Petitioner merely acted as agent for
JACKBILT in the marketing of its products. This is shown by the fact that petitioner merely
accepted orders from the public for the purchase of JACKBILT blocks. The purchase orders
were transmitted to JACKBILT which delivered the blocks to the purchaser directly. There
was no instance in which the blocks ordered by the purchasers were delivered to the
petitioner. Petitioner never purchased concrete blocks from JACKBILT so that it never
acquired ownership of such concrete blocks. This being so, petitioner could not have sold
JACKBILT blocks for its own account. It did so merely as agent of JACKBILT. The
distributorship agreement of July 27, 1948, is denominated by the parties themselves as an
"agency for marketing" JACKBILT products. ... .
xxx

xxx

xxx

Therefore, the taxable selling price of JACKBILT blocks under the aforesaid agreement is
the price charged to the public and not the amount billed by JACKBILT to petitioner. The
deficiency sales tax should have been assessed against JACKBILT and not against
petitioner which merely acted as the former's agent.
xxx

xxx

xxx

Presiding Judge Nable of the same Court expressed a partial dissent, stating:
Upon the aforestated circumstances, which disclose Norton's control over and direction of
Jackbilt's affairs, the corporate personality of Jackbilt should be disregarded, and the
transactions between these two corporations relative to the concrete blocks should be
ignored in determining the percentage tax for which Norton is liable. Consequently, the
percentage tax should be computed on the basis of the sales of Jackbilt blocks to the public.
The majority opinion is now before Us on appeal by the Commissioner of Internal Revenue,
on four (4) assigned errors, all of which pose the following propositions: (1) whether the
acquisition of all the stocks of the Jackbilt by the Norton & Harrison Co., merged the two

30
corporations into a single corporation; (2) whether the basis of the computation of the
deficiency sales tax should be the sale of the blocks to the public and not to Norton.
It has been settled that the ownership of all the stocks of a corporation by another
corporation does not necessarily breed an identity of corporate interest between the two
companies and be considered as a sufficient ground for disregarding the distinct
personalities (Liddell & Co., Inc. v. Coll. of Int. Rev. L-9687, June 30, 1961). However, in the
case at bar, we find sufficient grounds to support the theory that the separate identities of the
two companies should be disregarded. Among these circumstances, which we find not
successfully refuted by appellee Norton are: (a) Norton and Harrison owned all the
outstanding stocks of Jackbilt; of the 15,000 authorized shares of Jackbilt on March 31,
1958, 14,993 shares belonged to Norton and Harrison and one each to seven others; (b)
Norton constituted Jackbilt's board of directors in such a way as to enable it to actually direct
and manage the other's affairs by making the same officers of the board for both companies.
For instance, James E. Norton is the President, Treasurer, Director and Stockholder of
Norton. He also occupies the same positions in Jackbilt corporation, the only change being,
in the Jackbilt, he is merely a nominal stockholder. The same is true with Mr. Jordan, F. M.
Domingo, Mr. Mantaring, Gilbert Golden and Gerardo Garcia, while they are merely
employees of the North they are Directors and nominal stockholders of the Jackbilt (c)
Norton financed the operations of the Jackbilt, and this is shown by the fact that the loans
obtained from the RFC and Bank of America were used in the expansion program of
Jackbilt, to pay advances for the purchase of equipment, materials rations and salaries of
employees of Jackbilt and other sundry expenses. There was no limit to the advances given
to Jackbilt so much so that as of May 31, 1956, the unpaid advances amounted to
P757,652.45, which were not paid in cash by Jackbilt, but was offset by shares of stock
issued to Norton, the absolute and sole owner of Jackbilt; (d) Norton treats Jackbilt
employees as its own. Evidence shows that Norton paid the salaries of Jackbilt employees
and gave the same privileges as Norton employees, an indication that Jackbilt employees
were also Norton's employees. Furthermore service rendered in any one of the two
companies were taken into account for purposes of promotion; (e) Compensation given to
board members of Jackbilt, indicate that Jackbilt is merely a department of Norton. The
income tax return of Norton for 1954 shows that as President and Treasurer of Norton and
Jackbilt, he received from Norton P56,929.95, but received from Jackbilt the measly amount
of P150.00, a circumstance which points out that remuneration of purported officials of
Jackbilt are deemed included in the salaries they received from Norton. The same is true in
the case of Eduardo Garcia, an employee of Norton but a member of the Board of Jackbilt.
His Income tax return for 1956 reveals that he received from Norton in salaries and bonuses
P4,220.00, but received from Jackbilt, by way of entertainment, representation, travelling
and transportation allowances P3,000.00. However, in the withholding statement (Exh. 28A), it was shown that the total of P4,200.00 and P3,000.00 (P7,220.00) was received by
Garcia from Norton, thus portraying the oneness of the two companies. The Income Tax
Returns of Albert Golden and Dioscoro Ramos both employees of Norton but board
members of Jackbilt, also disclose the game method of payment of compensation and
allowances. The offices of Norton and Jackbilt are located in the same compound. Payments
were effected by Norton of accounts for Jackbilt and vice versa. Payments were also made
to Norton of accounts due or payable to Jackbilt and vice versa.
Norton and Harrison, while not denying the presence of the set up stated above, tried to
explain that the control over the affairs of Jackbilt was not made in order to evade payment
of taxes; that the loans obtained by it which were given to Jackbilt, were necessary for the
expansion of its business in the manufacture of concrete blocks, which would ultimately
benefit both corporations; that the transactions and practices just mentioned, are not
unusual and extraordinary, but pursued in the regular course of business and trade; that
there could be no confusion in the present set up of the two corporations, because they have
separate Boards, their cash assets are entirely and strictly separate; cashiers and official

31
receipts and bank accounts are distinct and different; they have separate income tax returns,
separate balance sheets and profit and loss statements. These explanations notwithstanding
an over-all appraisal of the circumstances presented by the facts of the case, yields to the
conclusion that the Jackbilt is merely an adjunct, business conduit or alter ego, of Norton
and Harrison and that the fiction of corporate entities, separate and distinct from each,
should be disregarded. This is a case where the doctrine of piercing the veil of corporate
fiction, should be made to apply. In the case of Liddell & Co. Inc. v. Coll. of Int. Rev., supra, it
was held:
There are quite a series of conspicuous circumstances that militates against the separate
and distinct personality of Liddell Motors Inc., from Liddell & Co. We notice that the bulk of
the business of Liddell & Co. was channel Red through Liddell Motors, Inc. On the other
hand, Liddell Motors Inc. pursued no activities except to secure cars, trucks, and spare parts
from Liddell & Co., Inc. and then sell them to the general public. These sales of vehicles by
Liddell & Co, to Liddell Motors. Inc. for the most part were shown to have taken place on the
same day that Liddell Motors, Inc. sold such vehicles to the public. We may even say that
the cars and trucks merely touched the hands of Liddell Motors, Inc. as a matter of formality.
xxx

xxx

xxx

Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc. are corporations owned
and controlled by Frank Liddell directly or indirectly is not by itself sufficient to justify the
disregard of the separate corporate identity of one from the other. There is however, in this
instant case, a peculiar sequence of the organization and activities of Liddell Motors, Inc.
As opined in the case of Gregory v. Helvering "the legal right of a tax payer to decrease the
amount of what otherwise would be his taxes, or altogether avoid them, by means which the
law permits, cannot be doubted". But as held in another case, "where a corporation is a
dummy, is unreal or a sham and serves no business purpose and is intended only as a blind,
the corporate form may be ignored for the law cannot countenance a form that is bald and a
mischievous fictions".
... a taxpayer may gain advantage of doing business thru a corporation if he pleases, but the
revenue officers in proper cases, may disregard the separate corporate entity where it
serves but as a shield for tax evasion and treat the person who actually may take benefits of
the transactions as the person accordingly taxable.
... to allow a taxpayer to deny tax liability on the ground that the sales were made through
another and distinct corporation when it is proved that the latter is virtually owned by the
former or that they are practically one and the same is to sanction a circumvention of our tax
laws. (and cases cited therein.)
In the case of Yutivo Sons Hardware Co. v. Court of Tax Appeals, L-13203, Jan. 28, 1961,
this Court made a similar ruling where the circumstances of unity of corporate identities have
been shown and which are identical to those obtaining in the case under consideration.
Therein, this Court said:
We are, however, inclined to agree with the court below that SM was actually owned and
controlled by petitioner as to make it a mere subsidiary or branch of the latter created for the
purpose of selling the vehicles at retail (here concrete blocks) ... .
It may not be amiss to state in this connection, the advantages to Norton in maintaining a
semblance of separate entities. If the income of Norton should be considered separate from
the income of Jackbilt, then each would declare such earning separately for income tax
purposes and thus pay lesser income tax. The combined taxable Norton-Jackbilt income
would subject Norton to a higher tax. Based upon the 1954-1955 income tax return of Norton
and Jackbilt (Exhs. 7 & 8), and assuming that both of them are operating on the same fiscal
basis and their returns are accurate, we would have the following result: Jackbilt declared a

32
taxable net income of P161,202.31 in which the income tax due was computed at
P37,137.00 (Exh. 8); whereas Norton declared as taxable, a net income of P120,101.59, on
which the income tax due was computed at P25,628.00. The total of these liabilities is
P50,764.84. On the other hand, if the net taxable earnings of both corporations are
combined, during the same taxable year, the tax due on their total which is P281,303.90
would be P70,764.00. So that, even on the question of income tax alone, it would be to the
advantages of Norton that the corporations should be regarded as separate entities.
WHEREFORE, the decision appealed from should be as it is hereby reversed and another
entered making the appellee Norton & Harrison liable for the deficiency sales taxes
assessed against it by the appellant Commissioner of Internal Revenue, plus 25% surcharge
thereon. Costs against appellee Norton & Harrison.

Mcleod vs NLRC
FACTS:
On February 2, 1995, John F. McLeod filed a complaint for retirement benefits, vacation and
sick leave benefits and other benefits against Filipinas Synthetic Corporation (Filsyn), Far
Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc., Complainant was the former VP and Plant
Manager of Peggy Mills, Inc.; that he was hired in June 1980 and Peggy Mills closed
operations due to irreversible losses but its assets were acquired by Sta. Rosa Textile
Corporation complainant was hired by Sta. Rosa Textile but he resigned and that while
complainant was Vice President and Plant Manager of Peggy Mills, the union staged a strike
up to July 1992 resulting in closure of operations due to irreversible losses as per Notice
.The complainant was relied upon to settle the labor problem but due to his lack of attention
and absence the strike continued resulting in closure of the company. Mcleod contends that
the corporations are solidarily liable. On 3 April 1998, the Labor Arbiter rendered his decision
in favor of Mcleod The NLRC Reversed decision CA- Modified the NLRCs decision. Lim
was solidarily liable

33
Issue:
whether there is merger/ consolidation
w/n Patricio Lim must be solidarily liable with PMI

Held:
There was also no merger or consolidation of PMI and SRTI. Consolidation is the union of
two or more existing corporations to form a new corporation called the consolidated
corporation. It is a combination by agreement between two or more corporations by which
their rights, franchises, and property are united and become those of a single, new
corporation, composed generally, although not necessarily, of the stockholders of the original
corporations. Merger, on the other hand, is a union whereby one corporation absorbs one or
more existing corporations, and the absorbing corporation survives and continues the
combined business.

The parties to a merger or consolidation are called constituent corporations. In consolidation,

all the constituents are dissolved and absorbed by the new consolidated enterprise. In
merger, all constituents, except the surviving corporation, are dissolved. In both cases,
however, there is no liquidation of the assets of the dissolved corporations, and the surviving
or consolidated corporation acquires all their properties, rights and franchises and their
stockholders usually become its stockholders. The surviving or consolidated corporation
assumes automatically the liabilities of the dissolved corporations, regardless of whether the
creditors have consented or not to such merger or consolidation.27 In the present case,
there is no showing that the subject dation in payment involved any corporate merger or
consolidation. Neither is there any showing of those indicative factors that SRTI is a mere
instrumentality of PMI.

Moreover, SRTI did not expressly or impliedly agree to assume any of PMIs debts. 2. In the
present case, there is nothing substantial on record to show that Patricio acted in bad faith in
terminating McLeods services to warrant Patricios personal liability. PMI had no other
choice but to stop plant operations. The work stoppage therefore was by necessity. The
company could no longer continue with its plant operations because of the serious business
losses that it had suffered. The mere fact that Patricio was president and director of PMI is
not a ground to conclude that he should be held solidarily liable with PMI for McLeods
money claims.

The ruling in A.C. Ransom Labor Union-CCLU v. NLRC,59 which the Court of Appeals cited,
does not apply to this case. We quote pertinent portions of the ruling, thus:
(a) Article 265 of the Labor Code, in part, expressly provides: "Any worker whose
employment has been terminated as a consequence of an unlawful lockout shall be entitled
to reinstatement with full backwages."
Article 273 of the Code provides that: "Any person violating any of the provisions of Article
265 of this Code shall be punished by a fine of not exceeding five hundred pesos and/or
imprisonment for not less than one (1) day nor more than six (6) months."

34
(b) How can the foregoing provisions be implemented when the employer is a corporation?
The answer is found in Article 212 (c) of the Labor Code which provides: "(c) Employer
includes any person acting in the interest of an employer, directly or indirectly. The term shall
not include any labor organization or any of its officers or agents except when acting as
employer.". The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law.
Since RANSOM is an artificial person, it must have an officer who can be presumed to be
the employer, being the "person acting in the interest of (the) employer" RANSOM. The
corporation, only in the technical sense, is the employer. The responsible officer of an
employer corporation can be held personally, not to say even criminally, liable for nonpayment of back wages. That is the policy of the law.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-61549 May 27, 1985
FRANCISCO DE ASIS & CO., INC., FRANCISCO DE ASIS and LEOCADIO DE
ASIS, petitioners,
vs.
THE COURT OF APPEALS, and MERCEDES PRIETO DELGADO, respondents.
Cruz, Durian, Agabin, Atienza & Alday for petitioners.
Efren C. Carag for private respondent.

RELOVA, J:

35
In this petition for review on certiorari, petitioners seek to reverse and/or modify the decision,
dated July 30, 1981, of respondent Court of Appeals affirming the decision of the trial court,
as well as the resolution, dated August 20, 1982, denying the motion for reconsideration.
The facts of the case as aptly synthesized and adopted in toto by the respondent appellate
court are as follows:
Defendant Francisco de Asis & Co., Inc. was organized sometime in 1967
with Francisco de Asis as its president and Leocadio de Asis as one of the
members of the Board of Directors, As a stock brokerage company, it did
business in the Makati Stock Exchange wherein one becomes a member
upon the execution of an undertaking by at least 2 members of its Board of
Directors who own 95% of the stocks to answer solidarily for the corporation
liabilities of the member company. Leocadio de Asis and Francisco de Asis
who owned 95% of the outstanding capital stock of the Francisco de Asis &
Co., Inc. executed a joint and several undertaking on July 25, 1967 wherein
they jointly and severally warrant the equitable payment of all valid and
legitimate corporate liabilities of Francisco de Asis & Co., Inc. in connection
with its membership in the Makati Stock Exchange (Exhibits A, A-1, and A-2).
Sometime in June, 1970 the defendant company thru its president Francisco
de Asis approached Mrs. Mercedes P. Delgado for assistance to secure a
loan in the amount of P200,000.00 from the Resource & Finance Corporation.
Since Francisco de Asis was a good friend and his father Leocadio de Asis
was solvent and answerable in a joint and solidarily undertaking of the
company, she agreed to raise the amount of P200,000.00 as requested. She
was able to secure P100,000.00 from the Resource and Finance Corporation
for which she executed a promissory note (Exhibit F) and the amount of
P100,000.00 from her brother Benito Prieto, Jr. With this amount, she
deposited it in the Bank of Asia, Makati Branch in favor of Francisco de Asis &
Co., Inc. under current account of 2-001, in accordance with the instructions
of its President Francisco de Asis (Exhibit B). Thereafter, on or about August,
1973 Francisco de Asis informed her that he had P100,000.00 to be made as
partial payment of their loan and suggested that she invest it by buying
shares of Philex Mining. To this suggestion, she agreed. Unfortunately, this
supposed partial payment which was to be invested in shares of Philex was
not carried out because Francisco de Asis & Co., Inc. was suspended by the
Makati Stock Exchange from trading, As a result, there was a rush of claims
against the company resulting in its collapse. She Called up Mr. Asis to settle
the loan and she was assured of settlement as Mr. Leocadio de Asis is
solvent and answerable for the debts of the company. Mr. de Asis even sent
her a cable assuring her that the loan would be settled (Exhibits C and C-1).
This loan she extended to Francisco de Asis & Co., Inc. remained unpaid. On
the other hand, she had been paying on her own the loan with the Resource
& Finance Corp. as well as with her brother Benito Prieto, Jr. She is married
but separated from her husband.
On the part of the defendants only Leocadio de Asis testified. His testimony
substantially established that he is a lawyer and had fully understood the
effects and circumstances of executing the joint and several undertaking,
Exhibit A, which was made in accomodation to his son Francisco de Asis. He

36
was a nominal stockholder of the Francisco de Asis & Co., Inc. of which 97%
of the subscribed capital belong to his son Francisco while the remaining 3%
was subscribed by him This joint and several undertaking, Exhibit A, was to
answer for obligation in favor of the Makati Stock Exchange in connection
with the operation of said exchange and not in favor of any other party
(Exhibit I). He was compelled to execute this joint and several undertaking
which in his opinion is null and void especially considering that a nominal
stock member like himself wig be held liable because no license will be
issued unless this condition is first satisfied. He was an original Director of the
defendant corporation and at one time chairman of the board for a short
period. He ceased to be an officer of this corporation sometime in 1970. He
had no direct participation in the management of the corporation to attend the
board meetings. The corporation had never pass any resolution authorizing
Francisco de Asis to secure a loan of P200,000.00 from Mercedes P.
Delgado. As a matter of fact, he had no knowledge of this transaction except
when the instant suit was filed. (pp. 34-37, Record on Appeal). (pages 30-32,
Rollo).
Petitioners raised the same assignments of errors presented and passed upon by the
appellate court that the latter erred (1) in declaring that the obligation sued upon was
corporate loan of Francisco de Asis and Co., Inc. and not a personal loan of Francisco de
Asis with the private respondent; and (2) in holding petitioner Leocadio de Asis liable, jointly
and severally, with petitioners Francisco de Asis and Francisco de Asis & Co., Inc. under the
"Joint and Several Undertakings."
WE do not agree.
The records are negative of any evidence which would show that the corporate nature of the
transaction alleged in paragraphs 4 and 8 of the complaint which read:
4. Sometime in June of 1970, defendant, Francisco de Asis approached
plaintiff, who was a good friend, and informed her that he was in need of
P200,000.00 because the stock brokerage firm bearing his name, defendant
Francisco de Asis and Co., Inc. was encountering cash flow problems;
8. On July 2, 1970, plaintiff deposited the P200,000.00 to the bank account of
defendant corporation at the Bank of Asia, Makati Branch (pages 32-33,
Rollo).
have been denied and proved to be false. Thus, We are in affirmance of the findings of
respondent appellate court that
The necessity and urgency for the loan of P200,000.00 was not to meet the
personal need of Francisco de Asis as there is no showing that he was in
financial difficulties but to resolve the cash flow problems of Francisco de Asis
and Co., Inc. for which plaintiff-appellee deposited the amount of P200,000.00
on July 2, 1970 in the current account of defendant corporation at the Makati
Branch of the Bank of Asia. Neither would the absence of the usual
documents, i.e., promissory notes and/or real estate or chattel mortgages,
negate the existence of the loan. Considering the relationship between the
parties, being very good friends, plaintiff-appellee dispensed with the

37
customary documentation in her desire to bail out a friend from the difficulties
that his corporation is facing, 97% of the capital stock of which he owned. But
the loan of P200,000.00 is not totally without any document. The deposit slip
(Exhibit "B") of the Bank of Asia showing the deposit of P200,000.00 on July
2, 1970, in Current Account No. 2-0017 of defendant corporation indicates the
receipt of said amount. And the record is bereft of any evidence disclosing
that said funds were used other than for corporate purposes.
If the transaction contemplated by the parties herein is that of a personal loan
to Francisco de Asis, then plaintiff could have simply written out a check in the
latter's name or deposited the amount of the loan in his personal account.
(page 33, Rollo).
The claim of the corporation that it had not authorized Francisco de Asis to obtain loan for
the company from the private respondent is belied by the fact that upon deposit of the sum
of P200,000.00 in its current account, it had retained and disbursed the said amount. And,
assuming that it had not really authorized Francisco de Asis to borrow money from private
respondent, the company is still obliged to return the same under Article 2154 of the Civil
Code which provides:
If something is received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises.
Relative to the argument that Francisco and Leocadio de Asis' liability under their "Joint and
Several Undertaking" is limited to the obligation of the corporation in connection with its
membership at the Makati Stock Exchange, their liability is spelled out by Exhibit "A" as
follows:
NOW, THEREFORE, for and in consideration of the foregoing premises, the
Owners hereby jointly and severally warrant the equitable payment of all valid
and legitimate corporate liabilities of the Francisco de Asis & Co., Inc. in
connection with its membership at the Makati Stock Exchange Exhibit "A"
(page 33, Rollo).
The execution of the foregoing instrument is a requirement for membership in the Makati
Stock Exchange. Subdivision 2, Section 1 of Article XIII of the Constitution of the Makati
Stock Exchange clearly states:
that stockholders owning at least 95% of the outstanding capital stock of the
applicant corporation shall execute a public instrument making themselves
jointly and severally liable without limitation for all the transactions and
dealings of said corporation and a copy of said document shall be filed with
the Commission provided, however, that if the 95% outstanding capital stock
is owned by only one person another stockholder shall be required to execute
with him the said public instrument or guaranty. (page 34, Rollo), (Emphasis
supplied).
And, as pointed out by respondent appellate court, "Leocadio and Francisco de Asis
knowingly and voluntarily executed and signed the Joint and Several Undertaking, Exhibit

38
"A" ". More so, in the case of Leocadio de Asis who is a lawyer and, therefore, knew the
legal import and far-reaching consequences of the document he signed.
ACCORDINGLY, for lack of merit, the petition is hereby DISMISSED.
SO ORDERED.

39
SECOND DIVISION
[G.R. No. 123547. May 21, 2001]
REV. FR. DANTE MARTINEZ, petitioner, vs. HONORABLE COURT OF APPEALS,
HONORABLE JUDGE JOHNSON BALLUTAY, PRESIDING JUDGE, BRANCH 25,
REGIONAL TRIAL COURT OF CABANATUAN CITY, HONORABLE JUDGE
ADRIANO TUAZON, JR., PRESIDING JUDGE, BRANCH 28, REGIONAL TRIAL
COURT OF CABANATUAN CITY, SPOUSES REYNALDO VENERACION and
SUSAN VENERACION, SPOUSES MAXIMO HIPOLITO and MANUELA DE LA
PAZ and GODOFREDO DE LA PAZ, respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision, dated September 7, 1995, and
resolution, dated January 31, 1996, of the Court of Appeals, which affirmed the decisions of
the Regional Trial Court, Branches 25[1] and 28,[2] Cabanatuan City, finding private
respondents spouses Reynaldo and Susan Veneracion owners of the land in dispute,
subject to petitioners rights as a builder in good faith.
The facts are as follows:
Sometime in February 1981, private respondents Godofredo De la Paz and his sister
Manuela De la Paz, married to Maximo Hipolito, entered into an oral contract with petitioner
Rev. Fr. Dante Martinez, then Assistant parish priest of Cabanatuan City, for the sale of Lot
No. 1337-A-3 at the Villa Fe Subdivision in Cabanatuan City for the sum of P15,000.00. The
lot is located along Maharlika Road near the Municipal Hall of Cabanatuan City. At the time
of the sale, the lot was still registered in the name of Claudia De la Paz, mother of private
respondents, although the latter had already sold it to private respondent Manuela de la Paz
by virtue of a Deed of Absolute Sale dated May 26, 1976 (Exh. N/Exh. 2-Veneracion).
[3]
Private respondent Manuela subsequently registered the sale in her name on October 22,
1981 and was issued TCT No. T-40496 (Exh. 9). [4] When the land was offered for sale to
petitioner, private respondents De la Paz were accompanied by their mother, since petitioner
dealt with the De la Pazes as a family and not individually. He was assured by them that the
lot belonged to Manuela De la Paz. It was agreed that petitioner would give a downpayment
of P3,000.00 to private respondents De la Paz and that the balance would be payable by
installment. After giving the P3,000.00 downpayment, petitioner started the construction of a
house on the lot after securing a building permit from the City Engineers Office on April 23,
1981, with the written consent of the then registered owner, Claudia de la Paz (Exh. B/Exh,
1).[5] Petitioner likewise began paying the real estate taxes on said property (Exh. D, D-1, D2).[6] Construction on the house was completed on October 6, 1981 (Exh. V). [7] Since then,
petitioner and his family have maintained their residence there.[8]
On January 31, 1983, petitioner completed payment of the lot for which private
respondents De la Paz executed two documents. The first document (Exh. A) read:
1-31-83

40
Ang halaga ng Lupa sa Villa Fe Subdivision na ipinagbili kay Fr. Dante Martinez ay
P15,000.00 na pinangangako namin na ibibigay ang Deed of Sale sa ika-25 ng Febrero
1983.
[SGD.] METRING HIPOLITO
[SGD.] JOSE GODOFREDO DE LA PAZ[9]
The second writing (Exh. O) read:
Cabanatuan City
March 19, 1986
TO WHOM IT MAY CONCERN:
This is to certify that Freddie dela Paz has agreed to sign tomorrow (March 20) the affidavit
of sale of lot located at Villa Fe Subdivision sold to Fr. Dante Martinez.
[Sgd.] Freddie dela Paz
FREDDIE DELA PAZ[10]
However, private respondents De la Paz never delivered the Deed of Sale they
promised to petitioner.
In the meantime, in a Deed of Absolute Sale with Right to Repurchase dated October
28, 1981 (Exh. 10),[11] private respondents De la Paz sold three lots with right to repurchase
the same within one year to private respondents spouses Reynaldo and Susan Veneracion
for the sum of P150,000.00. One of the lots sold was the lot previously sold to petitioner.[12]
Reynaldo Veneracion had been a resident of Cabanatuan City since birth. He used to
pass along Maharlika Highway in going to the Municipal Hall or in going to and from
Manila. Two of the lots subject of the sale were located along Maharlika Highway, one of
which was the lot sold earlier by the De la Pazes to petitioner. The third lot (hereinafter
referred to as the Melencio lot) was occupied by private respondents De la Paz. Private
respondents Veneracion never took actual possession of any of these lots during the period
of redemption, but all titles to the lots were given to him.[13]
Before the expiration of the one year period, private respondent Godofredo De la Paz
informed private respondent Reynaldo Veneracion that he was selling the three lots to
another person for P200,000.00. Indeed, private respondent Veneracion received a call from
a Mr. Tecson verifying if he had the titles to the properties, as private respondents De la Paz
were offering to sell the two lots along Maharlika Highway to him (Mr. Tecson)
for P180,000.00 The offer included the lot purchased by petitioner in February, 1981. Private
respondent Veneracion offered to purchase the same two lots from the De la Pazes for the
same amount. The offer was accepted by private respondents De la Paz. Accordingly, on
June 2, 1983, a Deed of Absolute Sale was executed over the two lots (Exh. I/Exh. 5Veneracion).[14] Sometime in January, 1984, private respondent Reynaldo Veneracion asked
a certain Renato Reyes, petitioners neighbor, who the owner of the building erected on the

41
subject lot was. Reyes told him that it was Feliza Martinez, petitioners mother, who was in
possession of the property. Reynaldo Veneracion told private respondent Godofredo about
the matter and was assured that Godofredo would talk to Feliza. Based on that assurance,
private respondents Veneracion registered the lots with the Register of Deeds of
Cabanatuan on March 5, 1984. The lot in dispute was registered under TCT No. T-44612
(Exh. L/Exh. 4-Veneracion).[15]
Petitioner discovered that the lot he was occupying with his family had been sold to the
spouses Veneracion after receiving a letter (Exh. P/Exh. 6-Veneracion) from private
respondent Reynaldo Veneracion on March 19, 1986, claiming ownership of the land and
demanding that they vacate the property and remove their improvements thereon.
[16]
Petitioner, in turn, demanded through counsel the execution of the deed of sale from
private respondents De la Paz and informed Reynaldo Veneracion that he was the owner of
the property as he had previously purchased the same from private respondents De la Paz.
[17]

The matter was then referred to the Katarungang Pambarangay of San Juan,
Cabanatuan City for conciliation, but the parties failed to reach an agreement (Exh. M/Exh.
13).[18] As a consequence, on May 12, 1986, private respondent Reynaldo Veneracion
brought an action for ejectment in the Municipal Trial Court, Branch III, Cabanatuan City
against petitioner and his mother (Exh. 14).[19]
On the other hand, on June 10, 1986, petitioner caused a notice of lis pendens to be
recorded on TCT No. T-44612 with the Register of Deeds of Cabanatuan City (Exh. U).[20]
During the pre-trial conference, the parties agreed to have the case decided under the
Rules on Summary Procedure and defined the issues as follows:
1. Whether or not defendant (now petitioner) may be judicially ejected.
2. Whether or not the main issue in this case is ownership.
3. Whether or not damages may be awarded.[21]
On January 29, 1987, the trial court rendered its decision, pertinent portions of which
are quoted as follows:
With the foregoing findings of the Court, defendants [petitioner Rev. Fr. Dante Martinez and
his mother] are the rightful possessors and in good faith and in concept of owner, thus
cannot be ejected from the land in question. Since the main issue is ownership, the better
remedy of the plaintiff [herein private respondents Veneracion] is Accion Publiciana in the
Regional Trial Court, having jurisdiction to adjudicate on ownership.
Defendants counterclaim will not be acted upon it being more than P20,000.00 is beyond
this Courts power to adjudge.
WHEREFORE, judgment is hereby rendered, dismissing plaintiffs complaint and ordering
plaintiff to pay Attorneys fee of P5,000.00 and cost of suit.
SO ORDERED.[22]

42
On March 3, 1987, private respondents Veneracion filed a notice of appeal with the
Regional Trial Court, but failed to pay the docket fee. On June 6, 1989, or over two years
after the filing of the notice of appeal, petitioner filed a Motion for Execution of the Judgment,
alleging finality of judgment for failure of private respondents Veneracion to perfect their
appeal and failure to prosecute the appeal for an unreasonable length of time.
Upon objection of private respondents Veneracion, the trial court denied on June 28,
1989 the motion for execution and ordered the records of the case to be forwarded to the
appropriate Regional Trial Court. On July 11, 1989, petitioner appealed from this order. The
appeal of private respondents Veneracion from the decision of the MTC and the appeal of
petitioner from the order denying petitioners motion for execution were forwarded to the
Regional Trial Court, Branch 28, Cabanatuan City. The cases were thereafter consolidated
under Civil Case No. 670-AF.
On February 20, 1991, the Regional Trial Court rendered its decision finding private
respondents Veneracion as the true owners of the lot in dispute by virtue of their prior
registration with the Register of Deeds, subject to petitioners rights as builder in good faith,
and ordering petitioner and his privies to vacate the lot after receipt of the cost of the
construction of the house, as well as to pay the sum of P5,000.00 as attorneys fees and the
costs of the suit. It, however, failed to rule on petitioners appeal of the Municipal Trial Courts
order denying their Motion for Execution of Judgment.
Meanwhile, on May 30, 1986, while the ejectment case was pending before the
Municipal Trial Court, petitioner Martinez filed a complaint for annulment of sale with
damages against the Veneracions and De la Pazes with the Regional Trial Court, Branch 25,
Cabanatuan City. On March 5, 1990, the trial court rendered its decision finding private
respondents Veneracion owners of the land in dispute, subject to the rights of petitioner as a
builder in good faith, and ordering private respondents De la Paz to pay petitioner the sum
of P50,000.00 as moral damages and P10,000.00 as attorneys fees, and for private
respondents to pay the costs of the suit.
On March 20, 1991, petitioner then filed a petition for review with the Court of Appeals of
the RTCs decision in Civil Case No. 670-AF (for ejectment). Likewise, on April 2, 1991,
petitioner appealed the trial courts decision in Civil Case No. 44-[AF]-8642-R (for annulment
of sale and damages) to the Court of Appeals. The cases were designated as CA G.R. SP.
No. 24477 and CA G.R. CV No. 27791, respectively, and were subsequently
consolidated. The Court of Appeals affirmed the trial courts decisions, without ruling on
petitioners appeal from the Municipal Trial Courts order denying his Motion for Execution of
Judgment. It declared the Veneracions to be owners of the lot in dispute as they were the
first registrants in good faith, in accordance with Art. 1544 of the Civil Code. Petitioner
Martinez failed to overcome the presumption of good faith for the following reasons:
1. when private respondent Veneracion discovered the construction on the lot, he
immediately informed private respondent Godofredo about it and relied on the
latters assurance that he will take care of the matter.
2. the sale between petitioner Martinez and private respondents De la Paz was not
notarized, as required by Arts. 1357 and 1358 of the Civil Code, thus it cannot be
said that the private respondents Veneracion had knowledge of the first sale.[23]

43
Petitioners motion for reconsideration was likewise denied in a resolution dated January
31, 1996.[24] Hence this petition for review. Petitioner raises the following assignment of
errors:
I THE PUBLIC RESPONDENTS HONORABLE COURT OF APPEALS AND
REGIONAL TRIAL COURT JUDGES JOHNSON BALLUTAY AND ADRIANO
TUAZON ERRED IN HOLDING THAT PRIVATE RESPONDENTS REYNALDO
VENERACION AND WIFE ARE BUYERS AND REGISTRANTS IN GOOD
FAITH IN RESOLVING THE ISSUE OF OWNERSHIP AND POSSESSION OF
THE LAND IN DISPUTE.
II THAT PUBLIC RESPONDENTS ERRED IN NOT RESOLVING AND DECIDING
THE APPLICABILITY OF THE DECISION OF THIS HONORABLE COURT IN
THE CASES OF SALVORO VS. TANEGA, ET AL., G.R. NO. L 32988 AND IN
ARCENAS VS. DEL ROSARIO, 67 PHIL 238, BY TOTALLY IGNORING THE
SAID DECISIONS OF THIS HONORABLE COURT IN THE ASSAILED
DECISIONS OF THE PUBLIC RESPONDENTS.
III THAT THE HONORABLE COURT OF APPEALS ERRED IN NOT GIVING DUE
COURSE TO THE PETITION FOR REVIEW IN CA G.R. SP. NO. 24477.
IV THAT THE HONORABLE COURT OF APPEALS IN DENYING PETITIONERS
PETITION FOR REVIEW AFORECITED INEVITABLY SANCTIONED AND/OR
WOULD ALLOW A VIOLATION OF LAW AND DEPARTURE FROM THE USUAL
COURSE OF JUDICIAL PROCEEDINGS BY PUBLIC RESPONDENT
HONORABLE JUDGE ADRIANO TUAZON WHEN THE LATTER RENDERED A
DECISION IN CIVIL CASE NO. 670-AF [ANNEX D] REVERSING THE
DECISION OF THE MUNICIPAL TRIAL COURT JUDGE SENDON DELIZO IN
CIVIL CASE NO. 9523 [ANNEX C] AND IN NOT RESOLVING IN THE SAME
CASE THE APPEAL INTERPOSED BY DEFENDANTS ON THE ORDER OF
THE SAME COURT DENYING THE MOTION FOR EXECUTION.
V THAT THE RESOLUTION [ANNEX B] (OF THE COURT OF APPEALS)
DENYING PETITIONERS MOTION FOR RECONSIDERATION [ANNEX I]
WITHOUT STATING CLEARLY THE FACTS AND THE LAW ON WHICH SAID
RESOLUTION WAS BASED, (IS ERRONEOUS).
These assignment of errors raise the following issues:
1. Whether or not private respondents Veneracion are buyers in good faith of the lot
in dispute as to make them the absolute owners thereof in accordance with Art.
1544 of the Civil Code on double sale of immovable property.
2. Whether or not payment of the appellate docket fee within the period to appeal is
not necessary for the perfection of the appeal after a notice of appeal has been
filed within such period.
3. Whether or not the resolution of the Court of Appeals denying petitioners motion
for reconsideration is contrary to the constitutional requirement that a denial of a
motion for reconsideration must state the legal reasons on which it is based.

44
First. It is apparent from the first and second assignment of errors that petitioner is
assailing the findings of fact and the appreciation of the evidence made by the trial courts
and later affirmed by the respondent court. While, as a general rule, only questions of law
may be raised in a petition for review under Rule 45 of the Rules of Court, review may
nevertheless be granted under certain exceptions, namely: (a) when the conclusion is a
finding grounded entirely on speculation, surmises, or conjectures; (b) when the inference
made is manifestly mistaken, absurd, or impossible; (c) where there is a grave abuse of
discretion; (d) when the judgment is based on a misapprehension of facts; (e) when the
findings of fact are conflicting; (f) when the Court of Appeals, in making its findings, went
beyond the issue of the case and the same is contrary to the admissions of both appellant
and appellee; (g) when the findings of the Court of Appeals are contrary to those of the trial
court; (h) when the findings of fact are conclusions without citation of specific evidence on
which they are based; (i) when the facts set forth in the petition as well as in the petitioners
main and reply briefs are not disputed by the respondents; (j) when the finding of fact of the
Court of Appeals is premised on the supposed absence of evidence but is contradicted by
the evidence on record; and (k) when the Court of Appeals manifestly overlooked certain
relevant facts not disputed by the parties and which, if properly considered, would justify a
different conclusion.[25]
In this case, the Court of Appeals based its ruling that private respondents Veneracion
are the owners of the disputed lot on their reliance on private respondent Godofredo De la
Pazs assurance that he would take care of the matter concerning petitioners occupancy of
the disputed lot as constituting good faith. This case, however, involves double sale and, on
this matter, Art. 1544 of the Civil Code provides that where immovable property is the subject
of a double sale, ownership shall be transferred (1) to the person acquiring it who in good
faith first recorded it to the Registry of Property; (2) in default thereof, to the person who in
good faith was first in possession; and (3) in default thereof, to the person who presents the
oldest title.[26] The requirement of the law, where title to the property is recorded in the
Register of Deeds, is two-fold: acquisition in good faith and recording in good faith. To be
entitled to priority, the second purchaser must not only prove prior recording of his title but
that he acted in good faith, i.e., without knowledge or notice of a prior sale to another. The
presence of good faith should be ascertained from the circumstances surrounding the
purchase of the land.[27]
1. With regard to the first sale to private respondents Veneracion, private respondent
Reynaldo Veneracion testified that on October 10, 1981, 18 days before the execution of the
first Deed of Sale with Right to Repurchase, he inspected the premises and found it vacant.
[28]
However, this is belied by the testimony of Engr. Felix D. Minor, then building inspector of
the Department of Public Works and Highways, that he conducted on October 6, 1981 an
ocular inspection of the lot in dispute in the performance of his duties as a building inspector
to monitor the progress of the construction of the building subject of the building permit
issued in favor of petitioner on April 23, 1981, and that he found it 100 % completed (Exh. V).
[29]
In the absence of contrary evidence, he is to be presumed to have regularly performed
his official duty.[30] Thus, as early as October, 1981, private respondents Veneracion already
knew that there was construction being made on the property they purchased.
2. The Court of Appeals failed to determine the nature of the first contract of sale
between the private respondents by considering their contemporaneous and subsequent
acts.[31] More specifically, it overlooked the fact that the first contract of sale between the
private respondents shows that it is in fact an equitable mortgage.

45
The requisites for considering a contract of sale with a right of repurchase as an
equitable mortgage are (1) that the parties entered into a contract denominated as a contract
of sale and (2) that their intention was to secure an existing debt by way of mortgage. [32] A
contract of sale with right to repurchase gives rise to the presumption that it is an equitable
mortgage in any of the following cases: (1) when the price of a sale with a right to
repurchase is unusually inadequate; (2) when the vendor remains in possession as lessee or
otherwise; (3) when, upon or after the expiration of the right to repurchase, another
instrument extending the period of redemption or granting a new period is executed; (4)
when the purchaser retains for himself a part of the purchase price; (5) when the vendor
binds himself to pay the taxes on the thing sold; (6) in any other case where it may be fairly
inferred that the real intention of the parties is that the transaction shall secure the payment
of a debt or the performance of any other obligation.[33] In case of doubt, a contract
purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.
[34]

In this case, the following circumstances indicate that the private respondents intended
the transaction to be an equitable mortgage and not a contract of sale: (1) Private
respondents Veneracion never took actual possession of the three lots; (2) Private
respondents De la Paz remained in possession of the Melencio lot which was co-owned by
them and where they resided; (3) During the period between the first sale and the second
sale to private respondents Veneracion, they never made any effort to take possession of
the properties; and (4) when the period of redemption had expired and private respondents
Veneracion were informed by the De la Pazes that they are offering the lots for sale to
another person for P200,000.00, they never objected. To the contrary, they offered to
purchase the two lots for P180,000.00 when they found that a certain Mr. Tecson was
prepared to purchase it for the same amount. Thus, it is clear from these circumstances that
both private respondents never intended the first sale to be a contract of sale, but merely
that of mortgage to secure a debt of P150,000.00.
With regard to the second sale, which is the true contract of sale between the parties, it
should be noted that this Court in several cases, [35] has ruled that a purchaser who is aware
of facts which should put a reasonable man upon his guard cannot turn a blind eye and later
claim that he acted in good faith. Private respondent Reynaldo himself admitted during the
pre-trial conference in the MTC in Civil Case No. 9523 (for ejectment) that petitioner was
already in possession of the property in dispute at the time the second Deed of Sale was
executed on June 1, 1983 and registered on March 4, 1984. He, therefore, knew that there
were already occupants on the property as early as 1981. The fact that there are persons,
other than the vendors, in actual possession of the disputed lot should have put private
respondents on inquiry as to the nature of petitioners right over the property. But he never
talked to petitioner to verify the nature of his right. He merely relied on the assurance of
private respondent Godofredo De la Paz, who was not even the owner of the lot in question,
that he would take care of the matter. This does not meet the standard of good faith.
3. The appellate courts reliance on Arts. 1357 and 1358 of the Civil Code to determine
private respondents Veneracions lack of knowledge of petitioners ownership of the disputed
lot is erroneous.
Art. 1357[36] and Art. 1358,[37] in relation to Art. 1403(2)[38] of the Civil Code, requires that
the sale of real property must be in writing for it to be enforceable. It need not be notarized. If
the sale has not been put in writing, either of the contracting parties can compel the other to
observe such requirement.[39] This is what petitioner did when he repeatedly demanded that

46
a Deed of Absolute Sale be executed in his favor by private respondents De la Paz. There is
nothing in the above provisions which require that a contract of sale of realty must be
executed in a public document. In any event, it has been shown that private respondents
Veneracion had knowledge of facts which would put them on inquiry as to the nature of
petitioners occupancy of the disputed lot.
Second. Petitioner contends that the MTC in Civil Case No. 9523 (for ejectment) erred
in denying petitioners Motion for Execution of the Judgment, which the latter filed on June 6,
1989, two years after private respondents Veneracion filed a notice of appeal with the MTC
on March 3, 1987 without paying the appellate docket fee. He avers that the trial courts
denial of his motion is contrary to this Courts ruling in the cases of Republic v. Director of
Lands,[40] and Aranas v. Endona[41] in which it was held that where the appellate docket fee is
not paid in full within the reglementary period, the decision of the MTC becomes final and
unappealable as the payment of docket fee is not only a mandatory but also a jurisdictional
requirement.
Petitioners contention has no merit. The case of Republic v. Director of Lands deals with
the requirement for appeals from the Courts of First Instance, the Social Security
Commission, and the Court of Agrarian Relations to the Court of Appeals. The case
of Aranas v. Endona, on the other hand, was decided under the 1964 Rules of Court and
prior to the enactment of the Judiciary Reorganization Act of 1981 (B.P. Blg. 129) and the
issuance of its Interim Rules and Guidelines by this Court on January 11, 1983. Hence,
these cases are not applicable to the matter at issue.
On the other hand, in Santos v. Court of Appeals,[42] it was held that although an appeal
fee is required to be paid in case of an appeal taken from the municipal trial court to the
regional trial court, it is not a prerequisite for the perfection of an appeal under 20[43] and
23[44] of the Interim Rules and Guidelines issued by this Court on January 11, 1983
implementing the Judiciary Reorganization Act of 1981 (B.P. Blg. 129). Under these sections,
there are only two requirements for the perfection of an appeal, to wit: (a) the filing of a
notice of appeal within the reglementary period; and (b) the expiration of the last day to
appeal by any party. Even in the procedure for appeal to the regional trial courts,[45] nothing is
mentioned about the payment of appellate docket fees.
Indeed, this Court has ruled that, in appealed cases, the failure to pay the appellate
docket fee does not automatically result in the dismissal of the appeal, the dismissal being
discretionary on the part of the appellate court.[46] Thus, private respondents Veneracions
failure to pay the appellate docket fee is not fatal to their appeal.
Third. Petitioner contends that the resolution of the Court of Appeals denying his motion
for reconsideration was rendered in violation of the Constitution because it does not state the
legal basis thereof.
This contention is likewise without merit.
Art. VIII, Sec. 14 of the Constitution provides that No petition for review or motion for
reconsideration of a decision of the court shall be refused due course or denied without
stating the basis therefor. This requirement was fully complied with when the Court of
Appeals, in denying reconsideration of its decision, stated in its resolution that it found no
reason to change its ruling because petitioner had not raised anything new. [47] Thus, its
resolution denying petitioners motion for reconsideration states:

47
For resolution is the Motion for Reconsideration of Our Decision filed by the petitioners.
Evidently, the motion poses nothing new. The points and arguments raised by the movants
have been considered and passed upon in the Decision sought to be reconsidered. Thus,
We find no reason to disturb the same.
WHEREFORE, the motion is hereby DENIED.
SO ORDERED.[48]
Attorneys fees should be awarded as petitioner was compelled to litigate to protect his
interest due to private respondents act or omission.[49]
WHEREFORE, the decision of the Court of Appeals is REVERSED and a new one is
RENDERED:
(1) declaring as null and void the deed of sale executed by private respondents Godofredo
and Manuela De la Paz in favor of private respondents spouses Reynaldo and Susan
Veneracion;
(2) ordering private respondents Godofredo and Manuela De la Paz to execute a deed of
absolute sale in favor of petitioner Rev. Fr. Dante Martinez;
(3) ordering private respondents Godofredo and Manuela De la Paz to reimburse private
respondents spouses Veneracion the amount the latter may have paid to the former;
(4) ordering the Register of Deeds of Cabanatuan City to cancel TCT No. T-44612 and issue
a new one in the name of petitioner Rev. Fr. Dante Martinez; and
(5) ordering private respondents to pay petitioner jointly and severally the sum of P20,000.00
as attorneys fees and to pay the costs of the suit.
SO ORDERED.

48
THIRD DIVISION
[G.R. No. 153535. July 28, 2005]
SOLIDBANK
CORPORATION, petitioner,
vs.
MINDANAO
FERROALLOY CORPORATION, Spouses JONG-WON HONG and SOO-OK KIM
HONG,*TERESITA CU, and RICARDO P. GUEVARA and Spouse,** respondents.
DECISION
PANGANIBAN, J.:
To justify an award for moral and exemplary damages under Articles 19 to 21 of the Civil
Code (on human relations), the claimants must establish the other partys malice or bad faith
by clear and convincing evidence.
The Case
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, assailing the
December 21, 2001 Decision[2] and the May 15, 2002 Resolution[3] of the Court of Appeals
(CA) in CA-GR CV No. 67482. The CA disposed as follows:
IN THE LIGHT OF ALL THE FOREGOING, the appeal is DISMISSED. The Decision
appealed from is AFFIRMED.[4]
The assailed Resolution, on the other hand, denied petitioners Motion for
Reconsideration.
The Facts
The CA narrated the antecedents as follows:
The Maria Cristina Chemical Industries (MCCI) and three (3) Korean corporations, namely,
the Ssangyong Corporation, the Pohang Iron and Steel Company and the Dongil Industries
Company, Ltd., decided to forge a joint venture and establish a corporation, under the name
of the Mindanao Ferroalloy Corporation (Corporation for brevity) with principal offices in
Iligan City. Ricardo P. Guevara was the President and Chairman of the Board of Directors of
the Corporation. Jong-Won Hong, the General Manager of Ssangyong Corporation, was the
Vice-President of the Corporation for Finance, Marketing and Administration. So was
Teresita R. Cu. On November 26, 1990, the Board of Directors of the Corporation approved
a Resolution authorizing its President and Chairman of the Board of Directors or Teresita R.
Cu, acting together with Jong-Won Hong, to secure an omnibus line in the aggregate
amount of P30,000,000.00 from the Solidbank x x x.
xxxxxxxxx
In the meantime, the Corporation started its operations sometime in April, 1991. Its
indebtedness ballooned to P200,453,686.69 compared to its assets of only P65,476,000.00.
On May 21, 1991, the Corporation secured an ordinary time loan from the Solidbank in the
amount of P3,200,000.00. Another ordinary time loan was granted by the Bank to the

49
Corporation on May 28, 1991, in the amount of P1,800,000.00 or in the total amount
of P5,000,000.00, due on July 15 and 26, 1991, respectively.
However, the Corporation and the Bank agreed to consolidate and, at the same time,
restructure the two (2) loan availments, the same payable on September 20, 1991. The
Corporation executed Promissory Note No. 96-91-00865-6 in favor of the Bank evidencing
its loan in the amount of P5,160,000.00, payable on September 20, 1991. Teresita Cu and
Jong-Won Hong affixed their signatures on the note. To secure the payment of the said loan,
the Corporation, through Jong-Won Hong and Teresita Cu, executed a Deed of
Assignment in favor of the Bank covering its rights, title and interest to the following:
The entire proceeds of drafts drawn under Irrevocable Letter of Credit No. M-S-041-2002080
opened with The Mitsubishi Bank Ltd. Tokyo dated June 13, 1991 for the account of
Ssangyong Japan Corporation, 7F. Matsuoka-Tamura-Cho Bldg., 22-10, 5-Chome,
Shimbashi, Minato-Ku, Tokyo, Japan up to the extent of US$197,679.00
The Corporation likewise executed a Quedan, by way of additional security, under which the
Corporation bound and obliged to keep and hold, in trust for the Bank or its
Order, Ferrosilicon for US$197,679.00. Jong-Won Hong and Teresita Cu affixed their
signatures thereon for the Corporation. The Corporation, also, through Jong-Won Hong and
Teresita Cu, executed a Trust Receipt Agreement, by way of additional security for said loan,
the Corporation undertaking to hold in trust, for the Bank, as its property, the following:
1. THE MITSUBISHI BANK LTD., Tokyo L/C No. M-S-041-2002080 for account of
Ssangyong Japan Corporation, Tokyo, Japan for US$197,679.00 Ferrosilicon
to expire September 20, 1991.
2. SEC QUEDAN NO. 91-476 dated June 26, 1991 covering the following:
Ferrosilicon for US$197,679.00
However, shortly after the execution of the said deeds, the Corporation stopped its
operations. The Corporation failed to pay its loan availments from the Bank inclusive of
accrued interest. On February 11, 1992, the Bank sent a letter to the Corporation demanding
payment of its loan availments inclusive of interests due. The Corporation failed to comply
with the demand of the Bank. On November 23, 1992, the Bank sent another letter to the
[Corporation] demanding payment of its account which, by November 23, 1992, had
amounted to P7,283,913.33. The Corporation again failed to comply with the demand of the
Bank.
On January 6, 1993, the Bank filed a complaint against the Corporation with the Regional
Trial Court of Makati City, entitled and docketed as Solidbank Corporation vs. Mindanao
Ferroalloy Corporation, Sps. Jong-Won Hong and the Sps. Teresita R. Cu, Civil Case No.
93-038 for Sum of Money with a plea for the issuance of a writ of preliminary attachment. x x
x
xxxxxxxxx
Under its Amended Complaint, the Plaintiff alleged that it impleaded Ricardo Guevara and
his wife as Defendants because, [among others]:

50
Defendants JONG-WON HONG and TERESITA CU, are the Vice-Presidents of defendant
corporation, and also members of the companys Board of Directors. They are impleaded as
joint and solidary debtors of [petitioner] bank having signed the Promissory Note, Quedan,
and Trust Receipt agreements with [petitioner], in this case.
xxxxxxxxx
[Petitioner] likewise filed a criminal complaint x x x entitled and docketed as Solidbank
Corporation vs. Ricardo Guevara, Teresita R. Cu and Jong Won Hong x x x for Violation of
P.D. 115. On April 14, 1993, the investigating Prosecutor issued a Resolution finding no
probable cause for violation of P.D. 115 against the Respondents as the goods covered by
the quedan were nonexistent:
xxxxxxxxx
In their Answer to the complaint [in the civil case], the Spouses Jong-Won Hong and Soo-ok
Kim Hong alleged, inter alia, that [petitioner] had no cause of action against them as:
x x x the clean loan of P5.1 M obtained was a corporate undertaking of defendant
MINFACO executed through its duly authorized representatives, Ms. Teresita R. Cu and Mr.
Jong-Won Hong, both Vice Presidents then of MINFACO. x x x.
xxxxxxxxx
[On their part, respondents] Teresita Cu and Ricardo Guevara alleged that [petitioner] had no
cause of action against them because: (a) Ricardo Guevara did not sign any of the
documents in favor of [petitioner]; (b) Teresita Cu signed the Promissory Note, Deed of
Assignment, Trust Receipt and Quedan in blank and merely as representative and, hence,
for and in behalf of the Defendant Corporation and, hence, was not personally liable to
[petitioner].
In the interim, the Corporation filed, on June 20, 1994, a Petition, with the Regional Trial
Court of Iligan City, for Voluntary Insolvency x x x.
xxxxxxxxx
Appended to the Petition was a list of its creditors, including [petitioner], for the amount
of P8,144,916.05. The Court issued an Order, on July 12, 1994, finding the Petition sufficient
in form and substance x x x.
xxxxxxxxx
In view of said development, the Court issued an Order, in Civil Case No. 93-038,
suspending the proceedings as against the Defendant Corporation but ordering the
proceedings to proceed as against the individual defendants x x x.
xxxxxxxxx

51
On December 10, 1999, the Court rendered a Decision dismissing the complaint for lack of
cause of action of [petitioner] against the Spouses Jong-Won Hong, Teresita Cu and the
Spouses Ricardo Guevara, x x x.
xxxxxxxxx
In dismissing the complaint against the individual [respondents], the Court a quo found and
declared that [petitioner] failed to adduce a morsel of evidence to prove the personal liability
of the said [respondents] for the claims of [petitioner] and that the latter impleaded the
[respondents], in its complaint and amended complaint, solely to put more pressure on the
Defendant Corporation to pay its obligations to [petitioner].
[Petitioner] x x x interposed an appeal, from the Decision of the Court a quo and posed, for x
x x resolution, the issue of whether or not the individual [respondents], are jointly and
severally liable to [petitioner] for the loan availments of the [respondent] Corporation,
inclusive of accrued interests and penalties.
In the meantime, on motion of [petitioner], the Court set aside its Order, dated February 2,
1995, suspending the proceedings as against the [respondent] Corporation. [Petitioner] filed
a Motion for Summary Judgment against the [respondent] Corporation. On February 28,
2000, the Court rendered a Summary Judgment against the [respondent] Corporation, the
decretal portion of which reads as follows:
WHEREFORE, premises considered, this Court hereby resolves to give due course to the
motion for summary judgment filed by herein [petitioner]. Consequently, judgment is hereby
rendered in favor of [Petitioner] SOLIDBANK CORPORATION and against [Respondent]
MINDANAO FERROALLOY CORPORATION, ordering the latter to pay the former the amount
of P7,086,686.70, representing the outstanding balance of the subject loan as of 24
September 1994, plus stipulated interest at the rate of 16% per annum to be computed from
the aforesaid date until fully paid together with an amount equivalent to 12% of the total
amount due each year from 24 September 1994 until fully paid. Lastly, said [respondent] is
hereby ordered to pay [petitioner] the amount of P25,000.00 to [petitioner] as reasonable
attorneys fees as well as cost of litigation.[5]
In its appeal, petitioner argued that (1) it had adduced the requisite evidence to prove
the solidary liability of the individual respondents, and (2) it was not liable for their
counterclaims for damages and attorneys fees.
Ruling of the Court of Appeals
Affirming the RTC, the appellate court ruled that the individual respondents were not
solidarily liable with the Mindanao Ferroalloy Corporation, because they had acted merely as
officers of the corporation, which was the real party in interest. Respondent Guevara was not
even a signatory to the Promissory Note, the Trust Receipt Agreement, the Deed of
Assignment or the Quedan; he was merely authorized to represent Minfaco to negotiate with
and secure the loans from the bank. On the other hand, the CA noted that Respondents Cu
and Hong had not signed the above documents as comakers, but as signatories in their
representative capacities as officers of Minfaco.

52
Likewise, the CA held that the individual respondents were not liable to petitioner for
damages, simply because (1) they had not received the proceeds of the irrevocable Letter of
Credit, which was the subject of the Deed of Assignment; and (2) the goods subject of the
Trust Receipt Agreement had been found to be nonexistent. The appellate court took judicial
notice of the practice of banks and financing institutions to investigate, examine and assess
all properties offered by borrowers as collaterals, in order to determine the feasibility and
advisability of granting loans. Before agreeing to the consolidation of Minfacos loans, it
presumed that petitioner had done its homework.
As to the award of damages to the individual respondents, the CA upheld the trial courts
findings that it was clearly unfair on petitioners part to have impleaded the wives of Guevara
and Hong, because the women were not privy to any of the transactions between petitioner
and Minfaco. Under Articles 19, 20 and 2229 of the Civil Code, such reckless and wanton act
of pressuring individual respondents to settle the corporations obligations is a ground to
award moral and exemplary damages, as well as attorneys fees.
Hence this Petition.[6]
Issues
In its Memorandum, petitioner raises the following issues:
A. Whether or not there is ample evidence on record to support the joint and solidary liability
of individual respondents with Mindanao Ferroalloy Corporation.
B. In the absence of joint and solidary liability[,] will the provision of Article 1208 in relation to
Article 1207 of the New Civil Code providing for joint liability be applicable to the case at bar.
C. May bank practices be the proper subject of judicial notice under Sec. 1 [of] Rule 129 of
the Rules of Court.
D. Whether or not there is evidence to sustain the claim that respondents were impleaded to
apply pressure upon them to pay the obligations in lieu of MINFACO that is declared
insolvent.
E. Whether or not there are sufficient bases for the award of various kinds of and substantial
amounts in damages including payment for attorneys fees.
F. Whether or not respondents committed fraud and misrepresentations and acted in bad
faith.
G. Whether or not the inclusion of respondents spouses is proper under certain
circumstances and supported by prevailing jurisprudence.[7]
In sum, there are two main questions: (1) whether the individual respondents are liable,
either jointly or solidarily, with the Mindanao Ferroalloy Corporation; and (2) whether the
award of damages to the individual respondents is valid and legal.
The Courts Ruling

53
The Petition is partly meritorious.
First Issue:
Liability of Individual Respondents
Petitioner argues that the individual respondents were jointly or solidarily liable with
Minfaco, either because their participation in the loan contract and the loan documents made
them comakers; or because they committed fraud and deception, which justifies the piercing
of the corporate veil.
The first contention hinges on certain factual determinations made by the trial and the
appellate courts. These tribunals found that, although he had not signed any document in
connection with the subject transaction, Respondent Guevara was authorized to represent
Minfaco in negotiating for a P30 million loan from petitioner. As to Cu and Hong, it was
determined, among others, that their signatures on the loan documents other than the Deed
of Assignment were not prefaced with the word by, and that there were no other signatures
to indicate who had signed for and on behalf of Minfaco, the principal borrower. In the
Promissory Note, they signed above the printed name of the corporation -- on the space
provided for Maker/Borrower, not on that provided for Co-maker.
Petitioner has not shown any exceptional circumstance that sanctions the disregard of
these findings of fact, which are thus deemed final and conclusive upon this Court and may
not be reviewed on appeal.[8]
No Personal Liability
for Corporate Deeds
Basic is the principle that a corporation is vested by law with a personality separate and
distinct from that of each person composing[9] or representing it.[10] Equally fundamental is the
general rule that corporate officers cannot be held personally liable for the consequences of
their acts, for as long as these are for and on behalf of the corporation, within the scope of
their authority and in good faith.[11] The separate corporate personality is a shield against the
personal liability of corporate officers, whose acts are properly attributed to the corporation.
[12]

Tramat Mercantile v. Court of Appeals[13] held thus:

Personal liability of a corporate director, trustee or officer along (although not necessarily)
with the corporation may so validly attach, as a rule, only when
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof, does
not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or

54
4. He is made, by a specific provision of law, to personally answer for his corporate action.
Consistent with the foregoing principles, we sustain the CAs ruling that Respondent
Guevara was not personally liable for the contracts. First, it is beyond cavil that he was duly
authorized to act on behalf of the corporation; and that in negotiating the loans with
petitioner, he did so in his official capacity. Second, no sufficient and specific evidence was
presented to show that he had acted in bad faith or gross negligence in that
negotiation. Third, he did not hold himself personally and solidarily liable with the
corporation. Neither is there any specific provision of law making him personally answerable
for the subject corporate acts.
On the other hand, Respondents Cu and Hong signed the Promissory Note without the
word by preceding their signatures, atop the designation Maker/Borrower and the printed
name of the corporation, as follows:
__(Sgd) Cu/Hong__
(Maker/Borrower)
MINDANAO FERROALLOY
While their signatures appear without qualification, the inference that they signed in their
individual capacities is negated by the following facts: 1) the name and the address of the
corporation appeared on the space provided for Maker/Borrower; 2) Respondents Cu and
Hong had only one set of signatures on the instrument, when there should have been two, if
indeed they had intended to be bound solidarily -- the first as representatives of the
corporation, and the second as themselves in their individual capacities; 3) they did not sign
under the spaces provided for Co-maker, and neither were their addresses reflected there;
and 4) at the back of the Promissory Note, they signed above the words Authorized
Representative.
Solidary Liability
Not Lightly Inferred
Moreover, it is axiomatic that solidary liability cannot be lightly inferred. [14] Under Article
1207 of the Civil Code, there is a solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires solidarity. Since solidary
liability is not clearly expressed in the Promissory Note and is not required by law or the
nature of the obligation in this case, no conclusion of solidary liability can be made.
Furthermore, nothing supports the alleged joint liability of the individual petitioners
because, as correctly pointed out by the two lower courts, the evidence shows that there is
only one debtor: the corporation. In a joint obligation, there must be at least two debtors,
each of whom is liable only for a proportionate part of the debt; and the creditor is entitled
only to a proportionate part of the credit.[15]
Moreover, it is rather late in the day to raise the alleged joint liability, as this matter has
not been pleaded before the trial and the appellate courts. Before the lower courts, petitioner
anchored its claim solely on the alleged joint and several (or solidary) liability of the

55
individual respondents. Petitioner must be reminded that an issue cannot be raised for the
first time on appeal, but seasonably in the proceedings before the trial court.[16]
So too, the Promissory Note in question is a negotiable instrument. Under Section 19 of
the Negotiable Instruments Law, agents or representatives may sign for the principal. Their
authority may be established, as in other cases of agency. Section 20 of the law provides
that a person signing for and on behalf of a [disclosed] principal or in a representative
capacity x x x is not liable on the instrument if he was duly authorized.
The authority of Respondents Cu and Hong to sign for and on behalf of the corporation
has been amply established by the Resolution of Minfacos Board of Directors, stating that
Atty. Ricardo P. Guevara (President and Chairman), or Ms. Teresita R. Cu (Vice President),
acting together with Mr. Jong Won Hong (Vice President), be as they are hereby authorized
for and in behalf of the Corporation to: 1. Negotiate with and obtain from (petitioner) the
extension of an omnibus line in the aggregate of P30 million x x x; and 2. Execute and
deliver all documentation necessary to implement all of the foregoing.[17]
Further, the agreement involved here is a contract of adhesion, which was prepared
entirely by one party and offered to the other on a take it or leave it basis. Following the
general rule, the contract must be read against petitioner, because it was the party that
prepared it,[18] more so because a bank is held to high standards of care in the conduct of its
business.[19]
In the totality of the circumstances, we hold that Respondents Cu and Hong clearly
signed the Note merely as representatives of Minfaco.
No Reason to Pierce
the Corporate Veil
Under certain circumstances, courts may treat a corporation as a mere aggroupment of
persons, to whom liability will directly attach. The distinct and separate corporate personality
may be disregarded, inter alia, when the corporate identity is used to defeat public
convenience, justify a wrong, protect a fraud, or defend a crime. Likewise, the corporate veil
may be pierced when the corporation acts as a mere alter ego or business conduit of a
person, or when it is so organized and controlled and its affairs so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.[20] But to
disregard the separate juridical personality of a corporation, the wrongdoing must be clearly
and convincingly established; it cannot be presumed.[21]
Petitioner contends that the corporation was used to protect the fraud foisted upon it by
the individual respondents. It argues that the CA failed to consider the following badges of
fraud and evident bad faith: 1) the individual respondents misrepresented the corporation as
solvent and financially capable of paying its loan; 2) they knew that prices of ferrosilicon
were declining in the world market when they secured the loan in June 1991; 3) not a single
centavo was paid for the loan; and 4) the corporation suspended its operations shortly after
the loan was granted.[22]
Fraud refers to all kinds of deception -- whether through insidious machination,
manipulation, concealment or misrepresentation -- that would lead an ordinarily prudent

56
person into error after taking the circumstances into account.[23] In contracts, a fraud known
as dolo causante or causal fraud[24] is basically a deception used by one party prior to or
simultaneous with the contract, in order to secure the consent of the other. [25] Needless to
say, the deceit employed must be serious. In contradistinction, only some particular or
accident of the obligation is referred to by incidental fraud or dolo incidente,[26] or that which
is not serious in character and without which the other party would have entered into the
contract anyway.[27]
Fraud must be established by clear and convincing evidence; mere preponderance of
evidence is not adequate.[28] Bad faith, on the other hand, imports a dishonest purpose or
some moral obliquity and conscious doing of a wrong, not simply bad judgment or
negligence.[29] It is synonymous with fraud, in that it involves a design to mislead or deceive
another.[30]
Unfortunately, petitioner was unable to establish clearly and precisely how the alleged
fraud was committed. It failed to establish that it was deceived into granting the loans
because of respondents misrepresentations and/or insidious actions. Quite the contrary,
circumstances indicate the weakness of its submission.
First, petitioner does not deny that the P5 million loan represented the consolidation of
two loans,[31] granted long before the bank required the individual respondents to execute the
Promissory Note, Trust Receipt Agreement, Quedan or Deed of Assignment. Hence, no
words, acts or machinations arising from any of those instruments could have been used by
them prior to or simultaneous with the execution of the contract, or even as some accident or
particular of the obligation.
Second, petitioner bank was in a position to verify for itself the solvency and
trustworthiness of respondent corporation. In fact, ordinary business prudence required it to
do so before granting the multimillion loans. It is of common knowledge that, as a matter of
practice, banks conduct exhaustive investigations of the financial standing of an applicant
debtor, as well as appraisals of collaterals offered as securities for loans to ensure their
prompt and satisfactory payment. To uphold petitioners cry of fraud when it failed to verify
the existence of the goods covered by the Trust Receipt Agreement and the Quedan is to
condone its negligence.
Judicial Notice
of Bank Practices
This point brings us to the alleged error of the appellate court in taking judicial notice of
the practice of banks in conducting background checks on borrowers and sureties. While a
court is not mandated to take judicial notice of this practice under Section 1 of Rule 129 of
the Rules of Court, it nevertheless may do so under Section 2 of the same Rule. The latter
Rule provides that a court, in its discretion, may take judicial notice of matters which are of
public knowledge, or ought to be known to judges because of their judicial functions.
Thus, the Court has taken judicial notice of the practices of banks and other financial
institutions. Precisely, it has noted that it is their uniform practice, before approving a loan, to
investigate, examine and assess would-be borrowers credit standing or real estate [32] offered
as security for the loan applied for.

57
Second Issue:
Award of Damages
The individual respondents were awarded moral and exemplary damages as well as
attorneys fees under Articles 19 to 21 of the Civil Code, on the basic premise that the suit
was clearly malicious and intended merely to harass.
Article 19 of the Civil Code expresses the fundamental principle of law on human
conduct that a person must, in the exercise of his rights and in the performance of his duties,
act with justice, give every one his due, and observe honesty and good faith. Under this
basic postulate, the exercise of a right, though legal by itself, must nonetheless be done in
accordance with the proper norm. When the right is exercised arbitrarily, unjustly or
excessively and results in damage to another, a legal wrong is committed for which the
wrongdoer must be held responsible.[33]
To be liable under the abuse-of-rights principle, three elements must concur: a) a legal
right or duty, b) its exercise in bad faith, and c) the sole intent of prejudicing or injuring
another.[34] Needless to say, absence of good faith[35] must be sufficiently established.
Article 20 makes [e]very person who, contrary to law, willfully or negligently causes
damage to another liable for damages. Upon the other hand, held liable for damages under
Article 21 is one who willfully causes loss or injury to another in a manner that is contrary to
morals, good customs or public policy.
For damages to be properly awarded under the above provisions, it is necessary to
demonstrate by clear and convincing evidence[36] that the action instituted by petitioner was
clearly so unfounded and untenable as to amount to gross and evident bad faith.[37] To justify
an award of damages for malicious prosecution, one must prove two elements: malice or
sinister design to vex or humiliate and want of probable cause.[38]
Petitioner was proven wrong in impleading Spouses Guevara and Hong. Beyond that
fact, however, respondents have not established that the suit was so patently malicious as to
warrant the award of damages under the Civil Codes Articles 19 to 21, which are grounded
on malice or bad faith.[39] With the presumption of law on the side of good faith, and in the
absence of adequate proof of malice, we find that petitioner impleaded the spouses because
it honestly believed that the conjugal partnerships had benefited from the proceeds of the
loan, as stated in their Complaint and subsequent pleadings. Its act does not amount to
evident bad faith or malice; hence, an award for damages is not proper. The adverse result
of an act per se neither makes the act wrongful nor subjects the actor to the payment of
damages, because the law could not have meant to impose a penalty on the right to litigate.
[40]

For the same reason, attorneys fees cannot be granted. Article 2208 of the Civil Code
states that in the absence of a stipulation, attorneys fees cannot be recovered, except in any
of the following circumstances:
(1) When exemplary damages are awarded;

58
(2) When the defendants act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest;
(3) In criminal cases of malicious prosecution against the plaintiff;
(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;
(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the
plaintiffs plainly valid, just and demandable claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;
(8) In actions for indemnity under workmens compensation and employers liability laws;
(9) In a separate civil action to recover civil liability arising from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and equitable that attorneys fees and
expenses of litigation should be recovered.
In the instant case, none of the enumerated grounds for recovery of attorneys fees are
present.
WHEREFORE, this Petition is PARTIALLY GRANTED. The assailed Decision
is AFFIRMED, but the award of moral and exemplary damages as well as attorneys fees
is DELETED. No costs.
SO ORDERED.
Sandoval-Gutierrez, Corona, Carpio-Morales, and Garcia, JJ., concur.

59

RYUICHI YAMAMOTO v. NISHINO LEATHER INDUSTRIES, INC. and IKUO NISHINO 551
SCRA 447 (2008)
To disregard the separate juridical personality of a corporation, the wrongdoing or unjust act
in contravention of a plaintiffs legal rights must be clearly and convincingly established.
Also, without acceptance, a mere offer produces no obligation.
Ryuichi Yamamoto and Ikuo Nishino agreed to enter into a joint venture wherein Nishino
would acquire such number of shares of stock equivalent to 70% of the authorized
capital stock of the corporation. However, Nishino and his brother Yoshinobu Nishino
acquired more than 70% of the authorized capital stock. Negotiations subsequently ensued
in light of a planned takeover by Nishino who would buy-out the shares of stock of
Yamamoto who was advised through a letter that he may take all the equipment/ machinery
he had contributed to the company (for his own use and sale) provided that the value of such
machines is deducted from the capital contributions which will be paid to him. However, the
letter requested that he give his comments on all the above, soonest. On the basis of the
said letter, Yamamoto attempted to recover the machineries but Nishino hindered him to do
so, drawing him to file a Writ of Replevin. The Trial Court issued the writ. However, on
appeal, Nishino claimed that the properties being recovered were owned by the corporation
and the above-said letter was a mere proposal which was not yet authorized by the Board of
Directors. Thus, the Court of Appeals reversed the trial courts decision despite
Yamamotos contention that the company is merely an instrumentality of the Nishinos.
ISSUE:
Whether or not Yamamoto can recover the properties he contributed to the company in view
of the Doctrine of Piercing the Veil of Corporate Fiction and Doctrine of Promissory Estoppel.
HELD:
One of the elements determinative of the applicability of the doctrine of piercing the veil of
corporate fiction is that control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of the plaintiffs legal rights. To disregard the separate juridical
personality of a corporation, the wrongdoing or unjust act in contravention of a
plaintiffs legal rights must be clearly and convincingly established; it cannot be presumed.
Without a demonstration that any of the evils sought to be prevented by the doctrine is
present, it does not apply. Estoppel may arise from the making of a promise. However, it

60
bears noting that the letter was followed by a request for Yamamoto to give his comments
on all the above, soonest. What was thus proffered to Yamamoto was not a promise, but a
mere offer, subject to his acceptance. Without acceptance, a mere offer produces no
obligation. Thus, the machineries and equipment, which comprised Yamamotos investment,
remained part of the capital property of the corporation.

SECOND DIVISION
ASJ
CORPORATION
ANTONIO SAN JUAN,

and
G.R. No. 158086

Petitioners,
Present:

QUISUMBING, J., Chairperson,

CARPIO,
- versus -

CARPIO MORALES,
TINGA, and
VELASCO, JR., JJ.

SPS.
EFREN
EVANGELISTA,
Respondents.

&

MAURA

Promulgated:

February 14, 2008

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION
QUISUMBING, J.:
For review on certiorari is the Decision[1] dated April 30, 2003 of the Court of Appeals in CAG.R. CV No. 56082, which had affirmed the Decision [2] dated July 8, 1996 of the Regional Trial
Court (RTC) of Malolos, Bulacan, Branch 9 in Civil Case No. 745-M-93. The Court of Appeals,
after applying the doctrine of piercing the veil of corporate fiction, held petitioners ASJ
Corporation (ASJ Corp.) and Antonio San Juan solidarily liable to respondents Efren and

61
Maura Evangelista for the unjustified retention of the chicks and egg by-products covered by
Setting Report Nos. 108 to 113.[3]
The pertinent facts, as found by the RTC and the Court of Appeals, are as follows:
Respondents, under the name and style of R.M. Sy Chicks, are engaged in the large-scale
business of buying broiler eggs, hatching them, and selling their hatchlings (chicks) and egg
by-products[4] in Bulacan and Nueva Ecija. For the incubation and hatching of these eggs,
respondents availed of the hatchery services of ASJ Corp., a corporation duly registered in
the name of San Juan and his family.
Sometime in 1991, respondents delivered to petitioners various quantities of eggs at an
agreed service fee of 80 centavos per egg, whether successfully hatched or not. Each
delivery was reflected in a Setting Report indicating the following: the number of eggs
delivered; the date of setting or the date the eggs were delivered and laid out in the
incubators; the date of candling or the date the eggs, through a lighting system, were
inspected and determined if viable or capable of being hatched into chicks; and the date of
hatching, which is also the date respondents would pick-up the chicks and byproducts. Initially, the service fees were paid upon release of the eggs and by-products to
respondents. But as their business went along, respondents delays on their payments were
tolerated by San Juan, who just carried over the balance, as there may be, into the next
delivery, out of keeping goodwill with respondents.
From January 13 to February 3, 1993, respondents had delivered to San Juan a total of
101,3[50][5] eggs, detailed as follows:[6]
Date Set SR Number No. of eggs delivered Date hatched/Pick-up date
1/13/1993 SR 108 32,566 eggs February 3, 1993
1/20/1993 SR 109 21,485 eggs February 10, 1993
1/22/1993 SR 110 7,213 eggs February 12, 1993
1/28/1993 SR 111 14,495 eggs February 18, 1993
1/30/1993 SR 112 15,346 eggs February 20, 1993
2/3/1993 SR 113 10,24[5][7] eggs February 24, 1993
TOTAL 101,350 eggs
On February 3, 1993, respondent Efren went to the hatchery to pick up the chicks and byproducts covered by Setting Report No. 108, but San Juan refused to release the same due
to respondents failure to settle accrued service fees on several setting reports starting from
Setting Report No. 90. Nevertheless, San Juan accepted from Efren 10,245 eggs covered by
Setting Report No. 113 and P15,000.00[8] in cash as partial payment for the accrued service
fees.

62
On February 10, 1993, Efren returned to the hatchery to pick up the chicks and by-products
covered by Setting Report No. 109, but San Juan again refused to release the same unless
respondents fully settle their accounts. In the afternoon of the same day, respondent Maura,
with her son Anselmo, tendered P15,000.00[9] to San Juan, and tried to claim the chicks and
by-products. She explained that she was unable to pay their balance because she was
hospitalized for an undisclosed ailment. San Juan accepted the P15,000.00, but insisted on
the full settlement of respondents accounts before releasing the chicks and byproducts. Believing firmly that the total value of the eggs delivered was more than sufficient
to cover the outstanding balance, Maura promised to settle their accounts only upon proper
accounting by San Juan. San Juan disliked the idea and threatened to impound their vehicle
and detain them at the hatchery compound if they should come back unprepared to fully
settle their accounts with him.
On February 11, 1993, respondents directed their errand boy, Allan Blanco, to pick up the
chicks and by-products covered by Setting Report No. 110 and also to ascertain if San
Juan was still willing to settle amicably their differences. Unfortunately, San Juan was firm in
his refusal and reiterated his threats on respondents. Fearing San Juans threats,
respondents never went back to the hatchery.
The parties tried to settle amicably their differences before police authorities, but to
no avail. Thus, respondents filed with the RTC an action for damages based on petitioners
retention of the chicks and by-products covered by Setting Report Nos. 108 to 113.
On July 8, 1996, the RTC ruled in favor of respondents and made the following
findings: (1) as of Setting Report No. 107, respondents owed petitioners P102,336.80;[10](2)
petitioners withheld the release of the chicks and by-products covered by Setting Report
Nos. 108-113;[11] and (3) the retention of the chicks and by-products was unjustified and
accompanied by threats and intimidations on respondents. [12] The RTC disregarded the
corporate fiction of ASJ Corp.,[13] and held it and San Juan solidarily liable to respondents
for P529,644.80 as actual damages, P100,000.00 as moral damages, P50,000.00 as
attorneys fees, plus interests and costs of suit. The decretal portion of the decision reads:
WHEREFORE, based on the evidence on record and the
laws/jurisprudence applicable thereon, judgment is hereby rendered ordering
the defendants to pay, jointly and severally, unto the plaintiffs the amounts
of P529,644.80, representing the value of the hatched chicks and by-products
which the plaintiffs on the average expected to derive under Setting Reports
Nos. 108 to 113, inclusive, with legal interest thereon from the date of this
judgment until the same shall have been fully paid, P100,000.00 as moral
damages and P50,000.00 as attorneys fees, plus the costs of suit.
SO ORDERED.[14]
Both parties appealed to the Court of Appeals. Respondents prayed for an additional award
of P76,139.00 as actual damages for the cost of other unreturned by-products
and P1,727,687.52 as unrealized profits, while petitioners prayed for the reversal of the trial
courts entire decision.
On April 30, 2003, the Court of Appeals denied both appeals for lack of merit and affirmed
the trial courts decision, with the slight modification of including an award of exemplary
damages of P10,000.00 in favor of respondents. The Court of Appeals, applying the doctrine
of piercing the veil of corporate fiction, considered ASJ Corp. and San Juan as one entity,

63
after finding that there was no bona fide intention to treat the corporation as separate and
distinct from San Juan and his wife Iluminada. The fallo of the Court of Appeals decision
reads:
WHEREFORE, in view of the foregoing, the Decision appealed from is
hereby AFFIRMED, with the slight modification that exemplary damages in
the amount of P10,000.00 are awarded to plaintiffs.
Costs against defendants.
SO ORDERED.[15]
Hence, the instant petition, assigning the following errors:
I.
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN
HOLDING, AS DID THE COURT A QUO, THAT PETITIONERS
WITHHELD/OR FAILED TO RELEASE THE CHICKS AND BY-PRODUCTS
COVERED BY SETTING REPORT NOS. 108 AND 109.
II.
THE HONORABLE COURT OF APPEALS ERRED IN ADMITTING THE
HEARSAY TESTIMONY OF MAURA EVANGELISTA SUPPORTIVE OF ITS
FINDINGS THAT PETITIONERS WITHHELD/OR FAILED TO RELEASE THE
CHICKS AND BY-PRODUCTS COVERED BY SETTING REPORT NOS. 108
AND 109.
III.
THE HONORABLE COURT OF APPEALS, AS DID THE COURT A QUO,
ERRED IN NOT FINDING THAT RESPONDENTS FAILED TO RETURN TO
THE PLANT TO GET THE CHICKS AND BY-PRODUCTS COVERED BY
SETTING REPORT NOS. 110, 111, 112 AND 113.
IV.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING, AS DID
THE COURT A QUO, THAT THE PIERCING OF THE VEIL OF CORPORATE
ENTITY IS JUSTIFIED, AND CONSEQUENTLY HOLDING PETITIONERS
JOINTLY AND SEVERALLY LIABLE TO PAY RESPONDENTS THE SUM
OF P529,644.[80].
V.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONERS HAVE VIOLATED THE PRINCIPLES ENUNCIATED IN ART.
19 OF THE NEW CIVIL CODE AND CONSEQUENTLY IN AWARDING
MORAL DAMAGES, EXEMPLARY DAMAGES AND ATTORNEYS FEES.
VI.
THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING
PETITIONERS COUNTERCLAIM.[16]

64
Plainly, the issues submitted for resolution are: First, did the Court of Appeals err
when (a) it ruled that petitioners withheld or failed to release the chicks and by-products
covered by Setting Report Nos. 108 and 109; (b) it admitted the testimony of Maura; (c) it did
not find that it was respondents who failed to return to the hatchery to pick up the chicks and
by-products covered by Setting Report Nos. 110 to 113; and (d) it pierced the veil of
corporate fiction and held ASJ Corp. and Antonio San Juan as one entity? Second, was it
proper to hold petitioners solidarily liable to respondents for the payment of P529,644.80 and
other damages?
In our view, there are two sets of issues that the petitioners have raised.
The first set is factual. Petitioners seek to establish a set of facts contrary to the
factual findings of the trial and appellate courts. However, as well established in our
jurisprudence, only errors of law are reviewable by this Court in a petition for review under
Rule 45.[17] The trial court, having had the opportunity to personally observe and analyze the
demeanor of the witnesses while testifying, is in a better position to pass judgment on their
credibility.[18] More importantly, factual findings of the trial court, when amply supported by
evidence on record and affirmed by the appellate court, are binding upon this Court and will
not be disturbed on appeal.[19] While there are exceptional circumstances [20] when these
findings may be set aside, none of them is present in this case.
Based on the records, as well as the parties own admissions, the following facts were
uncontroverted: (1) As of Setting Report No. 107, respondents were indebted to petitioners
for P102,336.80 as accrued service fees for Setting Report Nos. 90 to 107; [21] (2) Petitioners,
based on San Juans own admission,[22] did not release the chicks and by-products covered
by Setting Report Nos. 108 and 109 for failure of respondents to fully settle their previous
accounts; and (3) Due to San Juans threats, respondents never returned to the hatchery to
pick up those covered by Setting Report Nos. 110 to 113.[23]
Furthermore, although no hard and fast rule can be accurately laid down under which the
juridical personality of a corporate entity may be disregarded, the following probative factors
of identity justify the application of the doctrine of piercing the veil of corporate fiction [24] in
this case: (1) San Juan and his wife own the bulk of shares of ASJ Corp.; (2) The lot where
the hatchery plant is located is owned by the San Juan spouses; (3) ASJ Corp. had no other
properties or assets, except for the hatchery plant and the lot where it is located; (4) San
Juan is in complete control of the corporation; (5) There is no bona fide intention to treat ASJ
Corp. as a different entity from San Juan; and (6) The corporate fiction of ASJ Corp. was
used by San Juan to insulate himself from the legitimate claims of respondents, defeat
public convenience, justify wrong, defend crime, and evade a corporations subsidiary liability
for damages.[25] These findings, being purely one of fact, [26] should be respected. We need
not assess and evaluate the evidence all over again where the findings of both courts on
these matters coincide.
On the second set of issues, petitioners contend that the retention was justified and did not
constitute an abuse of rights since it was respondents who failed to comply with their
obligation. Respondents, for their part, aver that all the elements on abuse of rights were
present. They further state that despite their offer to partially satisfy the accrued service fees,
and the fact that the value of the chicks and by-products was more than sufficient to cover their
unpaid obligations, petitioners still chose to withhold the delivery.
The crux of the controversy, in our considered view, is simple enough. Was
petitioners retention of the chicks and by-products on account of respondents failure to pay

65
the corresponding service fees unjustified? While the trial and appellate courts had the same
decisions on the matter, suffice it to say that a modification is proper. Worth stressing,
petitioners act of withholding the chicks and by-products is entirely different from petitioners
unjustifiable acts of threatening respondents. The retention had legal basis; the threats had
none.
To begin with, petitioners obligation to deliver the chicks and by-products
corresponds to three dates: the date of hatching, the delivery/pick-up date and the date of
respondents payment. On several setting reports, respondents made delays on their
payments, but petitioners tolerated such delay. When respondents accounts accumulated
because of their successive failure to pay on several setting reports, petitioners opted to
demand the full settlement of respondents accounts as a condition precedent to the
delivery. However, respondents were unable to fully settle their accounts.
Respondents offer to partially satisfy their accounts is not enough to extinguish their
obligation. Under Article 1248[27] of the Civil Code, the creditor cannot be compelled to
accept partial payments from the debtor, unless there is an express stipulation to that
effect. More so, respondents cannot substitute or apply as their payment the value of the
chicks and by-products they expect to derive because it is necessary that all the debts be for
the same kind, generally of a monetary character. Needless to say, there was no valid
application of payment in this case.
Furthermore, it was respondents who violated the very essence of reciprocity in
contracts, consequently giving rise to petitioners right of retention. This case is clearly one
among the species of non-performance of a reciprocal obligation. Reciprocal obligations are
those which arise from the same cause, wherein each party is a debtor and a creditor of the
other, such that the performance of one is conditioned upon the simultaneous fulfillment of
the other.[28] From the moment one of the parties fulfills his obligation, delay by the other
party begins.[29]
Since respondents are guilty of delay in the performance of their obligations, they are
liable to pay petitioners actual damages of P183,416.80, computed as follows: From
respondents outstanding balance of P102,336.80, as of Setting Report No. 107, we add the
corresponding services fees of P81,080.00[30] for Setting Report Nos. 108 to 113 which had
remain unpaid.
Nonetheless, San Juans subsequent acts of threatening respondents should not
remain among those treated with impunity. Under Article 19[31] of the Civil Code, an act
constitutes an abuse of right if the following elements are present: (a) the existence of a
legal right or duty; (b) which is exercised in bad faith; and (c) for the sole intent of prejudicing
or injuring another.[32] Here, while petitioners had the right to withhold delivery, the highhanded and oppressive acts of petitioners, as aptly found by the two courts below, had no
legal leg to stand on. We need not weigh the corresponding pieces of evidence all over
again because factual findings of the trial court, when adopted and confirmed by the
appellate court, are binding and conclusive and will not be disturbed on appeal.[33]
Since it was established that respondents suffered some pecuniary loss anchored on
petitioners abuse of rights, although the exact amount of actual damages cannot be
ascertained, temperate damages are recoverable. In arriving at a reasonable level of
temperate damages of P408,852.10, which is equivalent to the value of the chicks and byproducts, which respondents, on the average, are expected to derive, this Court was guided
by the following factors: (a) award of temperate damages will cover only Setting Report Nos.

66
109 to 113 since the threats started only on February 10 and 11, 1993, which are the pick-up
dates for Setting Report Nos. 109 and 110; the rates of (b) 41% and (c)17%, representing
the average rates of conversion of broiler eggs into hatched chicks and egg by-products as
tabulated by the trial court based on available statistical data which was unrebutted by
petitioners; (d) 68,784 eggs,[34] or the total number of broiler eggs under Setting Report Nos.
109 to 113; and (e) P14.00 and (f) P1.20, or the then unit market price of the chicks and byproducts, respectively.
Thus, the temperate damages of P408,852.10 is computed as follows:
[b X (d X e) + c X (d X f)] = Temperate Damages
41% X (68,784 eggs X P14) = P394,820.16
17% X (68,784 eggs X P1.20) = P 14,031.94
[P394,820.16 + P14,031.94] = P408,852.10
At bottom, we agree that petitioners conduct flouts the norms of civil society and
justifies the award of moral and exemplary damages. As enshrined in civil law
jurisprudence: Honeste vivere, non alterum laedere et jus suum cuique tribuere. To live
virtuously, not to injure others and to give everyone his due. [35] Since exemplary damages
are awarded, attorneys fees are also proper. Article 2208 of the Civil Code provides that:
In the absence of stipulation, attorneys fees and expenses of litigation,
other than judicial costs, cannot be recovered, except:
(1) When exemplary damages are awarded;
xxxx
WHEREFORE, the petition is PARTLY GRANTED. The Decision dated April 30,
2003 of the Court of Appeals in CA-G.R. CV No. 56082 is hereby MODIFIED as follows:
a.

Respondents are ORDERED to pay petitioners P183,416.80 as actual

damages, with interest of 6% from the date of filing of the complaint until
fully paid, plus legal interest of 12% from the finality of this decision until
fully paid.

b.

The award of actual damages of P529,644.80 in favor of respondents is

hereby REDUCED to P408,852.10, with legal interest of 12% from the
date of finality of this judgment until fully paid.

c.

The award of moral damages, exemplary damages and attorneys fees

of P100,000.00, P10,000.00, P50,000.00, respectively, in favor of
respondents is hereby AFFIRMED.

d.

All other claims are hereby DENIED.

No pronouncement as to costs.
SO ORDERED.

67

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19118

January 30, 1965

MARIANO A. ALBERT, plaintiff-appellant,

vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.

68
Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.
Aruego, Mamaril & Associates for defendant-appellees.
BENGZON, J.P., J.:
No less than three times have the parties here appealed to this Court.
In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found plaintiff entitled
to damages (for breach of contract) but reduced the amount from P23,000.00 to P15,000.00.
Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, we held that
the judgment for P15,000.00 which had become final and executory, should be executed to
its full amount, since in fixing it, payment already made had been considered.
Now we are asked whether the judgment may be executed against Jose M. Aruego,
supposed President of University Publishing Co., Inc., as the real defendant.
Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University Publishing Co.,
Inc. Plaintiff alleged inter alia that defendant was a corporation duly organized and existing
under the laws of the Philippines; that on July 19, 1948, defendant, through Jose M. Aruego,
its President, entered into a contract with plaintifif; that defendant had thereby agreed to pay
plaintiff P30,000.00 for the exclusive right to publish his revised Commentaries on the
Revised Penal Code and for his share in previous sales of the book's first edition; that
defendant had undertaken to pay in eight quarterly installments of P3,750.00 starting July
15, 1948; that per contract failure to pay one installment would render the rest due; and that
defendant had failed to pay the second installment.
Defendant admitted plaintiff's allegation of defendant's corporate existence; admitted the
execution and terms of the contract dated July 19, 1948; but alleged that it was plaintiff who
breached their contract by failing to deliver his manuscript. Furthermore, defendant
counterclaimed for damages.1wph1.t
Plaintiff died before trial and Justo R. Albert, his estate's administrator, was substituted for
him.
The Court of First Instance of Manila, after trial, rendered decision on April 26, 1954, stating
in the dispositive portion
IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor of the
plaintiff and against the defendant the University Publishing Co., Inc., ordering the
defendant to pay the administrator Justo R. Albert, the sum of P23,000.00 with legal
[rate] of interest from the date of the filing of this complaint until the whole amount
shall have been fully paid. The defendant shall also pay the costs. The counterclaim
of the defendant is hereby dismissed for lack of evidence.
As aforesaid, we reduced the amount of damages to P15,000.00, to be executed in full.
Thereafter, on July 22, 1961, the court a quo ordered issuance of an execution writ against
University Publishing Co., Inc. Plaintiff, however, on August 10, 1961, petitioned for a writ of
execution against Jose M. Aruego, as the real defendant, stating, "plaintiff's counsel and the
Sheriff of Manila discovered that there is no such entity as University Publishing Co., Inc."

69
Plaintiff annexed to his petition a certification from the securities and Exchange Commission
dated July 31, 1961, attesting: "The records of this Commission do not show the registration
of UNIVERSITY PUBLISHING CO., INC., either as a corporation or partnership." "University
Publishing Co., Inc." countered by filing, through counsel (Jose M. Aruego's own law firm), a
"manifestation" stating that "Jose M. Aruego is not a party to this case," and that, therefore,
plaintiff's petition should be denied.
Parenthetically, it is not hard to decipher why "University Publishing Co., Inc.," through
counsel, would not want Jose M. Aruego to be considered a party to the present case:
should a separate action be now instituted against Jose M. Aruego, the plaintiff will have to
reckon with the statute of limitations.
The court a quo denied the petition by order of September 9, 1961, and from this, plaintiff
has appealed.
The fact of non-registration of University Publishing Co., Inc. in the Securities and Exchange
Commission has not been disputed. Defendant would only raise the point that "University
Publishing Co., Inc.," and not Jose M. Aruego, is the party defendant; thereby assuming that
"University Publishing Co., Inc." is an existing corporation with an independent juridical
personality. Precisely, however, on account of the non-registration it cannot be considered a
corporation, not even a corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no
personality separate from Jose M. Aruego; it cannot be sued independently.
The corporation-by-estoppel doctrine has not been invoked. At any rate, the same is
inapplicable here. Aruego represented a non-existent entity and induced not only the plaintiff
but even the court to believe in such representation. He signed the contract as "President" of
"University Publishing Co., Inc.," stating that this was "a corporation duly organized and
existing under the laws of the Philippines," and obviously misled plaintiff (Mariano A. Albert)
into believing the same. One who has induced another to act upon his wilful
misrepresentation that a corporation was duly organized and existing under the law, cannot
thereafter set up against his victim the principle of corporation by estoppel (Salvatiera vs.
Garlitos, 56 O.G. 3069).
"University Publishing Co., Inc." purported to come to court, answering the complaint and
litigating upon the merits. But as stated, "University Publishing Co., Inc." has no independent
personality; it is just a name. Jose M. Aruego was, in reality, the one who answered and
litigated, through his own law firm as counsel. He was in fact, if not, in name, the defendant.
Even with regard to corporations duly organized and existing under the law, we have in
many a case pierced the veil of corporate fiction to administer the ends of justice. * And
in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person acting or purporting to act on
behalf of a corporation which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered into or for other acts
performed as such agent." Had Jose M. Aruego been named as party defendant instead of,
or together with, "University Publishing Co., Inc.," there would be no room for debate as to
his personal liability. Since he was not so named, the matters of "day in court" and "due
process" have arisen.
In this connection, it must be realized that parties to a suit are "persons who have a right to
control the proceedings, to make defense, to adduce and cross-examine witnesses, and to
appeal from a decision" (67 C.J.S. 887) and Aruego was, in reality, the person who had

70
and exercised these rights. Clearly, then, Aruego had his day in court as the real defendant;
and due process of law has been substantially observed.
By "due process of law" we mean " "a law which hears before it condemns; which proceeds
upon inquiry, and renders judgment only after trial. ... ." (4 Wheaton, U.S. 518, 581.)"; or, as
this Court has said, " "Due process of law" contemplates notice and opportunity to be heard
before judgment is rendered, affecting one's person or property" (Lopez vs. Director of
Lands, 47 Phil. 23, 32)." (Sicat vs. Reyes, L-11023, Dec. 14, 1956.) And it may not be amiss
to mention here also that the "due process" clause of the Constitution is designed to secure
justice as a living reality; not to sacrifice it by paying undue homage to formality.
For substance must prevail over form. It may now be trite, but none the less apt, to quote
what long ago we said in Alonso vs. Villamor, 16 Phil. 315, 321-322:
A litigation is not a game of technicalities in which one, more deeply schooled and
skilled in the subtle art of movement and position, entraps and destroys the other. It
is, rather, a contest in which each contending party fully and fairly lays before the
court the facts in issue and then, brushing side as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that Justice be done upon
the merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to justice and becomes its great hindrance
and chief enemy, deserves scant consideration from courts. There should be no
vested rights in technicalities.
The evidence is patently clear that Jose M. Aruego, acting as representative of a nonexistent principal, was the real party to the contract sued upon; that he was the one who
reaped the benefits resulting from it, so much so that partial payments of the consideration
were made by him; that he violated its terms, thereby precipitating the suit in question; and
that in the litigation he was the real defendant. Perforce, in line with the ends of justice,
responsibility under the judgment falls on him.
We need hardly state that should there be persons who under the law are liable to Aruego
for reimbursement or contribution with respect to the payment he makes under the judgment
in question, he may, of course, proceed against them through proper remedial measures.
PREMISES CONSIDERED, the order appealed from is hereby set aside and the case
remanded ordering the lower court to hold supplementary proceedings for the purpose of
carrying the judgment into effect against University Publishing Co., Inc. and/or Jose M.
Aruego. So ordered.

71

ABS-CBN v CA

01 SCRA 572 Business Organization Corporation Law Delegation of Corporate

Powers Moral Damages
In 1992, ABS-CBN Broadcasting Corporation, through its vice president Charo SantosConcio, requested Viva Production, Inc. to allow ABS-CBN to air at least 14 films produced
by Viva. Pursuant to this request, a meeting was held between Vivas representative
(Vicente Del Rosario) and ABS-CBNs Eugenio Lopez (General Manager) and SantosConcio was held on April 2, 1992. During the meeting Del Rosario proposed a film package
which will allow ABS-CBN to air 104 Viva films for P60 million. Later, Santos-Concio, in a
letter to Del Rosario, proposed a counterproposal of 53 films (including the 14 films initially
requested) for P35 million. Del Rosario presented the counter offer to Vivas Board of
Directors but the Board rejected the counter offer. Several negotiations were subsequently
made but on April 29, 1992, Viva made an agreement with Republic Broadcasting
Corporation (referred to as RBS or GMA 7) which gave exclusive rights to RBS to air 104
Viva films including the 14 films initially requested by ABS-CBN.
ABS-CBN now filed a complaint for specific performance against Viva as it alleged that there
is already a perfected contract between Viva and ABS-CBN in the April 2, 1992 meeting.
Lopez testified that Del Rosario agreed to the counterproposal and he (Lopez) even put the
agreement in a napkin which was signed and given to Del Rosario. ABS-CBN also filed an
injunction against RBS to enjoin the latter from airing the films. The injunction was granted.
RBS now filed a countersuit with a prayer for moral damages as it claimed that its reputation
was debased when they failed to air the shows that they promised to their viewers. RBS
relied on the ruling in People vs Manero and Mambulao Lumber vs PNB which states that a
corporation may recover moral damages if it has a good reputation that is debased,
resulting in social humiliation. The trial court ruled in favor of Viva and RBS. The Court of
Appeals affirmed the trial court.
ISSUE:
1.
Whether or not a contract was perfected in the April 2, 1992 meeting between the
representatives
of
the
two
corporations.
2.
Whether or not a corporation, like RBS, is entitled to an award of moral damages
upon grounds of debased reputation.
HELD:

72
1. No. There is no proof that a contract was perfected in the said meeting. Lopez testimony
about the contract being written in a napkin is not corroborated because the napkin was
never produced in court. Further, there is no meeting of the minds because Del Rosarios
offer was of 104 films for P60 million was not accepted. And that the alleged counter-offer
made by Lopez on the same day was not also accepted because theres no proof of such.
The counter offer can only be deemed to have been made days after the April 2 meeting
when Santos-Concio sent a letter to Del Rosario containing the counter-offer. Regardless,
there was no showing that Del Rosario accepted. But even if he did accept, such acceptance
will not bloom into a perfected contract because Del Rosario has no authority to do so.
As a rule, corporate powers, such as the power; to enter into contracts; are exercised by the
Board of Directors. But this power may be delegated to a corporate committee, a corporate
officer or corporate manager. Such a delegation must be clear and specific. In the case at
bar, there was no such delegation to Del Rosario. The fact that he has to present the
counteroffer to the Board of Directors of Viva is proof that the contract must be accepted first
by the Vivas Board. Hence, even if Del Rosario accepted the counter-offer, it did not result
to a contract because it will not bind Viva sans authorization.
2. No. The award of moral damages cannot be granted in favor of a corporation because,
being an artificial person and having existence only in legal contemplation, it has no feelings,
no emotions, no senses, It cannot, therefore, experience physical suffering and mental
anguish, which call be experienced only by one having a nervous system. No moral
damages can be awarded to a juridical person. The statement in the case of People vs
Manero and Mambulao Lumber vs PNB is a mere obiter dictum hence it is not binding as a
jurisprudence.

73

FIRST DIVISION

COASTAL PACIFIC
TRADING, INC.,
Petitioner,

G.R. No. 118692

Present:

Panganiban, CJ,
- versus -

Chairman,
Ynares-Santiago,
Austria-Martinez,

SOUTHERN ROLLING MILLS, CO., INC. (now known Callejo, Sr., and
as Visayan Integrated Steel Corporation), FAR EAST
Chico-Nazario, JJ
BANK & TRUST COMPANY, PHILIPPINE
[1]
COMMERCIAL INDUSTRIAL BANK, EQUITABLE
BANKING CORPORATION, PRUDENTIAL BANK,
BOARD OF TRUSTEES-CONSORTIUM OF BANKSVISCO, UNITED COCONUT PLANTERS BANK,
CITYTRUST BANKING CORPORATION,
ASSOCIATED BANK, INSULAR BANK OF ASIA AND
AMERICA, INTERNATIONAL CORPORATE BANK,
COMMER-CIAL BANK OF MANILA, BANK OF THE
PHILIPPINE ISLANDS, NATIONAL STEEL CORPORATION, THE PROVINCIAL SHERIFF OF BOHOL, and
DEPUTY SHERIFF JOVITO DIGAL,[2]
Respondents.

74

Promulgated:

X -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- - -- -- X
DECISION

PANGANIBAN, CJ:

D
irectors owe loyalty and fidelity to the corporation they serve and to its creditors. When these
directors sit on the board as representatives of shareholders who are also major creditors,
they cannot be allowed to use their offices to secure undue advantage for those
shareholders, in fraud of other creditors who do not have a similar representation in the
board of directors.

The Case

Before us is a Petition for Review[3] under Rule 45 of the Rules of Court, assailing
the September 27, 1994 Decision[4] and the January 5, 1995 Resolution[5] of the Court of
Appeals (CA) in CA-GR CV No. 39385. The challenged Decision disposed as follows:
WHEREFORE, the decision of the Regional Trial Court is
hereby AFFIRMED in toto.[6]

The challenged Resolution denied reconsideration.

75

The Facts

Respondent Southern Rolling Mills Co., Inc. was organized in 1959 for the purpose of
engaging in a steel processing business. It was later renamed Visayan Integrated Steel
Corporation (VISCO).[7]
On December 11, 1961, VISCO obtained a loan from the Development Bank of the
Philippines (DBP) in the amount of P836,000. This loan was secured by a duly recorded
Real Estate Mortgage over VISCOs three (3) parcels of land, including all the machineries
and equipment found there.[8]

On August 15, 1963, VISCO entered into a Loan Agreement[9] with respondent banks
(later referred to as Consortium [10]) for the amount of US$5,776,186.71
or P21,745,707.36 (at the then prevailing exchange rate) to finance its importation of various
raw materials. To secure the full and faithful performance of its obligation, VISCO executed
on August 3, 1965, a second mortgage[11] over the same land, machineries and equipment in
favor of respondent banks. This second mortgage remained unrecorded.[12]

VISCO eventually defaulted in the performance of its obligation to respondent

banks. This prompted the Consortium to file on January 26, 1966, Civil Case No. 1841,
which was a Petition for Foreclosure of Mortgage with Petition for Receivership. [13] This case
was eventually dismissed for failure to prosecute.[14]

Afterwards, negotiations were conducted between VISCO and respondent banks for
the conversion of the unpaid loan into equity in the corporation.[15]Vicente Garcia, vicepresident of VISCO and of Far East Bank and Trust Company (FEBTC), [16] testified that
sometime in 1966, the creditor banks were given management of and control over VISCO.
[17]
In time,[18] in order to reorganize it, its principal creditors agreed to group themselves into
a creditors consortium.[19] As a result of the reorganized corporate structure of VISCO,
respondent banks acquired more than 90 percent of its equity. Notwithstanding this
conversion, it remained indebted to the Consortium in the amount of P16,123,918.02.[20]

Meanwhile from 1964 to 1965, VISCO also entered into a processing agreement with
Petitioner Coastal Pacific Trading, Inc. (Coastal). Pursuant to that agreement, petitioner
delivered 3,000 metric tons of hot rolled steel coils to VISCO for processing into block iron
sheets. Contrary to their agreement, the latter was able to process and deliver to petitioner
only 1,600 metric tons of those sheets. Hence, a total of 1,400 metric tons of hot rolled steel

76
coils remained unaccounted for.[21] The fact that petitioner was among the major creditors of
VISCO was recognized by the latters vice-president, Vicente Garcia. [22] Indeed, on October
9, 1970, it forwarded to petitioner a proposal for a Compromise Agreement. [23] Subsequent
developments indicate, however, that the parties did not arrive at a compromise.

Two years later, on October 20, 1972, Garcia wrote Arturo P. Samonte, representative of
FEBTC[24] and director of VISCO,[25] a letter that reads as follows:

In the light of recent development on IISMI and Elirol which were taken over
by the government, I suggest that we take certain precautionary measures to
protect the interests of the Consortium of Banks. One such step may be to
insure the safety of the unexpended funds of VISCO from any contingencies
in the future. As of now VISCOs account with the Far East Bank is in the
name of BOARD OF TRUSTEES VISCO CONSORTIUM OF BANKS. It may
be better to eliminate the term VISCO and just call the account BOARD OF
TRUSTEES CONSORTIUM OF BANKS.[26]

According to a notation on this letter, an FEBTC assistant cashier named Silverio duly
complied with the above request.[27] Indeed, events would later reveal that the bank held a
deposit account in the name of the Board of Trustees-Consortium of Banks.[28]
On September 20, 1974, respondent banks held a luncheon meeting [29] in the FEBTC
Boardroom to discuss how they would address the insistent demands of the DBP for VISCO
to settle its obligations. Jose B. Fernandez, Jr., VISCOs then chairman and concurrent
FEBTC President,[30] expressed his apprehension that either the DBP or the
government would soon pursue extra-judicial foreclosure against VISCO.

In this regard, Fernandez informed the members of the Consortium that he had
received
letter-offers
from
two
corporations
that
were
interested
in
purchasing VISCOs generator sets.[31] After deliberating on the matter, the members decided
to approve the sale of these two generator sets to Filmag (Phil.), Inc. It was also agreed that
the proceeds of the sale would be used to pay VISCOs indebtedness to DBP and to secure
the release of the first mortgage. [32] The Consortium agreed with Filmag on the following
payment procedure:

The payment procedure will be as follows: Filmag pays to VISCO;

VISCO pays the Consortium; and then the Consortium pays the DBP with the
arrangement that the Consortium subrogates to the rights of the DBP as first

77
mortgagee to the VISCO plant. The Consortium further agreed to call a
meeting of the VISCO board of directors for the purpose of considering and
formally approving the proposed sale of the 2 generators to Filmag.[33]

Accordingly, on October 4, 1974, the VISCO board of directors had a meeting in the FEBTC
Boardroom.[34] The board was asked to decide how VISCO would settle its debt to DBP:
whether by asking the Consortium to put up the necessary amount or by
accepting Filmags offer to purchase VISCOs generator sets.[35] The latter option was
unanimously chosen[36] in a Resolution worded as follows:

RESOLVED, That the offer of Filmag (Philippines) Inc. in their letters

of December 14, 1973 and March 19, 1974 to purchase two (2) units of
generator sets, including standard accessories, of VISCO is hereby accepted
under the following terms and conditions:

xxxxxxxxx

2. The price for the two (2) generator sets is PESOS: ONE MILLION
FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY TWO
ONLY (P1,550,572) x x x and shall be payable upon signing of a letteragreement and which shall be later formalized into a Deed of Sale. The
amount, however, shall be held by the depositary bank of VISCO, Far East
Bank and Trust Company, in escrow and shall be at VISCOs disposal upon
the signing of Filmag of the receipt/s of delivery of the said two (2) generator
sets.

xxxxxxxxx

FURTHER RESOLVED, That the sales proceeds of PESOS: ONE

MILLION FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY
TWO ONLY (P1,550,572) shall be utilized to pay the liability of VISCO with
the Development Bank of the Philippines.[37]

78
The sale of the generator sets to Filmag took place and, according to the testimony of
Garcia, the proceeds were deposited with FEBTC in a special account held in trust for the
Consortium.[38]

A year after, on May 22, 1975, petitioner filed with the Pasig Regional Trial Court
(RTC) a Complaint[39] for Recovery of Property and Damages with Preliminary Injunction and
Attachment.[40] Petitioners allegation was that VISCO had fraudulently misapplied or
converted the finished steel sheets entrusted to it.[41] On June 3, 1975, Judge Pedro
A. Revilla issued a Writ of Preliminary Attachment over its properties that were not exempt
from execution.[42]
In compliance with the Writ, Sheriff Andres R. Bonifacio attempted to garnish the
account of VISCO in FEBTC,[43] which denied holding that account.Instead, the bank
admitted that what it had was a deposit account in the name of the Board of TrusteesConsortium of Banks, particularly Account No. 2479-1.[44] FEBTC reported to
Sheriff Bonifacio that it had instructed its accounting department to hold the account, subject
to the prior liens or rights in favor of [FEBTC] and other entities.[45]
While petitioners case was pending, VISCOs vice-president (Garcia) and director
(Arturo Samonte) requested from FEBTC a cash advance of P1,342,656.88 for the full
settlement of VISCOs account with DBP.[46] On June 29, 1976, FEBTC complied by issuing
Check No. FE239249 for P1,342,656.88, payable to [DBP] for [the] account of VISCO. [47] On
even date, DBP executed a Deed of Assignment of Mortgage Rights Interest and
Participation[48] in favor of Respondent Consortium of Banks. The deed stated that, in
consideration of the payment made, all of DBPs rights under the mortgage agreement with
VISCO were being transferred and conveyed to the Consortium. [49] Thus did the latter
obtain DBPs recorded primary lien over the real and chattel properties of VISCO.

On September 23, 1980, the Consortium filed a Petition for Extra-Judicial Foreclosure
with the Office of the Provincial Sheriff of Bohol.[50] The Notice of Extrajudicial Foreclosure of
Mortgage, published in the Bohol Newsweek on October 10, 1980, announced that the
auction sale was scheduled for November 11, 1980.[51]

On November 3, 1980, Southern Industrial Projects, Inc. (SIP), which was a judgment
creditor[52] of VISCO, filed Civil Case No. 3383. It was a Complaint[53] for Declaration of Nullity
of the Mortgage and Injunction to Restrain the Consortium from Proceeding with the Auction
Sale. SIP argued that DBP had actually been paid by VISCO with the proceeds from the sale
of the generator sets. Hence, the mortgage in favor of that bank had been extinguished by
the payment and could not have been assigned to the Consortium. [54] A temporary
restraining order against the latter was thus successfully obtained; the provincial sheriff
could not proceed with the auction sale of the mortgaged assets.[55] But SIPs victory was

79
short-lived. On March 2, 1984, Civil Case No. 3383 was decided in favor of the Consortium.
[56]
Judge Andrew S. Namocatcat ruled thus:
The evidence of the plaintiff is only anchored on the fact that the deed
of assignment executed by the DBP in favor of the defendant banks is an act
which would defraud creditors. It is the thinking of the court that the payment
of defendant banks to DBP of VISCOs loan and the execution of the DBP of
the deed of assignment of credit and rights to the defendant banks is in
accordance with Article 1302 and 1303 of the New Civil Code, and said
transaction is not to defraud creditors because the defendant banks are also
creditors of VISCO.[57]

On June 14, 1985, this Decision was affirmed by the Intermediate Appellate Court in
CA-GR No. 03719. [58]

The auction sale of VISCOs mortgaged properties took place on March 19, 1985 and
the
Consortium
emerged
as
the
highest
bidder.[59] The Certificate of Sale[60] in its favor was registered on May 22, 1985.[61]

On June 27, 1985, VISCO executed through Vicente Garcia, a Deed of Assignment of
Right of Redemption[62] in favor of the National Steel Corporation (NSC), in consideration
of P100,000. [63] On the same day, the Consortium sold the foreclosed real and personal
properties of VISCO to the NSC.[64]

On August 16, 1985, petitioner filed against respondents Civil Case No. 3929, which
was a Complaint for Annulment or Rescission of Sale, Damages with Preliminary Injunction.
[65]
Coastal alleged that, despite the Writ of Attachment issued in its favor in the still pending
Civil Case No. 21272, the Consortium had sold the properties to NSC. Further, despite the
attachment of the properties, the Consortium was allegedly able to sell and place them
beyond the reach of VISCOs other creditors.[66] Thus imputing bad faith to respondent banks
actions, petitioner said that the sale was intended to defraud VISCOs other creditors.

Petitioner further contended that the assignment in favor of the Consortium was
fraudulent, because DBP had been paid with the proceeds from the sale of the generator
sets owned by VISCO, and not with the Consortiums own funds.[67] Petitioner offered as
proof the minutes of the meeting [68] in which the transaction was decided. Respondent

80
Consortium countered that the minutes would in fact readily disclose that the intention of its
members was to apply the proceeds to a partial payment to DBP.[69] Respondent insisted that
it used its own funds to pay the bank.[70]

On August 20, 1985, a temporary restraining order (TRO)[71] was issued by Judge
Mercedes Gozo-Dadole against VISCO, enjoining it from proceeding with the removal or
disposal of its properties; the execution and/or consummation of the foreclosure sale; and
the sale of the foreclosed properties to NSC. On September 6, 1985, the trial court issued an
Order requiring the Consortium to post a bond of P25 million in favor of Coastal for damages
that petitioner may suffer from the lifting of the TRO. The bond filed was then approved by
the RTC in its Order of September 13, 1985.[72]

On December 15, 1986, Civil Case No. 21272 was finally decided by Judge Nicolas
P. Lapena, Jr., in favor of Coastal.[73] VISCO was ordered to pay petitioner the sum
of P851,316.19 with interest at the legal rate, plus attorneys fees of P50,000.00 and costs.
[74]
Coastal filed a Motion for Execution,[75] but the judgment has remained unsatisfied to date.

On January 5, 1992, a Decision[76] on Civil Case No. 3929 was rendered as follows:

WHEREFORE, this Court hereby renders judgment in favor of the

defendants and against the plaintiff Coastal Pacific Trading, Inc. BY WAY OF
THE MAIN COMPLAINT, to wit:

1. Declaring the extrajudicial foreclosure sale

conducted by the sheriff and the corresponding certificate of
sale executed by the defendant sheriffs on March 15, 1985
relative to the real properties of the defendant SRM/VISCO of
Cortes, Bohol, Philippines, which were registered in the
Register of Deeds of Bohol, on May 22, 1985 and the
Transfer of Assignment to the defendant National Steel
Corporation of any or part of the foreclosed properties arising
from the extrajudicial foreclosure sale as valid and legal;
2. Ordering the plaintiff Coastal Pacific Trading Inc. to
pay the defendant Consortium of Banks[,] Southern Rolling
Mills, Co., Inc., Far East Bank & Trust Company, Philippine

81
Commercial Industrial Bank, Equitable Banking Corporation,
Prudential Bank, Board of Trustees-Consortium of Banks[VISCO], United Coconut Planters Bank, City Trust Banking
Corporation, Associated Bank, Insular Bank of Asia and
America, International Corporate Bank, Commercial Bank of
Manila, Bank of the Philippine Islands and the National Steel
Corporation in the instant case the amount of FIVE
HUNDRED THOUSAND PESOS (P500,000.00) representing
damages;

3. Ordering the plaintiff The (sic) Coastal Pacific

Trading Inc. to pay the defendants the amount of FIFTEEN
THOUSAND PESOS (P15,000.00) representing attorneys
fees;

4. Dismissing the Amended Complaint of the plaintiff;

5. Ordering the plaintiff to pay the cost; AND
BY WAY OF CROSS CLAIM INTERPOSED
BY THE DEFENDANT National Steel Corporation against the
Consortium of Banks and SRM/VISCO, the same is dismissed
for lack of merit, without pronouncement as to cost.[77]

Insisting that the trial court erred in holding that it had failed to prove its case by
preponderance of evidence, Coastal filed an appeal with the CA. Allegedly, the purported
insufficiency of proof was based on the sole ground that petitioner did not file an objection
when the properties were sold on execution. It contended that the court a quo had arrived at
this erroneous conclusion by relying on inapplicable jurisprudence.[78]

Additionally, Coastal argued that the trial court had erred in not annulling the
foreclosure proceedings and sale for being fictitious and done to defraud petitioner
as VISCOs creditor. Supposedly, the DBP mortgage had already been extinguished by
payment; thus, the bank could not have assigned the contract to the Consortium.[79]

Petitioner also prayed for the annulment of the sale in favor of NSC on the ground
that the latter was a party to the fraudulent foreclosure and, hence, not a buyer in good faith.
[80]

82

Ruling of the Court of Appeals

At the outset, the CA stressed that the validity of the Consortiums mortgage,
foreclosure, and assignments had already been upheld in CA-GR CV No. 03719,
entitled Southern
Industrial
Projects
v.
United
Coconut
Planters
Bank[81] Citing Valencia v. RTC of Quezon City, Br. 90[82] and Vda. de Cruzo v. Carriaga,
[83]
the CA explained that the absolute identity of parties was not necessary for the
application of res judicata. All that was required was a shared identity of interests, as
shown by the identity of reliefs sought by one person in a prior case and by another in a
subsequent case.

While Coastal was not a party to Southern Industrial Projects, it should nevertheless be
bound by that Decision, because it had raised substantially the same claim and cause of action
as SIP, according to the appellate court. The CA held that the basic reliefs sought by Coastal and
SIP were substantially the same: the nullification of the Deed of Assignment in favor of the
Consortium, the foreclosure sale, and the subsequent sale to NSC. Because this identity
of reliefs sought showed an identity of interests, the CA concluded that it need not rule on those
issues.[84]

As to the issue that the DBP mortgage had been extinguished by payment, the CA
quoted its earlier Decision in Southern Industrial Projects:

The evidence shows that the proceeds of the sale of the two
generating sets were applied by defendants-appellees in the payment of the
outstanding obligation of VISCO. It appears that said proceeds were
deposited in the bank account of the consortium of creditors to avoid it being
garnished by the creditors notwithstanding the set-off, VISCO was still
indebted to the defendants-appellees.

The evidence x x x shows that upon VISCOs request for [cash]

advance, the Far East Banks (sic) and Trust Co., the manager of the
consortium of creditors, issued FEBTC check No. 239249 on June 29, 1976
in the amount of P1,342,656.68 payable to the DBP to pay off its loan to the
latter.

xxxxxxxxx

x x x. A public document celebrated with all the legal formalities under

the safeguard of notarial certificate is evidence against a party, and a high
degree [of] proof is necessary to overcome the legal presumption that the

83
recital is true. The biased and interested testimony of one of the parties to
such instrument who attempts to vary or repudiate what it purports to be,
cannot overcome the evidentiary force of what is recited in the document.[85]

The appellate court also rejected petitioners contention that the Consortiums Petition
for Extrajudicial Foreclosure was already barred by the earlier resort to a judicial
foreclosure. The CA clarified that in filing a Petition for Judicial Foreclosure, the Consortium
had pursued its right as junior encumbrancer. On the other hand, the Consortium filed a
Petition for Extrajudicial Foreclosure as a first encumbrancer by virtue of DBPs assignment
in its favor.[86]

The CA also rejected petitioners theory of extinguishment of obligation by merger. It

observed that the merger could not have possibly taken place, because respondent banks
and VISCO were not creditors and debtors in their own right.[87]

Petitioners Motion for Reconsideration,[88] which

on November 15, 1994,[89] was denied for lack of merit.

was

received

by

the

Hence, this Petition.[90]

Issues

Petitioner raises the following issues for our consideration:

Respondent Court of Appeals, seemingly to avoid the irrefutable evidence of

fraud and collusion practised by [respondents] against [Petitioner] Coastal,
erroneously sustained the trial courts holding that the present case is barred
by res judicata because of the previous decision in the case of Southern
Industrial Projects, Inc., vs. United Coconut Planters Bank, CA-G.R. No.
03719, considering that the elements that call for the application of this rule
are not present in the case at bar, and the exceptions allowed by this
Honorable Supreme Court are not applicable here for variance or distinction
in facts and issues, x x x:[91]

"II

CA

84
Respondent Court of Appeals further erred in not annulling the Deed of
Assignment of the DBP mortgage x x x, the extrajudicial foreclosure proceedings
of the two mortgages x x x, and the separate sale of the land and machineries
as real and personal properties by the foreclosing banks to NSC, as well as
the assignment or waiver of SRM/Viscos legal right of redemption over the
foreclosed properties, for being fraudulently executed through collusion
among the [respondents] and in fraud of SRM/Viscos creditor, [Petitioner]
Coastal, x x x;[92]

Stripped of nonessentials, the two issues may be restated as follows:

1. Whether the present action is barred by res judicata

2.

Whether respondents disposed of VISCOs assets in fraud of the

creditors

The Courts Ruling

The Petition is meritorious.

First Issue:
Res judicata

The CA cited Valencia v. RTC of Quezon City[93] to support the finding that SIP and
Coastal were substantially the same parties. We distinguish.

In Valencia, the plaintiff-intervenor in the first case, Cario, claimed Lot 4 based on an
alleged purchase of Valencias squatters rights over the property. The trial court dismissed
the claim and held that no such purchase ever took place. [94] It also held that, on the
assumption that a sale had taken place, the sale was null and void for being contrary to the
pertinent housing law. It also found that all current occupants of Lot 4 were illegal squatters;
thus, it ordered their ejectment.

When this first case attained finality, Carinos daughter, Catbagan, filed another suit
against Valencia. Catbagan challenged the applicability of the ejectmentOrder issued to her;

85
as an occupant of the lot, she was allegedly not a party to the first case. Her Petition was
denied for lack of merit.[95]

The execution of the Decision in the first case was again forestalled
when Llanes, Carios sister-in-law who was another occupant of Lot 4, filed another suit
against the same respondent. Like Cario, Llanes insisted on having purchased the subject
lot from Valencia.[96] This Court ruled that the suit was barred by resjudicata. There was a
substantial identity of parties, because the right claimed by both Cario and Llanes were
based on each ones alleged purchase of Valencias squatters rights.[97]

In the first case, sales of squatters rights were already categorically declared null and
void for being contrary to law. Thus, Llanes admission that she had purchased Valencias
squatters rights placed her in the same category as Cario. The purchase could not be
treated differently, because the final and executory Decision held that all purchases of
squatters rights (regardless of who the purchasers were) were null and void.[98]

Further, the earlier ruling held that the present occupants are illegal squatters. That
ruling included Llanes, who was admittedly one of the occupants. [99]Simply put, she
and Valencia were considered identical parties for purposes of res judicata, because they
were obviously litigating under the same void title and capacity as vendees of squatters
rights and as occupants of Lot 4.

Moreover, we held in Valencia that Llanes suit was merely a clear attempt to prevent
or delay the execution of the judgment in the first case, which had become final by reason of
the three affirmances by this Court. The pattern to obstruct the execution of the first
judgment was obvious: after Cario lost the first case, her daughter filed a second one. When
the daughter lost the second, the daughter-in-law filed a third case. It may be observed that
the three successive plaintiffs were all occupants of the same property and belonged to the
same family; this fact was also indicative of their privity.
Given this background, it becomes clear that the finding of a substantial identity of
parties in Valencia was based on its peculiar factual circumstances, which are different from
those in the present case.

Unlike Llanes, Coastal is not asserting a right that has been categorically declared
null and void in a prior case. In fact, its right based on the processing agreement was upheld
in Civil Case No. 21272. Clearly, Coastal cannot be treated in the same manner as Llanes.

The CA erred in applying Southern Industrial Projects v. United Coconut Planters

Bank[100] as a bar by res judicata with respect to the present case. For this principle to apply,
the following elements must concur: a) the former judgment was final; b) the court that
rendered it had jurisdiction over the subject matter and the parties; c) the judgment was
based on the merits; and, d) between the first and the second actions, there is an identity of
parties, subject matters, and causes of action.[101]

86
It is axiomatic that res judicata does not require an absolute, but only a substantial,
identity of parties. There is a substantial identity when there is privitybetween the two parties
or they are successors-in-interest by title subsequent to the commencement of the action,
litigating for the same thing, under the same title, and in the same capacity.[102] Petitioner was
not acting in the same capacity as SIP when it filed Civil Case No. 3383, which eventually
became AC-GR CV No. 03719. It brought this latter action as a creditor under a processing
agreement with VISCO; on the other hand, the latter was sued by SIP, based on an alleged
breach of their management contract. Very clearly, their rights were entirely distinct and
separate from each other. In no manner were these two creditors privies of each other.

The causes of action in the two Complaints were also different. Causes of action
arise from violations of rights. A single right may be violated by several acts or omissions, in
which case the plaintiff has only one cause of action. Likewise, a single act or omission may
violate several rights at the same time, as when the act constitutes a violation of separate
and distinct legal obligations.[103] The violation of each of these separate rights is a separate
cause of action in itself.[104]Hence, although these causes of action arise from the same state
of facts, they are distinct and independent and may be litigated separately; recovery on one
is not a bar to subsequent actions on the others.[105]

In the present case, the right of SIP (arising from its management contract with
VISCO) is totally distinct and separate from the right of Coastal (arising from its processing
contract with VISCO). SIP and Coastal are asserting distinct rights arising from different
legal obligations of the debtor corporation. Thus, VISCOs violation of those separate rights
has given rise to separate causes of action.
The confusion in the resolution of the issue of identity of parties occurred, because
the two creditors were assailing the same transactions of VISCO on the same
grounds. Since the two cases they filed presented similar legal issues, the appellate
court held that its ruling in AC-GR CV No. 03719 was also applicable to the instant case.

Common but palpable is this misconception of the doctrine of res judicata. Persons
do not become privies by the mere fact that they are interested in the same question or in
proving the same set of facts, or that one person is interested in the result of a litigation
involving the other. Hence, several creditors of one debtor cannot be considered as identical
parties for the purpose of assailing the acts of the debtor. They have distinct credits, rights,
and interests, such that the failure of one to recover should not preclude the other creditors
from also pursuing their legal remedies.

Further, petitioner, which was not a party to Southern Industrial Projects (their causes
of action being separate and distinct), did not have the opportunity to be heard in that case,
much less to present its own evidence. Thus, to bind petitioner to the Decision in that
case would clearly violate its rights to due process. As a separate party, it has the right to
have its arguments and evidence evaluated on their own merits.

Second Issue:

87
Fraud of Creditors

We now come to the heart of the Petition. Coastal alleges that the assignment of
mortgage, the extrajudicial foreclosure proceedings, and the sale of the properties of VISCO
should all be rescinded on the ground that they were done to defraud the latters creditors.

The CA found no merit in petitioners arguments. It ruled that the assignment

conformed to the requirements of law; that the consideration for the assignment had
allegedly been given by FEBTC; and that, hence, the Consortium had a right to foreclose on
the mortgaged properties.

By focusing on the innate validity of these Contracts, the CA totally overlooked the
issue of fraud as a ground for rescission. Elementary is the principle that the validity of a
contract does not preclude its rescission. Under Articles 1380 and 1381 (3) of the Civil Code,
contracts that are otherwise valid between the contracting parties may nonetheless be
subsequently rescinded by reason of injury to third persons, like creditors. [106] In fact,
rescission implies that there is a contract that, while initially valid, produces a lesion or
pecuniary damage to someone.[107] Thus, when the CA confined itself to the issue of the
validity of these contracts, it did not at all address the heart of petitioners cause of action:
whether these transactions had been undertaken by the Consortium to
defraud VISCOsother creditors.

There is more than a preponderance of evidence showing the Consortiums

deliberate plan to defraud VISCOs other creditors.

Consortium Banks as Directors

It will be recalled that Respondent Consortium took over management and control of
VISCO by acquiring 90 percent of the latters equity. Thus, 9 out of the 10 directors of the
corporation were all officials of the Consortium, [108] which may thus be said to have effectively
occupied and/or controlled the board.Significantly, nowhere in the records can we find any
denial by respondent of this allegation by petitioner.[109]

As directors of VISCO, the officials of the Consortium were in a position of trust; thus,
they owed it a duty of loyalty. This trust relationship sprang from the fact that they had
control and guidance over its corporate affairs and property.[110] Their duty was more
stringent when it became insolvent or without sufficient assets to meet its outstanding
obligations that arose. Because they were deemed trustees of the creditors in those
instances, they should have managed the corporations assets with strict regard for the
creditors interests. When these directors became corporate creditors in their own right, they

88
should not have permitted themselves to secure any undue advantage over other creditors.
[111]
In the instant case, the Consortium miserably failed to observe its duty of fidelity towards
VISCO and its creditors.

Duty of the Consortium Banks

to VISCOs Creditors

Recall that as early as 1966, the Consortium, through its directors on the board of
VISCO, had already assumed management and control over the latter.Hence, when VISCO
recognized its outstanding liability to petitioner in 1970 and offered a Compromise
Agreement,[112] respondent banks were already at the helm of the debtor corporation. The
members of the Consortium, therefore, cannot deny that they were aware of those claims
against the corporation.Nonetheless, they did not adopt any measure to protect petitioners
credit.

Quite the opposite, they even took steps to hide VISCOs unexpended funds. Garcias
1972 letter to Samonte unmistakably reveals that they kept those funds in an account
named Board of Trustees VISCO Consortium of Banks. This fact alone shows an effort to
hide, with the evident intent to keep, those funds for themselves. The letter even says that,
for the protection of the Consortium, the name VISCO should be eliminated entirely, so that
the account name would read Board of Trustees Consortium of Banks. Clearly, this particular
move was found to be necessary to avoid a takeover by the government, which was also a
creditor of VISCO.[113] This express intent of the latter, under the direction and for the benefit
of the Consortium, corroborated petitioners contention that respondent banks had
defrauded VISCOs creditors.

Assignment of Mortgage
in Favor of the Consortium Banks

The assignment of mortgage in favor of the Consortium also bears the earmarks of
fraud. Initially, respondent banks had agreed that VISCO should sell two of its generator
sets, so that the proceeds could be utilized to pay DBP. This plan was direct, simple, and
would extinguish the encumbrance in favor of the bank.

Then, quite surprisingly, the Consortium set down the following payment
procedure: Filmag would pay VISCO; the latter would pay the Consortium, which would pay
DBP; and the Consortium would then subrogate DBP to the latters rights as first
mortgagee. One is then led to ask: if the intention was to pay DBP; from the sales proceeds
of the generator sets, why did the money have to pass through the Consortium?

89
The answer lies in the nature of respondents mortgage. It will be recalled that this
mortgage remained unrecorded and not legally binding on the other creditors. [114] Thus, if
DBP had been directly paid by VISCO, the latter could have freed up its properties to the
satisfaction of all its other creditors. This procedure would have been fair to all, but it was not
followed by the Consortium.

Instead, the proceeds from the sale of the generator sets were first paid to
respondent banks, which used the money to pay DBP. The last step in the payment
procedure explains the reason for this preferred though roundabout manner of
payment. This final step entitled the Consortium to obtain DBPsprimary lien through an
assignment by allowing it to pay VISCOs loan to the bank, without incurring additional
expenses.

In the end, by collecting the money from VISCO, respondent banks recovered what
they had ostensibly remitted to DBP. Moreover, the primary lien that respondent banks
acquired allowed them, as unsecured creditors of VISCO, to foreclose on the assets of the
corporation without regard to its inferior claims. It was a clever ruse that would have worked,
were it not done by creditors who were duty-bound, as directors, not to take clever
advantage of other creditors.

To be sure, there was undue advantage. The payment scheme devised by the
Consortium continued the efficacy of the primary lien, this time in its favor, to the detriment of
the other creditors. When one considers its knowledge that VISCOs assets might not be
enough to meet its obligations to several creditors, [115]the intention to defraud the other
creditors is even more striking. Fraud is present when the debtor knows that its actions
would cause injury.[116]

The assignment in favor of the Consortium was a rescissible contract for having been
undertaken in fraud of creditors.[117] Article 1385 of the Civil Code provides for the effect of
rescission, as follows:

Rescission creates the obligation to return the things which were the
object of the contract, together with their fruits, and the price with its interest;
consequently, it can be carried out only when he who demands rescission can
return whatever he may be obliged to restore.

Neither shall rescission take place when the things which are the
object of the contract are legally in the possession of third persons who did
not act in bad faith.

In this case, indemnity for damages may be demanded from the

person causing the loss.

90

Indeed, mutual restitution is required in all cases involving rescission. But when it is
no longer possible to return the object of the contract, an indemnity for damages operates as
restitution. The important consideration is that the indemnity for damages should restore to
the injured party what was lost.

In the case at bar, it is no longer possible to order the return

of VISCOs properties. They have already been sold to the NSC, which has not been shown
to have acted in bad faith. The party alleging bad faith must establish it by competent proof.
Sans that proof, purchasers are deemed to be in good faith, and their interest in the subject
property must not be disturbed. Purchasers in good faith are those who buy the property of
another without notice that some other person has a right to or interest in the property; and
who pay the full and fair price for it at the time of the purchase, or before they get notice of
some other persons claim of interest in the property.[118]

In the present case, petitioner failed to discharge its burden of proving bad faith on
the part of NSC. There is insufficient evidence on record that the latter participated in the
design to defraud VISCOs creditors. To NSC, petitioner imputes fraud from the sole fact that
the former was allegedly aware that its vendor, the Consortium, had taken control over
VISCO including the corporations assets.[119] We cannot appreciate how knowledge of the
takeover would necessarily implicate anyone in the Consortiums fraudulent
designs. Besides, NSC was not shown to be privy to the information that VISCO had no
other assets to satisfy other creditors respective claims.

The right of an innocent purchaser for value must be respected and protected, even if
its vendors obtained their title through fraud.[120] Pursuant to this principle, the remedy of the
defrauded creditor is to sue for damages against those who caused or employed the
fraud. Hence, petitioner is entitled to damages from the Consortium.

Award of Damages

It is essential that for damages to be awarded, a claimant must satisfactorily prove during the
trial that they have a factual basis, and that the defendants acts have a causal connection to
them.[121] Thus, the question of damages should normally call for a remand of the case to the
lower court for further proceedings. Considering, however, the length of time that petitioners
just claim has been thwarted, we find it in the best interest of substantial justice to decide the
issue of damages now on the basis of the available records. A remand for further
proceedings would only result in a needless delay.

Going over the records of the case, we find that petitioner has a final and executory
judgment in its favor in Civil Case No. 21272. The judgment in that case reads as follows:

91

WHEREFORE, judgment is hereby rendered in favor of the plaintiffs

ordering defendant VISCO/SRM to pay the plaintiffs the sum
of P851,316.19 with interest thereon at the legal rate from the filing of this
complaint, plus attorneys fees of P50,000.00 and to pay the costs.[122]

The foregoing is the judgment credit that petitioner cannot enforce against VISCO
because of Respondent Consortiums fraudulent disposition of the corporations assets. In
other words, the above amounts define the extent of the actual damage suffered by Coastal
and the amount that respondent has to restore pursuant to Article 1385.

On the basis of the finding of fraud, the award of exemplary damages is in order, to
serve as a warning to other creditors not to abuse their rights. Under Article 2229 of the Civil
Code, exemplary or corrective damages are imposed by way of example or correction for the
public good. By their nature, exemplary damages should be imposed in an amount sufficient
and effective to deter possible future similar acts by respondent banks. The court finds the
amount of P250,000 sufficient in the instant case.

As a rule, a corporation is not entitled to moral damages because, not being a natural
person, it cannot experience physical suffering or sentiments like wounded feelings, serious
anxiety, mental anguish and moral shock. [123] The only exception to this rule is when the
corporation has a good reputation that is debased, resulting in its humiliation in the business
realm.[124] In the present case, the records do not show any evidence that the name or
reputation of petitioner has been sullied as a result of the Consortiums fraudulent
acts. Accordingly, moral damages are not warranted.

WHEREFORE, the Petition is GRANTED. The assailed Decision of the Court of Appeals
dated September 27, 1994, and its Resolution dated January 5, 1995, are
hereby REVERSED and SET ASIDE. Respondent Consortium of Banks is ordered
to PAY Petitioner Coastal Pacific Trading, Inc., the sum adjudged by the Regional Trial Court
of Pasig, Branch 167, in Civil Case No. 21272 entitled Coastal Pacific Trading, Felix de la
Costa, and Aurora del Banco v. Visayan Integrated Corporation, to wit: x x x the sum
of P851,316.19 with interest thereon at the legal rate from the filing of [the] [C]omplaint, plus
attorneys fees of P50,000 and x xx the costs. Respondent Consortium of Banks is further
ordered to pay petitioner exemplary damages in the amount of P250,000.

SO ORDERED.

92

Filipinas Broadcasting vs. Ago Medical Center

GRN 141994 January 17, 2005
Carpio, J.:
FACTS:
Rima & Alegre were host of FBNI radio program Expose. Respondent Ago was the owner
of the Medical & Educational center, subject of the radio program Expose. AMEC claimed
that the broadcasts were defamatory and owner Ago and school AMEC claimed for
damages. The complaint further alleged that AMEC is a reputable learning institution. With
the supposed expose, FBNI, Rima and Alegre transmitted malicious imputations and as
such, destroyed plaintiffs reputation. FBNI was included as defendant for allegedly failing to
exercise due diligence in the selection and supervision of its employees. The trial court
found Rimas statements to be within the bounds of freedom of speech and ruled that the
broadcast was libelous. It ordered the defendants Alegre and FBNI to pay AMEC 300k for
moral damages.
ISSUE:
Whether or not AMEC is entitled to moral damages.
RULING:
A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded feelings,
serious anxiety, mental anguish or moral shock. Nevertheless, AMECs claim, or moral
damages fall under item 7 of Art 2219 of the NCC.
This provision expressly authorizes the recovery of moral damages in cases of libel, slander
or any other form of defamation. Art 2219 (7) does not qualify whether the plaintiff is a
natural or juridical person. Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for moral damages. Moreover,
where the broadcast is libelous per se, the law implied damages. In such a case, evidence of
an honest mistake or the want of character or reputation of the party libeled goes only in
mitigation of damages. In this case, the broadcasts are libelous per se. thus, AMEC is
entitled to moral damages. However, we find the award P500,000 moral damages
unreasonable. The record shows that even though the broadcasts were libelous, per se,
AMEC has not suffered any substantial or material damage to its reputation. Therefore, we
reduce the award of moral damages to P150k.

93
v JOIN TORT FEASORS are all the persons who command, instigate, promote, encourage,
advice countenance, cooperate in, aid or abet the commission of a tort, as who approve of it
after it is done, for its benefit.

Republic of the Philippines

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-27155 May 18, 1978
PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE COURT OF APPEALS, RITA GUECO TAPNIO, CECILIO GUECO and THE PHILIPPINE
AMERICAN GENERAL INSURANCE COMPANY, INC., respondents.
Medina, Locsin, Corua, & Sumbillo for petitioner.
Manuel Lim & Associates for private respondents.

ANTONIO, J.:
Certiorari to review the decision of the Court of Appeals which affirmed the judgment of the Court
of First Instance of Manila in Civil Case No. 34185, ordering petitioner, as third-party defendant,
to pay respondent Rita Gueco Tapnio, as third-party plaintiff, the sum of P2,379.71, plus 12%
interest per annum from September 19, 1957 until the same is fully paid, P200.00 attorney's fees
and costs, the same amounts which Rita Gueco Tapnio was ordered to pay the Philippine
American General Insurance Co., Inc., to be paid directly to the Philippine American General
Insurance Co., Inc. in full satisfaction of the judgment rendered against Rita Gueco Tapnio in
favor of the former; plus P500.00 attorney's fees for Rita Gueco Tapnio and costs. The basic
action is the complaint filed by Philamgen (Philippine American General Insurance Co., Inc.) as
surety against Rita Gueco Tapnio and Cecilio Gueco, for the recovery of the sum of P2,379.71
paid by Philamgen to the Philippine National Bank on behalf of respondents Tapnio and Gueco,
pursuant to an indemnity agreement. Petitioner Bank was made third-party defendant by Tapnio
and Gueco on the theory that their failure to pay the debt was due to the fault or negligence of
petitioner.
The facts as found by the respondent Court of Appeals, in affirming the decision of the Court of
First Instance of Manila, are quoted hereunder:

94
Plaintiff executed its Bond, Exh. A, with defendant Rita Gueco Tapnio as principal,
in favor of the Philippine National Bank Branch at San Fernando, Pampanga, to
guarantee the payment of defendant Rita Gueco Tapnio's account with said Bank.
In turn, to guarantee the payment of whatever amount the bonding company
would pay to the Philippine National Bank, both defendants executed the
indemnity agreement, Exh. B. Under the terms and conditions of this indemnity
agreement, whatever amount the plaintiff would pay would earn interest at the
rate of 12% per annum, plus attorney's fees in the amount of 15 % of the whole
amount due in case of court litigation.
The original amount of the bond was for P4,000.00; but the amount was later
reduced to P2,000.00.
It is not disputed that defendant Rita Gueco Tapnio was indebted to the bank in
the sum of P2,000.00, plus accumulated interests unpaid, which she failed to pay
despite demands. The Bank wrote a letter of demand to plaintiff, as per Exh. C;
whereupon, plaintiff paid the bank on September 18, 1957, the full amount due
and owing in the sum of P2,379.91, for and on account of defendant Rita Gueco's
obligation (Exhs. D and D-1).
Plaintiff, in turn, made several demands, both verbal and written, upon
defendants (Exhs. E and F), but to no avail.
Defendant Rita Gueco Tapnio admitted all the foregoing facts. She claims,
however, when demand was made upon her by plaintiff for her to pay her debt to
the Bank, that she told the Plaintiff that she did not consider herself to be
indebted to the Bank at all because she had an agreement with one JacoboNazon whereby she had leased to the latter her unused export sugar quota for
the 1956-1957 agricultural year, consisting of 1,000 piculs at the rate of P2.80 per
picul, or for a total of P2,800.00, which was already in excess of her obligation
guaranteed by plaintiff's bond, Exh. A. This lease agreement, according to her,
was with the knowledge of the bank. But the Bank has placed obstacles to the
consummation of the lease, and the delay caused by said obstacles forced
'Nazon to rescind the lease contract. Thus, Rita Gueco Tapnio filed her third-party
complaint against the Bank to recover from the latter any and all sums of money
which may be adjudged against her and in favor of the plaitiff plus moral
damages, attorney's fees and costs.
Insofar as the contentions of the parties herein are concerned, we quote with
approval the following findings of the lower court based on the evidence
presented at the trial of the case:
It has been established during the trial that Mrs. Tapnio had an
export sugar quota of 1,000 piculs for the agricultural year 19561957 which she did not need. She agreed to allow Mr. Jacobo C.
Tuazon to use said quota for the consideration of P2,500.00 (Exh.
"4"-Gueco). This agreement was called a contract of lease of
sugar allotment.
At the time of the agreement, Mrs. Tapnio was indebted to the
Philippine National Bank at San Fernando, Pampanga. Her
indebtedness was known as a crop loan and was secured by a
mortgage on her standing crop including her sugar quota
allocation for the agricultural year corresponding to said standing
crop. This arrangement was necessary in order that when Mrs.
Tapnio harvests, the P.N.B., having a lien on the crop, may

95
effectively enforce collection against her. Her sugar cannot be
exported without sugar quota allotment Sometimes, however, a
planter harvest less sugar than her quota, so her excess quota is
utilized by another who pays her for its use. This is the
arrangement entered into between Mrs. Tapnio and Mr. Tuazon
regarding the former's excess quota for 1956-1957 (Exh. "4"Gueco).
Since the quota was mortgaged to the P.N.B., the contract of
lease had to be approved by said Bank, The same was submitted
to the branch manager at San Fernando, Pampanga. The latter
required the parties to raise the consideration of P2.80 per picul
or a total of P2,800.00 (Exh. "2-Gueco") informing them that "the
minimum lease rental acceptable to the Bank, is P2.80 per picul."
In a letter addressed to the branch manager on August 10, 1956,
Mr. Tuazon informed the manager that he was agreeable to
raising the consideration to P2.80 per picul. He further informed
the manager that he was ready to pay said amount as the funds
were in his folder which was kept in the bank.
Explaining the meaning of Tuazon's statement as to the funds, it
was stated by him that he had an approved loan from the bank
but he had not yet utilized it as he was intending to use it to pay
for the quota. Hence, when he said the amount needed to pay
Mrs. Tapnio was in his folder which was in the bank, he meant
and the manager understood and knew he had an approved loan
available to be used in payment of the quota. In said Exh. "6Gueco", Tuazon also informed the manager that he would want
for a notice from the manager as to the time when the bank
needed the money so that Tuazon could sign the corresponding
promissory note.
Further Consideration of the evidence discloses that when the branch manager of
the Philippine National Bank at San Fernando recommended the approval of the
contract of lease at the price of P2.80 per picul (Exh. 1 1-Bank), whose
recommendation was concurred in by the Vice-president of said Bank, J. V.
Buenaventura, the board of directors required that the amount be raised to 13.00
per picul. This act of the board of directors was communicated to Tuazon, who in
turn asked for a reconsideration thereof. On November 19, 1956, the branch
manager submitted Tuazon's request for reconsideration to the board of directors
with another recommendation for the approval of the lease at P2.80 per picul, but
the board returned the recommendation unacted upon, considering that the
current price prevailing at the time was P3.00 per picul (Exh. 9-Bank).
The parties were notified of the refusal on the part of the board of directors of the
Bank to grant the motion for reconsideration. The matter stood as it was until
February 22, 1957, when Tuazon wrote a letter (Exh. 10-Bank informing the Bank
that he was no longer interested to continue the deal, referring to the lease of
sugar quota allotment in favor of defendant Rita Gueco Tapnio. The result is that
the latter lost the sum of P2,800.00 which she should have received from Tuazon
and which she could have paid the Bank to cancel off her indebtedness,
The court below held, and in this holding we concur that failure of the negotiation
for the lease of the sugar quota allocation of Rita Gueco Tapnio to Tuazon was
due to the fault of the directors of the Philippine National Bank, The refusal on the
part of the bank to approve the lease at the rate of P2.80 per picul which, as

96
stated above, would have enabled Rita Gueco Tapnio to realize the amount of
P2,800.00 which was more than sufficient to pay off her indebtedness to the
Bank, and its insistence on the rental price of P3.00 per picul thus unnecessarily
increasing the value by only a difference of P200.00. inevitably brought about the
rescission of the lease contract to the damage and prejudice of Rita Gueco
Tapnio in the aforesaid sum of P2,800.00. The unreasonableness of the position
adopted by the board of directors of the Philippine National Bank in refusing to
approve the lease at the rate of P2.80 per picul and insisting on the rate of P3.00
per picul, if only to increase the retail value by only P200.00 is shown by the fact
that all the accounts of Rita Gueco Tapnio with the Bank were secured by chattel
mortgage on standing crops, assignment of leasehold rights and interests on her
properties, and surety bonds, aside from the fact that from Exh. 8-Bank, it
appears that she was offering to execute a real estate mortgage in favor of the
Bank to replace the surety bond This statement is further bolstered by the fact
that Rita Gueco Tapnio apparently had the means to pay her obligation fact that
she has been granted several value of almost P80,000.00 for the agricultural
years from 1952 to 56. 1
Its motion for the reconsideration of the decision of the Court of Appeals having been denied,
petitioner filed the present petition.
The petitioner contends that the Court of Appeals erred:
(1) In finding that the rescission of the lease contract of the 1,000 piculs of sugar quota allocation
of respondent Rita Gueco Tapnio by Jacobo C. Tuazon was due to the unjustified refusal of
petitioner to approve said lease contract, and its unreasonable insistence on the rental price of
P3.00 instead of P2.80 per picul; and
(2) In not holding that based on the statistics of sugar price and prices of sugar quota in the
possession of the petitioner, the latter's Board of Directors correctly fixed the rental of price per
picul of 1,000 piculs of sugar quota leased by respondent Rita Gueco Tapnio to Jacobo C.
Tuazon at P3.00 per picul.
Petitioner argued that as an assignee of the sugar quota of Tapnio, it has the right, both under its
own Charter and under the Corporation Law, to safeguard and protect its rights and interests
under the deed of assignment, which include the right to approve or disapprove the said lease of
sugar quota and in the exercise of that authority, its
Board of Directors necessarily had authority to determine and fix the rental price per picul of the
sugar quota subject of the lease between private respondents and Jacobo C. Tuazon. It argued
further that both under its Charter and the Corporation Law, petitioner, acting thru its Board of
Directors, has the perfect right to adopt a policy with respect to fixing of rental prices of export
sugar quota allocations, and in fixing the rentals at P3.00 per picul, it did not act arbitrarily since
the said Board was guided by statistics of sugar price and prices of sugar quotas prevailing at the
time. Since the fixing of the rental of the sugar quota is a function lodged with petitioner's Board
of Directors and is a matter of policy, the respondent Court of Appeals could not substitute its
own judgment for that of said Board of Directors, which acted in good faith, making as its basis
therefore the prevailing market price as shown by statistics which were then in their possession.
Finally, petitioner emphasized that under the appealed judgment, it shall suffer a great injustice
because as a creditor, it shall be deprived of a just claim against its debtor (respondent Rita
Gueco Tapnio) as it would be required to return to respondent Philamgen the sum of P2,379.71,
plus interest, which amount had been previously paid to petitioner by said insurance company in
behalf of the principal debtor, herein respondent Rita Gueco Tapnio, and without recourse
against respondent Rita Gueco Tapnio.

97
We must advert to the rule that this Court's appellate jurisdiction in proceedings of this nature is
limited to reviewing only errors of law, accepting as conclusive the factual fin dings of the Court of
Appeals upon its own assessment of the evidence. 2
The contract of lease of sugar quota allotment at P2.50 per picul between Rita Gueco Tapnio and
Jacobo C. Tuazon was executed on April 17, 1956. This contract was submitted to the Branch
Manager of the Philippine National Bank at San Fernando, Pampanga. This arrangement was
necessary because Tapnio's indebtedness to petitioner was secured by a mortgage on her
standing crop including her sugar quota allocation for the agricultural year corresponding to said
standing crop. The latter required the parties to raise the consideration to P2.80 per picul, the
minimum lease rental acceptable to the Bank, or a total of P2,800.00. Tuazon informed the
Branch Manager, thru a letter dated August 10, 1956, that he was agreeable to raising the
consideration to P2.80 per picul. He further informed the manager that he was ready to pay the
said sum of P2,800.00 as the funds were in his folder which was kept in the said Bank. This
referred to the approved loan of Tuazon from the Bank which he intended to use in paying for the
use of the sugar quota. The Branch Manager submitted the contract of lease of sugar quota
allocation to the Head Office on September 7, 1956, with a recommendation for approval, which
recommendation was concurred in by the Vice-President of the Bank, Mr. J. V. Buenaventura.
This notwithstanding, the Board of Directors of petitioner required that the consideration be
raised to P3.00 per picul.
Tuazon, after being informed of the action of the Board of Directors, asked for a reconsideration
thereof. On November 19, 1956, the Branch Manager submitted the request for reconsideration
and again recommended the approval of the lease at P2.80 per picul, but the Board returned the
recommendation unacted, stating that the current price prevailing at that time was P3.00 per
picul.
On February 22, 1957, Tuazon wrote a letter, informing the Bank that he was no longer
interested in continuing the lease of sugar quota allotment. The crop year 1956-1957 ended and
Mrs. Tapnio failed to utilize her sugar quota, resulting in her loss in the sum of P2,800.00 which
she should have received had the lease in favor of Tuazon been implemented.
It has been clearly shown that when the Branch Manager of petitioner required the parties to
raise the consideration of the lease from P2.50 to P2.80 per picul, or a total of P2,800-00, they
readily agreed. Hence, in his letter to the Branch Manager of the Bank on August 10, 1956,
Tuazon informed him that the minimum lease rental of P2.80 per picul was acceptable to him and
that he even offered to use the loan secured by him from petitioner to pay in full the sum of
P2,800.00 which was the total consideration of the lease. This arrangement was not only
satisfactory to the Branch Manager but it was also approves by Vice-President J. V.
Buenaventura of the PNB. Under that arrangement, Rita Gueco Tapnio could have realized the
amount of P2,800.00, which was more than enough to pay the balance of her indebtedness to
the Bank which was secured by the bond of Philamgen.
There is no question that Tapnio's failure to utilize her sugar quota for the crop year 1956-1957
was due to the disapproval of the lease by the Board of Directors of petitioner. The issue,
therefore, is whether or not petitioner is liable for the damage caused.
As observed by the trial court, time is of the essence in the approval of the lease of sugar quota
allotments, since the same must be utilized during the milling season, because any allotment
which is not filled during such milling season may be reallocated by the Sugar Quota
Administration to other holders of allotments. 3 There was no proof that there was any other person
at that time willing to lease the sugar quota allotment of private respondents for a price higher than
P2.80 per picul. "The fact that there were isolated transactions wherein the consideration for the lease
was P3.00 a picul", according to the trial court, "does not necessarily mean that there are always
ready takers of said price. " The unreasonableness of the position adopted by the petitioner's Board of
Directors is shown by the fact that the difference between the amount of P2.80 per picul offered by
Tuazon and the P3.00 per picul demanded by the Board amounted only to a total sum of P200.00.

98
Considering that all the accounts of Rita Gueco Tapnio with the Bank were secured by chattel
mortgage on standing crops, assignment of leasehold rights and interests on her properties, and
surety bonds and that she had apparently "the means to pay her obligation to the Bank, as shown by
the fact that she has been granted several sugar crop loans of the total value of almost P80,000.00 for
the agricultural years from 1952 to 1956", there was no reasonable basis for the Board of Directors of
petitioner to have rejected the lease agreement because of a measly sum of P200.00.

While petitioner had the ultimate authority of approving or disapproving the proposed lease since
the quota was mortgaged to the Bank, the latter certainly cannot escape its responsibility of
observing, for the protection of the interest of private respondents, that degree of care,
precaution and vigilance which the circumstances justly demand in approving or disapproving the
lease of said sugar quota. The law makes it imperative that every person "must in the exercise of
his rights and in the performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith, 4 This petitioner failed to do. Certainly, it knew that the agricultural
year was about to expire, that by its disapproval of the lease private respondents would be unable to
utilize the sugar quota in question. In failing to observe the reasonable degree of care and vigilance
which the surrounding circumstances reasonably impose, petitioner is consequently liable for the
damages caused on private respondents. Under Article 21 of the New Civil Code, "any person who
wilfully causes loss or injury to another in a manner that is contrary to morals, good customs or public
policy shall compensate the latter for the damage." The afore-cited provisions on human relations
were intended to expand the concept of torts in this jurisdiction by granting adequate legal remedy for
the untold number of moral wrongs which is impossible for human foresight to specifically provide in
the statutes. 5
A corporation is civilly liable in the same manner as natural persons for torts, because "generally
speaking, the rules governing the liability of a principal or master for a tort committed by an agent
or servant are the same whether the principal or master be a natural person or a corporation,
and whether the servant or agent be a natural or artificial person. All of the authorities agree that
a principal or master is liable for every tort which he expressly directs or authorizes, and this is
just as true of a corporation as of a natural person, A corporation is liable, therefore, whenever a
tortious act is committed by an officer or agent under express direction or authority from the
stockholders or members acting as a body, or, generally, from the directors as the governing
body." 6
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby
AFFIRMED.
Fernando, Aquino, Concepcion, Jr., and Santos, JJ., concur.

99

EN BANC

PROFESSIONAL SERVICES, G.R. No. 126297

INC.,
Petitioner, Present:
PUNO, C.J.,
CARPIO,
CORONA,
CARPIO MORALES,
VELASCO, JR.,
NACHURA,
- v e r s u s - LEONARDO-DE CASTRO,
BRION,
PERALTA,
BERSAMIN,*
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ and
MENDOZA, JJ.**
THE COURT OF APPEALS and NATIVIDAD and ENRIQUE
AGANA,
Respondents.

x-------------------x

100
NATIVIDAD [substituted by her G.R. No. 126467
children Marcelino Agana III,
Enrique Agana, Jr.,
Emma Agana-Andaya,
Jesus Agana and Raymund
Agana] and ENRIQUE AGANA,
Petitioners,

versus-

THE COURT OF APPEALS and JUAN FUENTES,

Respondents.

x-------------------x
MIGUEL AMPIL, G.R. No. 127590
Petitioner,

-versus-

NATIVIDAD and ENRIQUE

AGANA,
Respondents.
Promulgated:
February 2, 2010
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

RESOLUTION
CORONA, J.:

With prior leave of court,[1] petitioner Professional Services, Inc. (PSI) filed a second motion
for reconsideration[2] urging referral thereof to the Court en banc and seeking modification of

101
the decision dated January 31, 2007 and resolution dated February 11, 2008 which affirmed
its vicarious and direct liability for damages to respondents Enrique Agana and the heirs of
Natividad Agana (Aganas).

Manila Medical Services, Inc. (MMSI),[3] Asian Hospital, Inc. (AHI),[4] and Private Hospital
Association of the Philippines (PHAP)[5] all sought to intervene in these casesinvoking the
common ground that, unless modified, the assailed decision and resolution will jeopardize
the financial viability of private hospitals and jack up the cost of health care.

The Special First Division of the Court granted the motions for intervention of MMSI, AHI and
PHAP (hereafter intervenors),[6] and referred en consulta to the Court en banc the motion for
prior leave of court and the second motion for reconsideration of PSI.[7]

Due to paramount public interest, the Court en banc accepted the referral[8] and heard the
parties on oral arguments on one particular issue: whether a hospital may be held liable for
the negligence of physicians-consultants allowed to practice in its premises.[9]

To recall the salient facts, PSI, together with Dr. Miguel Ampil (Dr. Ampil) and Dr. Juan
Fuentes (Dr. Fuentes), was impleaded by Enrique Agana and Natividad Agana (later
substituted by her heirs), in a complaint[10] for damages filed in the Regional Trial Court
(RTC) of Quezon City, Branch 96, for the injuries suffered by Natividad when Dr. Ampil and
Dr. Fuentes neglected to remove from her body two gauzes[11] which were used in the
surgery they performed on her on April 11, 1984 at the Medical City General Hospital. PSI
was impleaded as owner, operator and manager of the hospital.
In a decision[12] dated March 17, 1993, the RTC held PSI solidarily liable with Dr. Ampil and
Dr. Fuentes for damages.[13] On appeal, the Court of Appeals (CA), absolved Dr. Fuentes but
affirmed the liability of Dr. Ampil and PSI, subject to the right of PSI to claim reimbursement
from Dr. Ampil.[14]

On petition for review, this Court, in its January 31, 2007 decision, affirmed the CA decision.
[15]
PSI filed a motion for reconsideration[16] but the Court denied it in a resolution
dated February 11, 2008.[17]

The Court premised the direct liability of PSI to the Aganas on the following facts and law:

First, there existed between PSI and Dr. Ampil an employer-employee relationship as
contemplated in the December 29, 1999 decision in Ramos v. Court of Appeals[18] that for
purposes of allocating responsibility in medical negligence cases, an employer-employee
relationship exists between hospitals and their consultants.[19] Although the Court
in Ramos later issued a Resolution dated April 11, 2002[20] reversing its earlier finding on the
existence of an employment relationship between hospital and doctor, a similar reversal was
not warranted in the present case because the defense raised by PSI consisted of a mere
general denial of control or responsibility over the actions of Dr. Ampil.[21]

102
Second, by accrediting Dr. Ampil and advertising his qualifications, PSI created the public
impression that he was its agent.[22] Enrique testified that it was on account of Dr. Ampil's
accreditation with PSI that he conferred with said doctor about his wife's (Natividad's)
condition.[23] After his meeting with Dr. Ampil, Enrique asked Natividad to personally consult
Dr. Ampil.[24] In effect, when Enrigue and Natividad engaged the services of Dr. Ampil, at the
back of their minds was that the latter was a staff member of a prestigious hospital. Thus,
under the doctrine of apparent authority applied in Nogales, et al. v. Capitol Medical Center,
et al.,[25] PSI was liable for the negligence of Dr. Ampil.

Finally, as owner and operator of Medical City General Hospital, PSI was bound by its duty
to provide comprehensive medical services to Natividad Agana, to exercise reasonable care
to protect her from harm,[26] to oversee or supervise all persons who practiced medicine
within its walls, and to take active steps in fixing any form of negligence committed within its
premises.[27] PSI committed a serious breach of its corporate duty when it failed to conduct
an immediate investigation into the reported missing gauzes.[28]

PSI is now asking this Court to reconsider the foregoing rulings for these reasons:
I

The declaration in the 31 January 2007 Decision vis-a-vis the 11 February 2009 Resolution
that the ruling in Ramos vs. Court of Appeals (G.R. No. 134354, December 29, 1999) that an
employer-employee relations exists between hospital and their consultants stays should be
set aside for being inconsistent with or contrary to the import of the resolution granting the
hospital's motion for reconsideration in Ramos vs. Court of Appeals (G.R. No. 134354, April
11, 2002), which is applicable to PSI since the Aganas failed to prove an employer-employee
relationship between PSI and Dr. Ampil and PSI proved that it has no control over Dr. Ampil.
In fact, the trial court has found that there is no employer-employee relationship in this case
and that the doctor's are independent contractors.

II

Respondents Aganas engaged Dr. Miguel Ampil as their doctor and did not primarily and
specifically look to the Medical City Hospital (PSI) for medical care and support; otherwise
stated, respondents Aganas did not select Medical City Hospital (PSI) to provide medical
care because of any apparent authority of Dr. Miguel Ampil as its agent since the latter was
chosen primarily and specifically based on his qualifications and being friend and neighbor.

III

PSI cannot be liable under doctrine of corporate negligence since the proximate cause of
Mrs. Agana's injury was the negligence of Dr. Ampil, which is an element of the principle of
corporate negligence.[29]

103
In their respective memoranda, intervenors raise parallel arguments that the Court's ruling on
the existence of an employer-employee relationship between private hospitals and
consultants will force a drastic and complex alteration in the long-established and currently
prevailing relationships among patient, physician and hospital, with burdensome operational
and financial consequences and adverse effects on all three parties.[30]

The Aganas comment that the arguments of PSI need no longer be entertained for they
have all been traversed in the assailed decision and resolution.[31]

After gathering its thoughts on the issues, this Court holds that PSI is liable to the Aganas,
not under the principle of respondeat superior for lack of evidence of an employment
relationship with Dr. Ampil but under the principle of ostensible agency for the negligence of
Dr. Ampil and, pro hac vice, under the principle of corporate negligence for its failure to
perform its duties as a hospital.
While in theory a hospital as a juridical entity cannot practice medicine,[32] in reality it utilizes
doctors, surgeons and medical practitioners in the conduct of its business of facilitating
medical and surgical treatment.[33] Within that reality, three legal relationships crisscross: (1)
between the hospital and the doctor practicing within its premises; (2) between the hospital
and the patient being treated or examined within its premises and (3) between the patient
and the doctor. The exact nature of each relationship determines the basis and extent of the
liability of the hospital for the negligence of the doctor.

Where an employment relationship exists, the hospital may be held vicariously liable under
Article 2176[34] in relation to Article 2180[35] of the Civil Code or the principle of respondeat
superior. Even when no employment relationship exists but it is shown that the hospital
holds out to the patient that the doctor is its agent, the hospital may still be vicariously liable
under Article 2176 in relation to Article 1431[36] and Article 1869[37] of the Civil Code or the
principle of apparent authority.[38] Moreover, regardless of its relationship with the doctor, the
hospital may be held directly liable to the patient for its own negligence or failure to follow
established standard of conduct to which it should conform as a corporation.[39]

This Court still employs the control test to determine the existence of an employer-employee
relationship between hospital and doctor. In Calamba Medical Center, Inc. v. National Labor
Relations Commission, et al.[40] it held:

Under the "control test", an employment relationship exists between a physician and a
hospital if the hospital controls both the means and the details of the process by which the
physician is to accomplish his task.

xx xx xx
As priorly stated, private respondents maintained specific work-schedules, as determined by
petitioner through its medical director, which consisted of 24-hour shifts totaling forty-eight
hours each week and which were strictly to be observed under pain of administrative
sanctions.

104
That petitioner exercised control over respondents gains light from the undisputed
fact that in the emergency room, the operating room, or any department or ward for
that matter, respondents' work is monitored through its nursing supervisors, charge
nurses and orderlies. Without the approval or consent of petitioner or its medical
director, no operations can be undertaken in those areas. For control test to apply, it
is not essential for the employer to actually supervise the performance of duties of
the employee, it being enough that it has the right to wield the power. (emphasis
supplied)

Even in its December 29, 1999 decision[41] and April 11, 2002 resolution[42] in Ramos, the
Court found the control test decisive.

In the present case, it appears to have escaped the Court's attention that both the RTC and
the CA found no employment relationship between PSI and Dr. Ampil, and thatthe Aganas
did not question such finding. In its March 17, 1993 decision, the RTC found that
defendant doctors were not employees of PSI in its hospital, they being merely consultants
without any employer-employee relationship and in the capacity of independent contractors.
[43]
The Aganas never questioned such finding.

PSI, Dr. Ampil and Dr. Fuentes appealed[44] from the RTC decision but only on the issues of
negligence, agency and corporate liability. In its September 6, 1996 decision, the CA
mistakenly referred to PSI and Dr. Ampil as employer-employee, but it was clear in its
discussion on the matter that it viewed their relationship as one of mere apparent agency.[45]

The Aganas appealed from the CA decision, but only to question the exoneration of Dr.
Fuentes.[46] PSI also appealed from the CA decision, and it was then that the issue of
employment, though long settled, was unwittingly resurrected.

In fine, as there was no dispute over the RTC finding that PSI and Dr. Ampil had no
employer-employee relationship, such finding became final and conclusive even to this
Court.[47] There was no reason for PSI to have raised it as an issue in its petition. Thus,
whatever discussion on the matter that may have ensued was purely academic.

Nonetheless, to allay the anxiety of the intervenors, the Court holds that, in this particular
instance, the concurrent finding of the RTC and the CA that PSI was not the employer of Dr.
Ampil is correct. Control as a determinative factor in testing the employer-employee
relationship between doctor and hospital under which the hospital could be held vicariously
liable to a patient in medical negligence cases is a requisite fact to be established by
preponderance of evidence. Here, there was insufficient evidence that PSI exercised the
power of control or wielded such power over the means and the details of the specific
process by which Dr. Ampil applied his skills in the treatment of Natividad.Consequently, PSI
cannot be held vicariously liable for the negligence of Dr. Ampil under the principle
of respondeat superior.
There is, however, ample evidence that the hospital (PSI) held out to the patient (Natividad)
[48]
that the doctor (Dr. Ampil) was its agent. Present are the two factors that determine

105
apparent authority: first, the hospital's implied manifestation to the patient which led the latter
to conclude that the doctor was the hospital's agent; and second, the patients reliance upon
the conduct of the hospital and the doctor, consistent with ordinary care and prudence.[49]

Enrique testified that on April 2, 1984, he consulted Dr. Ampil regarding the condition of his
wife; that after the meeting and as advised by Dr. Ampil, he asked [his] wife to go to Medical
City to be examined by [Dr. Ampil]; and that the next day, April 3, he told his daughter to
take her mother to Dr. Ampil.[50] This timeline indicates that it was Enrique who actually made
the decision on whom Natividad should consult and where, and that the latter merely
acceded to it. It explains the testimony of Natividad that she consulted Dr. Ampil at the
instigation of her daughter.[51]

Moreover, when asked what impelled him to choose Dr. Ampil, Enrique testified:
Atty. Agcaoili

On that particular occasion, April 2, 1984, what was your reason for choosing Dr. Ampil to
contact with in connection with your wife's illness?

A. First, before that, I have known him to be a specialist on that part of the body as a
surgeon, second, I have known him to be a staff member of the Medical City which is
a prominent and known hospital. And third, because he is a neighbor, I expect more than
the usual medical service to be given to us, than his ordinary patients.[52] (emphasis
supplied)

Clearly, the decision made by Enrique for Natividad to consult Dr. Ampil was significantly
influenced by the impression that Dr. Ampil was a staff member
of MedicalCity General Hospital, and that said hospital was well known and prominent.
Enrique looked upon Dr. Ampil not as independent of but as integrally related to Medical City.

PSI's acts tended to confirm and reinforce, rather than negate, Enrique's view. It is of record
that PSI required a consent for hospital care[53] to be signed preparatory to the surgery of
Natividad. The form reads:

Permission is hereby given to the medical, nursing and laboratory staff of

the Medical City General Hospital to perform such diagnostic procedures and to administer
such medications and treatments as may be deemed necessary or advisable by
the physicians of this hospital for and during the confinement of xxx. (emphasis supplied)
By such statement, PSI virtually reinforced the public impression that Dr. Ampil was a
physician of its hospital, rather than one independently practicing in it; that the medications
and treatments he prescribed were necessary and desirable; and that the hospital staff was
prepared to carry them out.

106
PSI pointed out in its memorandum that Dr. Ampil's hospital affiliation was not the exclusive
basis of the Aganas decision to have Natividad treated in Medical CityGeneral Hospital,
meaning that, had Dr. Ampil been affiliated with another hospital, he would still have been
chosen by the Aganas as Natividad's surgeon.[54]

The Court cannot speculate on what could have been behind the Aganas decision but would
rather adhere strictly to the fact that, under the circumstances at that time, Enriquedecided
to consult Dr. Ampil for he believed him to be a staff member of a prominent and known
hospital. After his meeting with Dr. Ampil, Enrique advised his wife Natividad to go to
the Medical City General Hospital to be examined by said doctor, and the hospital acted in a
way that fortified Enrique's belief.

This Court must therefore maintain the ruling that PSI is vicariously liable for the negligence
of Dr. Ampil as its ostensible agent.

Moving on to the next issue, the Court notes that PSI made the following admission in its
Motion for Reconsideration:

51. Clearly, not being an agent or employee of petitioner PSI, PSI [sic] is not liable for Dr.
Ampil's acts during the operation. Considering further that Dr. Ampil was personally engaged
as a doctor by Mrs. Agana, it is incumbent upon Dr. Ampil, as Captain of the Ship, and as
the Agana's doctor to advise her on what to do with her situation vis-a-vis the two missing
gauzes. In addition to noting the missing gauzes, regular check-ups were made and
no signs of complications were exhibited during her stay at the hospital, which could
have alerted petitioner PSI's hospital to render and provide post-operation services to
and tread on Dr. Ampil's role as the doctor of Mrs. Agana. The absence of negligence
of PSI from the patient's admission up to her discharge is borne by the finding of
facts in this case. Likewise evident therefrom is the absence of any complaint from
Mrs. Agana after her discharge from the hospital which had she brought to the
hospital's attention, could have alerted petitioner PSI to act accordingly and bring the
matter to Dr. Ampil's attention. But this was not the case. Ms. Agana complained
ONLY to Drs. Ampil and Fuentes, not the hospital. How then could PSI possibly do
something to fix the negligence committed by Dr. Ampil when it was not informed
about it at all.[55] (emphasis supplied)

PSI reiterated its admission when it stated that had Natividad Agana informed the hospital of
her discomfort and pain, the hospital would have been obliged to act on it.[56]

The significance of the foregoing statements is critical.

First, they constitute judicial admission by PSI that while it had no power to control the
means or method by which Dr. Ampil conducted the surgery on Natividad Agana, it had
the power to review or cause the review of what may have irregularly transpired within its
walls strictly for the purpose of determining whether some form of negligence may have
attended any procedure done inside its premises, with the ultimate end of protecting its
patients.

107
Second, it is a judicial admission that, by virtue of the nature of its business as well as its
prominence[57] in the hospital industry, it assumed a duty to tread on the captain of the ship
role of any doctor rendering services within its premises for the purpose of ensuring the
safety of the patients availing themselves of its services and facilities.

Third, by such admission, PSI defined the standards of its corporate conduct under the
circumstances of this case, specifically: (a) that it had a corporate duty to Natividad even
after her operation to ensure her safety as a patient; (b) that its corporate duty was not
limited to having its nursing staff note or record the two missing gauzes and (c) that its
corporate duty extended to determining Dr. Ampil's role in it, bringing the matter to his
attention, and correcting his negligence.

And finally, by such admission, PSI barred itself from arguing in its second motion for
reconsideration that the concept of corporate responsibility was not yet in existence at the
time Natividad underwent treatment;[58] and that if it had any corporate responsibility, the
same was limited to reporting the missing gauzes and did not include taking an active step in
fixing the negligence committed.[59] An admission made in the pleading cannot be
controverted by the party making such admission and is conclusive as to him, and all proofs
submitted by him contrary thereto or inconsistent therewith should be ignored, whether or
not objection is interposed by a party.[60]

Given the standard of conduct that PSI defined for itself, the next relevant inquiry is
whether the hospital measured up to it.

PSI excuses itself from fulfilling its corporate duty on the ground that Dr. Ampil assumed the
personal responsibility of informing Natividad about the two missing gauzes.[61]Dr. Ricardo
Jocson, who was part of the group of doctors that attended to Natividad, testified that toward
the end of the surgery, their group talked about the missing gauzes but Dr. Ampil assured
them that he would personally notify the patient about it.[62] Furthermore, PSI claimed that
there was no reason for it to act on the report on the two missing gauzes because Natividad
Agana showed no signs of complications. She did not even inform the hospital about her
discomfort.[63]

The excuses proffered by PSI are totally unacceptable.

To begin with, PSI could not simply wave off the problem and nonchalantly delegate to Dr.
Ampil the duty to review what transpired during the operation. The purpose of such review
would have been to pinpoint when, how and by whom two surgical gauzes were mislaid so
that necessary remedial measures could be taken to avert any jeopardy to Natividads
recovery. Certainly, PSI could not have expected that purpose to be achieved by merely
hoping that the person likely to have mislaid the gauzes might be able to retrace his own
steps. By its own standard of corporate conduct, PSI's duty to initiate the review was nondelegable.

While Dr. Ampil may have had the primary responsibility of notifying Natividad about the
missing gauzes, PSI imposed upon itself the separate and independent responsibility of

108
initiating the inquiry into the missing gauzes. The purpose of the first would have been to
apprise Natividad of what transpired during her surgery, while the purpose of the second
would have been to pinpoint any lapse in procedure that led to the gauze count discrepancy,
so as to prevent a recurrence thereof and to determine corrective measures that would
ensure the safety of Natividad. That Dr. Ampil negligently failed to notify Natividad did not
release PSI from its self-imposed separate responsibility.

Corollary to its non-delegable undertaking to review potential incidents of negligence

committed within its premises, PSI had the duty to take notice of medical records prepared
by its own staff and submitted to its custody, especially when these bear earmarks of a
surgery gone awry. Thus, the record taken during the operation of Natividad which reported
a gauze count discrepancy should have given PSI sufficient reason to initiate a review. It
should not have waited for Natividad to complain.

As it happened, PSI took no heed of the record of operation and consequently did not initiate
a review of what transpired during Natividads operation. Rather, it shirked its responsibility
and passed it on to others to Dr. Ampil whom it expected to inform Natividad, and to
Natividad herself to complain before it took any meaningful step. By its inaction, therefore,
PSI failed its own standard of hospital care. It committed corporate negligence.

It should be borne in mind that the corporate negligence ascribed to PSI is different from the
medical negligence attributed to Dr. Ampil. The duties of the hospital are distinct from those
of the doctor-consultant practicing within its premises in relation to the patient; hence, the
failure of PSI to fulfill its duties as a hospital corporation gave rise to a direct liability to the
Aganas distinct from that of Dr. Ampil.

All this notwithstanding, we make it clear that PSIs hospital liability based on ostensible
agency and corporate negligence applies only to this case, pro hac vice. It is not intended to
set a precedent and should not serve as a basis to hold hospitals liable for every form of
negligence of their doctors-consultants under any and all circumstances. The ruling is unique
to this case, for the liability of PSI arose from an implied agency with Dr. Ampil and an
admitted corporate duty to Natividad.[64]
Other circumstances peculiar to this case warrant this ruling,[65] not the least of which being
that the agony wrought upon the Aganas has gone on for 26 long years, with Natividad
coming to the end of her days racked in pain and agony. Such wretchedness could have
been avoided had PSI simply done what was logical: heed the report of a guaze count
discrepancy, initiate a review of what went wrong and take corrective measures to ensure
the safety of Nativad. Rather, for 26 years, PSI hemmed and hawed at every turn, disowning
any such responsibility to its patient. Meanwhile, the options left to the Aganas have all but
dwindled, for the status of Dr. Ampil can no longer be ascertained.[66]

Therefore, taking all the equities of this case into consideration, this Court believes P15
million would be a fair and reasonable liability of PSI, subject to 12% p.a. interest from the
finality of this resolution to full satisfaction.

109
WHEREFORE, the second motion for reconsideration is DENIED and the motions for
intervention are NOTED.

Professional Services, Inc. is ORDERED pro hac vice to pay Natividad (substituted by her
children Marcelino Agana III, Enrique Agana, Jr., Emma Agana-Andaya, Jesus Agana and
Raymund Agana) and Enrique Agana the total amount of P15 million, subject to 12% p.a.
interest from the finality of this resolution to full satisfaction.

No further pleadings by any party shall be entertained in this case.

Let the long-delayed entry of judgment be made in this case upon receipt by all concerned
parties of this resolution.
SO ORDERED.