CORPORATION LAW CASES SESSION 1
G.R. No. L-23145 November 29, 1968
TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATO D. TAYAG vs.
BENGUET CONSOLIDATED, INC.
Confronted by an obstinate and adamant refusal of the domiciliary administrator, the
County Trust Company of New York, United States of America, of the estate of the
deceased Idonah Slade Perkins, who died in New York City on March 27, 1960, to
surrender to the ancillary administrator in the Philippines the stock certificates owned by
her in a Philippine corporation, Benguet Consolidated, Inc., to satisfy the legitimate
claims of local creditors, the lower court, then presided by the Honorable Arsenio Santos,
now retired, issued on May 18, 1964, an order of this tenor: "After considering the motion
of the ancillary administrator, dated February 11, 1964, as well as the opposition filed by
the Benguet Consolidated, Inc., the Court hereby (1) considers as lost for all purposes in
connection with the administration and liquidation of the Philippine estate of Idonah
Slade Perkins the stock certificates covering the 33,002 shares of stock standing in her
name in the books of the Benguet Consolidated, Inc., (2) orders said certificates
cancelled, and (3) directs said corporation to issue new certificates in lieu thereof, the
same to be delivered by said corporation to either the incumbent ancillary administrator
or to the Probate Division of this Court."1
From such an order, an appeal was taken to this Court not by the domiciliary
administrator, the County Trust Company of New York, but by the Philippine corporation,
the Benguet Consolidated, Inc. The appeal cannot possibly prosper. The challenged
order represents a response and expresses a policy, to paraphrase Frankfurter, arising
out of a specific problem, addressed to the attainment of specific ends by the use of
specific remedies, with full and ample support from legal doctrines of weight and
significance.
The facts will explain why. As set forth in the brief of appellant Benguet Consolidated,
Inc., Idonah Slade Perkins, who died on March 27, 1960 in New York City, left among
others, two stock certificates covering 33,002 shares of appellant, the certificates being
in the possession of the County Trust Company of New York, which as noted, is the
domiciliary administrator of the estate of the deceased. 2 Then came this portion of the
appellant's brief: "On August 12, 1960, Prospero Sanidad instituted ancillary
administration proceedings in the Court of First Instance of Manila; Lazaro A. Marquez
was appointed ancillary administrator, and on January 22, 1963, he was substituted by
the appellee Renato D. Tayag. A dispute arose between the domiciary administrator in
New York and the ancillary administrator in the Philippines as to which of them was
entitled to the possession of the stock certificates in question. On January 27, 1964, the
Court of First Instance of Manila ordered the domiciliary administrator, County Trust
Company, to "produce and deposit" them with the ancillary administrator or with the Clerk
of Court. The domiciliary administrator did not comply with the order, and on February 11,
1964, the ancillary administrator petitioned the court to "issue an order declaring the
certificate or certificates of stocks covering the 33,002 shares issued in the name of
Idonah Slade Perkins by Benguet Consolidated, Inc., be declared [or] considered as
lost."3
It is to be noted further that appellant Benguet Consolidated, Inc. admits that "it is
immaterial" as far as it is concerned as to "who is entitled to the possession of the stock
certificates in question; appellant opposed the petition of the ancillary administrator
because the said stock certificates are in existence, they are today in the possession of
the domiciliary administrator, the County Trust Company, in New York, U.S.A...."4
It is its view, therefore, that under the circumstances, the stock certificates cannot be
declared or considered as lost. Moreover, it would allege that there was a failure to
observe certain requirements of its by-laws before new stock certificates could be issued.
Hence, its appeal.
As was made clear at the outset of this opinion, the appeal lacks merit. The challenged
order constitutes an emphatic affirmation of judicial authority sought to be emasculated
by the wilful conduct of the domiciliary administrator in refusing to accord obedience to a
court decree. How, then, can this order be stigmatized as illegal?
As is true of many problems confronting the judiciary, such a response was called for by
the realities of the situation. What cannot be ignored is that conduct bordering on wilful
defiance, if it had not actually reached it, cannot without undue loss of judicial prestige,
be condoned or tolerated. For the law is not so lacking in flexibility and resourcefulness
as to preclude such a solution, the more so as deeper reflection would make clear its
being buttressed by indisputable principles and supported by the strongest policy
considerations.
It can truly be said then that the result arrived at upheld and vindicated the honor of the
judiciary no less than that of the country. Through this challenged order, there is thus
dispelled the atmosphere of contingent frustration brought about by the persistence of
the domiciliary administrator to hold on to the stock certificates after it had, as admitted,
voluntarily submitted itself to the jurisdiction of the lower court by entering its appearance
through counsel on June 27, 1963, and filing a petition for relief from a previous order of
March 15, 1963.
Thus did the lower court, in the order now on appeal, impart vitality and effectiveness to
what was decreed. For without it, what it had been decided would be set at naught and
nullified. Unless such a blatant disregard by the domiciliary administrator, with residence
abroad, of what was previously ordained by a court order could be thus remedied, it
would have entailed, insofar as this matter was concerned, not a partial but a well-nigh
complete paralysis of judicial authority.
1

1. Appellant Benguet Consolidated, Inc. did not dispute the power of the appellee
ancillary administrator to gain control and possession of all assets of the decedent within
the jurisdiction of the Philippines. Nor could it. Such a power is inherent in his duty to
settle her estate and satisfy the claims of local creditors. 5 As Justice Tuason speaking for
this Court made clear, it is a "general rule universally recognized" that administration,
whether principal or ancillary, certainly "extends to the assets of a decedent found within
the state or country where it was granted," the corollary being "that an administrator
appointed in one state or country has no power over property in another state or
country."6
It is to be noted that the scope of the power of the ancillary administrator was, in an
earlier case, set forth by Justice Malcolm. Thus: "It is often necessary to have more than
one administration of an estate. When a person dies intestate owning property in the
country of his domicile as well as in a foreign country, administration is had in both
countries. That which is granted in the jurisdiction of decedent's last domicile is termed
the principal administration, while any other administration is termed the ancillary
administration. The reason for the latter is because a grant of administration does not ex
proprio vigore have any effect beyond the limits of the country in which it is granted.
Hence, an administrator appointed in a foreign state has no authority in the [Philippines].
The ancillary administration is proper, whenever a person dies, leaving in a country other
than that of his last domicile, property to be administered in the nature of assets of the
deceased liable for his individual debts or to be distributed among his heirs." 7
It would follow then that the authority of the probate court to require that ancillary
administrator's right to "the stock certificates covering the 33,002 shares ... standing in
her name in the books of [appellant] Benguet Consolidated, Inc...." be respected is
equally beyond question. For appellant 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.
Our holding in Wells Fargo Bank and Union v. Collector of Internal Revenue 8 finds
application. "In the instant case, the actual situs of the shares of stock is in the
Philippines, the corporation being domiciled [here]." To the force of the above undeniable
proposition, not even appellant is insensible. It does not dispute it. Nor could it
successfully do so even if it were so minded.
2. In the face of such incontrovertible doctrines that argue in a rather conclusive fashion
for the legality of the challenged order, how does appellant, Benguet Consolidated, Inc.
propose to carry the extremely heavy burden of persuasion of precisely demonstrating
the contrary? It would assign as the basic error allegedly committed by the lower court its
"considering as lost the stock certificates covering 33,002 shares of Benguet belonging
to the deceased Idonah Slade Perkins, ..." 9 More specifically, appellant would stress that
the "lower court could not "consider as lost" the stock certificates in question when, as a
CORPORATION LAW CASES SESSION 1
matter of fact, his Honor the trial Judge knew, and does know, and it is admitted by the
appellee, that the said stock certificates are in existence and are today in the possession
of the domiciliary administrator in New York."10
There may be an element of fiction in the above view of the lower court. That certainly
does not suffice to call for the reversal of the appealed order. Since there is a refusal,
persistently adhered to by the domiciliary administrator in New York, to deliver the shares
of stocks of appellant corporation owned by the decedent to the ancillary administrator in
the Philippines, there was nothing unreasonable or arbitrary in considering them as lost
and requiring the appellant to issue new certificates in lieu thereof. Thereby, the task
incumbent under the law on the ancillary administrator could be discharged and his
responsibility fulfilled.
Any other view would result in the compliance to a valid judicial order being made to
depend on the uncontrolled discretion of the party or entity, in this case domiciled
abroad, which thus far has shown the utmost persistence in refusing to yield obedience.
Certainly, appellant would not be heard to contend in all seriousness that a judicial
decree could be treated as a mere scrap of paper, the court issuing it being powerless to
remedy its flagrant disregard.
It may be admitted of course that such alleged loss as found by the lower court did not
correspond exactly with the facts. To be more blunt, the quality of truth may be lacking in
such a conclusion arrived at. It is to be remembered however, again to borrow from
Frankfurter, "that fictions which the law may rely upon in the pursuit of legitimate ends
have played an important part in its development."11
Speaking of the common law in its earlier period, Cardozo could state fictions "were
devices to advance the ends of justice, [even if] clumsy and at times offensive." 12 Some
of them have persisted even to the present, that eminent jurist, noting "the quasi
contract, the adopted child, the constructive trust, all of flourishing vitality, to attest the
empire of "as if" today."13 He likewise noted "a class of fictions of another order, the fiction
which is a working tool of thought, but which at times hides itself from view till reflection
and analysis have brought it to the light."14
What cannot be disputed, therefore, is the at times indispensable role that fictions as
such played in the law. There should be then on the part of the appellant a further
refinement in the catholicity of its condemnation of such judicial technique. If ever an
occasion did call for the employment of a legal fiction to put an end to the anomalous
situation of a valid judicial order being disregarded with apparent impunity, this is it. What
is thus most obvious is that this particular alleged error does not carry persuasion.
3. Appellant Benguet Consolidated, Inc. would seek to bolster the above contention by its
invoking one of the provisions of its by-laws which would set forth the procedure to be
2

followed in case of a lost, stolen or destroyed stock certificate; it would stress that in the
event of a contest or the pendency of an action regarding ownership of such certificate or
certificates of stock allegedly lost, stolen or destroyed, the issuance of a new certificate
or certificates would await the "final decision by [a] court regarding the ownership
[thereof]."15
Such reliance is misplaced. In the first place, there is no such occasion to apply such by-
law. It is admitted that the foreign domiciliary administrator did not appeal from the order
now in question. Moreover, there is likewise the express admission of appellant that as
far as it is concerned, "it is immaterial ... who is entitled to the possession of the stock
certificates ..." Even if such were not the case, it would be a legal absurdity to impart to
such a provision conclusiveness and finality. Assuming that a contrariety exists between
the above by-law and the command of a court decree, the latter is to be followed.
It is understandable, as Cardozo pointed out, that the Constitution overrides a statute, to
which, however, the judiciary must yield deference, when appropriately invoked and
deemed applicable. It would be most highly unorthodox, however, if a corporate by-law
would be accorded such a high estate in the jural order that a court must not only take
note of it but yield to its alleged controlling force.
The fear of appellant of a contingent liability with which it could be saddled unless the
appealed order be set aside for its inconsistency with one of its by-laws does not impress
us. Its obedience to a lawful court order certainly constitutes a valid defense, assuming
that such apprehension of a possible court action against it could possibly materialize.
Thus far, nothing in the circumstances as they have developed gives substance to such
a fear. Gossamer possibilities of a future prejudice to appellant do not suffice to nullify
the lawful exercise of judicial authority.
4. What is more the view adopted by appellant Benguet Consolidated, Inc. is fraught with
implications at war with the basic postulates of corporate theory.
We start with the undeniable premise that, "a corporation is an artificial being created by
operation of law...."16 It owes its life to the state, its birth being purely dependent on its
will. As Berle so aptly stated: "Classically, a corporation was conceived as an artificial
person, owing its existence through creation by a sovereign power." 17As a matter of fact,
the statutory language employed owes much to Chief Justice Marshall, who in the
Dartmouth College decision defined a corporation precisely as "an artificial being,
invisible, intangible, and existing only in contemplation of law." 18
The well-known authority Fletcher could summarize the matter thus: "A corporation is not
in fact and in reality a person, but the law treats it as though it were a person by process
of fiction, or by regarding it as an artificial person distinct and separate from its individual
stockholders.... It owes its existence to law. It is an artificial person created by law for
CORPORATION LAW CASES SESSION 1
certain specific purposes, the extent of whose existence, powers and liberties is fixed by
its charter."19 Dean Pound's terse summary, a juristic person, resulting from an
association of human beings granted legal personality by the state, puts the matter
neatly.20
There is thus a rejection of Gierke's genossenchaft theory, the basic theme of which to
quote from Friedmann, "is the reality of the group as a social and legal entity,
independent of state recognition and concession."21 A corporation as known to Philippine
jurisprudence is a creature without any existence until it has received the imprimatur of
the state according to law. It is logically inconceivable therefore that it will have rights and
privileges of a higher priority than that of its creator. More than that, it cannot legitimately
refuse to yield obedience to acts of its state organs, certainly not excluding the judiciary,
whenever called upon to do so.
As a matter of fact, a corporation once it comes into being, following American law still of
persuasive authority in our jurisdiction, comes more often within the ken of the judiciary
than the other two coordinate branches. It institutes the appropriate court action to
enforce its right. Correlatively, it is not immune from judicial control in those instances,
where a duty under the law as ascertained in an appropriate legal proceeding is cast
upon it.
To assert that it can choose which court order to follow and which to disregard is to
confer upon it not autonomy which may be conceded but license which cannot be
tolerated. It is to argue that it may, when so minded, overrule the state, the source of its
very existence; it is to contend that what any of its governmental organs may lawfully
require could be ignored at will. So extravagant a claim cannot possibly merit approval.
5. One last point. In Viloria v. Administrator of Veterans Affairs, 22 it was shown that in a
guardianship proceedings then pending in a lower court, the United States Veterans
Administration filed a motion for the refund of a certain sum of money paid to the minor
under guardianship, alleging that the lower court had previously granted its petition to
consider the deceased father as not entitled to guerilla benefits according to a
determination arrived at by its main office in the United States. The motion was denied.
In seeking a reconsideration of such order, the Administrator relied on an American
federal statute making his decisions "final and conclusive on all questions of law or fact"
precluding any other American official to examine the matter anew, "except a judge or
judges of the United States court." 23 Reconsideration was denied, and the Administrator
appealed.
In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus: "We are of the
opinion that the appeal should be rejected. The provisions of the U.S. Code, invoked by
the appellant, make the decisions of the U.S. Veterans' Administrator final and conclusive
when made on claims property submitted to him for resolution; but they are not
3

applicable to the present case, where the Administrator is not acting as a judge but as a
litigant. There is a great difference between actions against the Administrator (which
must be filed strictly in accordance with the conditions that are imposed by the Veterans'
Act, including the exclusive review by United States courts), and those actions where the
Veterans' Administrator seeks a remedy from our courts and submits to their jurisdiction
by filing actions therein. Our attention has not been called to any law or treaty that would
make the findings of the Veterans' Administrator, in actions where he is a party,
conclusive on our courts. That, in effect, would deprive our tribunals of judicial discretion
and render them mere subordinate instrumentalities of the Veterans' Administrator."
It is bad enough as the Viloria decision made patent for our judiciary to accept as final
and conclusive, determinations made by foreign governmental agencies. It is infinitely
worse if through the absence of any coercive power by our courts over juridical persons
within our jurisdiction, the force and effectivity of their orders could be made to depend
on the whim or caprice of alien entities. It is difficult to imagine of a situation more
offensive to the dignity of the bench or the honor of the country.
CORPORATION LAW CASES SESSION 1
In this petition for review on certiorari under Rule 45 of the Revised Rules of Court,
petitioners seek to annul the decision of the Court of Appeals in CA-G.R. SP. No. 31748
dated 23 May 1994 and its subsequent resolution dated 10 May 1995 denying
petitioners' motion for reconsideration.
The present case involves two separate but interrelated conflicts. The facts leading to the
first controversy are as follows:
The late Manuel A. Torres, Jr. (Judge Torres for brevity) was the majority stockholder of
Tormil Realty & Development Corporation while private respondents who are the children
of Judge Torres' deceased brother Antonio A. Torres, constituted the minority
stockholders. In particular, their respective shareholdings and positions in the corporation
were as follows:
Name of Stockholder Number of Percentage Position(s)
Shares

Yet that would be the effect, even if unintended, of the proposition to which appellant Manuel A. Torres, Jr. 100,120 57.21 Dir./Pres./Chair
Benguet Consolidated seems to be firmly committed as shown by its failure to accept the Milagros P. Torres 33,430 19.10 Dir./Treasurer
validity of the order complained of; it seeks its reversal. Certainly we must at all pains Josefina P. Torres 8,290 4.73 Dir./Ass. Cor-Sec.
see to it that it does not succeed. The deplorable consequences attendant on appellant Ma. Cristina T. Carlos 8,290 4.73 Dir./Cor-Sec.
prevailing attest to the necessity of negative response from us. That is what appellant will Antonio P. Torres, Jr. 8,290 4.73 Director
get. Ma. Jacinta P. Torres 8,290 4.73 Director
Ma. Luisa T. Morales 7,790 4.45 Director
That is all then that this case presents. It is obvious why the appeal cannot succeed. It is Dante D. Morales 500 .28 Director 1
always easy to conjure extreme and even oppressive possibilities. That is not decisive. It
does not settle the issue. What carries weight and conviction is the result arrived at, the In 1984, Judge Torres, in order to make substantial savings in taxes, adopted an "estate
just solution obtained, grounded in the soundest of legal doctrines and distinguished by planning" scheme under which he assigned to Tormil Realty & Development Corporation
its correspondence with what a sense of realism requires. For through the appealed (Tormil for brevity) various real properties he owned and his shares of stock in other
order, the imperative requirement of justice according to law is satisfied and national corporations in exchange for 225,972 Tormil Realty shares. Hence, on various dates in
dignity and honor maintained. July and August of 1984, ten (10) deeds of assignment were executed by the late Judge
Torres:
WHEREFORE, the appealed order of the Honorable Arsenio Santos, the Judge of the
Court of First Instance, dated May 18, 1964, is affirmed. With costs against oppositor- ASSIGNMENT DATE PROPERTY ASSIGNED LOCATION SHARES TO BE
appelant Benguet Consolidated, Inc. ISSUED

G.R. No. 120138 September 5, 1997 1. July 13, 1984 TCT 81834 Quezon City 13,252
MANUEL A. TORRES, JR., (Deceased), GRACIANO J. TOBIAS, RODOLFO L. TCT 144240 Quezon City
JOCSON, JR., MELVIN S. JURISPRUDENCIA, AUGUSTUS CESAR AZURA and
EDGARDO D. PABALAN vs. COURT OF APPEALS, SECURITIES AND EXCHANGE
2. July 13, 1984 TCT 77008 Manila
COMMISSION, TORMIL REALTY & DEVELOPMENT CORPORATION, ANTONIO P.
TCT 65689 Manila 78,493
TORRES, JR., MA. CRISTINA T. CARLOS, MA. LUISA T. MORALES and DANTE D.
TCT 109200 Manila
MORALES
4

3. July 13, 1984 TCT 374079 Makati 8,307
4. July 24, 1984 TCT 41527 Pasay
TCT 41528 Pasay 9,855
TCT 41529 Pasay
5. Aug. 06, 1984 El Hogar Filipino Stocks 2,000
6. Aug. 06, 1984 Manila Jockey Club Stocks 48,737
7. Aug. 07, 1984 San Miguel Corp. Stocks 50,283
8. Aug. 07, 1984 China banking Corp. Stocks 6,300
9. Aug. 20, 1984 Ayala Corp. Stocks 7,468
10. Aug. 29, 1984 Ayala Fund Stocks 1,322
Pursuant thereto, Judge Torres assigned from his own shares, one (l) share each to
225,972 2
Consequently, the aforelisted properties were duly recorded in the inventory of assets of
Tormil Realty and the revenues generated by the said properties were correspondingly
entered in the corporation's books of account and financial records.
Likewise, all the assigned parcels of land were duly registered with the respective
Register of Deeds in the name of Tormil Realty, except for the ones located in Makati and
Pasay City.
At the time of the assignments and exchange, however, only 225,000 Tormil Realty
shares remained unsubscribed, all of which were duly issued to and received by Judge
Torres (as evidenced by stock certificates Nos. 17, 18, 19, 20, 21, 22, 23, 24 & 25). 3
Due to the insufficient number of shares of stock issued to Judge Torres and the alleged
refusal of private respondents to approve the needed increase in the corporation's
authorized capital stock (to cover the shortage of 972 shares due to Judge Torres under
the "estate planning" scheme), on 11 September 1986, Judge Torres revoked the two (2)
deeds of assignment covering the properties in Makati and Pasay City. 4
Noting the disappearance of the Makati and Pasay City properties from the corporation's
inventory of assets and financial records private respondents, on 31 March 1987, were
CORPORATION LAW CASES SESSION 1
constrained to file a complaint with the Securities and Exchange Commission (SEC)
docketed as SEC Case No. 3153 to compel Judge Torres to deliver to Tormil corporation
the two (2) deeds of assignment covering the aforementioned Makati and Pasay City
properties which he had unilaterally revoked and to cause the registration of the
corresponding titles in the name of Tormil. Private respondents alleged that following the
disappearance of the properties from the corporation's inventory of assets, they found
that on October 24, 1986, Judge Torres, together with Edgardo Pabalan and Graciano
Tobias, then General Manager and legal counsel, respectively, of Tormil, formed and
organized a corporation named "Torres-Pabalan Realty and Development Corporation"
and that as part of Judge Torres' contribution to the new corporation, he executed in its
favor a Deed of Assignment conveying the same Makati and Pasay City properties he
had earlier transferred to Tormil.
The second controversy involving the same parties concerned the election of the
1987 corporate board of directors.
The 1987 annual stockholders meeting and election of directors of Tormil corporation
was scheduled on 25 March 1987 in compliance with the provisions of its by-laws.
petitioners Tobias, Jocson, Jurisprudencia, Azura and Pabalan. These assigned shares
were in the nature of "qualifying shares," for the sole purpose of meeting the legal
requirement to be able to elect them (Tobias and company) to the Board of Directors as
Torres' nominees.
The assigned shares were covered by corresponding Tormil Stock Certificates Nos. 030,
029, 028, 027, 026 and at the back of each certificate the following inscription is found:
The present certificate and/or the one share it represents, conformably to
the purpose and intention of the Deed of Assignment dated March 6,
1987, is not held by me under any claim of ownership and I acknowledge
that I hold the same merely as trustee of Judge Manuel A. Torres, Jr. and
for the sole purpose of qualifying me as Director;
(Signature of Assignee) 5
The reason behind the aforestated action was to remedy the "inequitable lopsided set-up
obtaining in the corporation, where, notwithstanding his controlling interest in the
corporation, the late Judge held only a single seat in the nine-member Board of Directors
and was, therefore, at the mercy of the minority, a combination of any two (2) of whom
would suffice to overrule the majority stockholder in the Board's decision making
functions." 6
5

On 25 March 1987, the annual stockholders meeting was held as scheduled. What
transpired therein was ably narrated by Attys. Benito Cataran and Bayani De los Reyes,
the official representatives dispatched by the SEC to observe the proceedings (upon
request of the late Judge Torres) in their report dated 27 March 1987:
xxx xxx xxx
The undersigned arrived at 1:55 p.m. in the place of the meeting, a
residential bungalow in Urdaneta Village, Makati, Metro Manila. Upon
arrival, Josefina Torres introduced us to the stockholders namely:
Milagros Torres, Antonio Torres, Jr., Ma. Luisa Morales, Ma. Cristina
Carlos and Ma. Jacinta Torres. Antonio Torres, Jr. questioned our
authority and personality to appear in the meeting claiming subject
corporation is a family and private firm. We explained that our
appearance there was merely in response to the request of Manuel
Torres, Jr. and that SEC has jurisdiction over all registered corporations.
Manuel Torres, Jr., a septuagenarian, argued that as holder of the major
and controlling shares, he approved of our attendance in the meeting.
At about 2:30 p.m., a group composed of Edgardo Pabalan, Atty.
Graciano Tobias, Atty. Rodolfo Jocson, Jr., Atty. Melvin Jurisprudencia,
and Atty. Augustus Cesar Azura arrived. Atty. Azura told the body that
they came as counsels of Manuel Torres, Jr. and as stockholders having
assigned qualifying shares by Manuel Torres, Jr.
The stockholders' meeting started at 2:45 p.m. with Mr. Pabalan presiding
after verbally authorized by Manuel Torres, Jr., the President and
Chairman of the Board. The secretary when asked about the quorum,
said that there was more than a quorum. Mr. Pabalan distributed copies
of the president's report and the financial statements. Antonio Torres,
Jr. requested time to study the said reports and brought out the question
of auditing the finances of the corporation which he claimed was
approved previously by the board. Heated arguments ensued which also
touched on family matters. Antonio Torres, Jr. moved for the suspension
of the meeting but Manuel Torres, Jr. voted for the continuation of the
proceedings.
Mr. Pabalan suggested that the opinion of the SEC representatives be
asked on the propriety of suspending the meeting but Antonio Torres, Jr.
objected reasoning out that we were just observers.
CORPORATION LAW CASES SESSION 1
When the Chairman called for the election of directors, the Secretary
refused to write down the names of nominees prompting Atty. Azura to
initiate the appointment of Atty. Jocson, Jr. as Acting Secretary.
Antonio Torres, Jr. nominated the present members of the Board. At this
juncture, Milagros Torres cried out and told the group of Manuel Torres,
Jr. to leave the house.
Manuel Torres, Jr., together with his lawyers-stockholders went to the
residence of Ma. Jacinta Torres in San Miguel Village, Makati, Metro
Manila. The undersigned joined them since the group with Manuel Torres,
Jr. the one who requested for S.E.C. observers, represented the majority
of the outstanding capital stock and still constituted a quorum.
At the resumption of the meeting, the following were nominated and
elected as directors for the year 1987-1988:
1. Manuel Torres, Jr.
2. Ma. Jacinta Torres
3. Edgardo Pabalan
4. Graciano Tobias
5. Rodolfo Jocson, Jr.
6. Melvin Jurisprudencia
7. Augustus Cesar Azura
8. Josefina Torres
9. Dante Morales
After the election, it was resolved that after the meeting, the new board of
directors shall convene for the election of officers.
xxx xxx xxx 7
6

Consequently, on 10 April 1987, private respondents instituted a complaint with the SEC
(SEC Case No. 3161) praying in the main, that the election of petitioners to the Board of
Directors be annulled.
Private respondents alleged that the petitioners-nominees were not legitimate
stockholders of Tormil because the assignment of shares to them violated the minority
stockholders' right of pre-emption as provided in the corporation's articles and by-laws.
Upon motion of petitioners, SEC Cases Nos. 3153 and 3161 were consolidated for joint
hearing and adjudication.
On 6 March 1991, the Panel of Hearing Officers of the SEC rendered a decision in favor
of private respondents. The dispositive portion thereof states, thus:
WHEREFORE, premises considered, judgment is hereby rendered as
follows:
1. Ordering and directing the respondents, particularly respondent
Manuel A. Torres, Jr., to turn over and deliver to TORMIL through its
Corporate Secretary, Ma. Cristina T. Carlos: (a) the originals of the Deeds
of Assignment dated July 13 and 24, 1984 together with the owner's
duplicates of Transfer Certificates of Title Nos. 374079 of the Registry of
Deeds for Makati, and 41527, 41528 and 41529 of the Registry of Deeds
for Pasay City and/or to cause the formal registration and transfer of title
in and over such real properties in favor of TORMIL with the proper
government agency; (b) all corporate books of account, records and
papers as may be necessary for the conduct of a comprehensive audit
examination, and to allow the examination and inspection of such
accounting books, papers and records by any or all of the corporate
directors, officers and stockholders and/or their duly authorized
representatives or auditors;
2. Declaring as permanent and final the writ of preliminary injunction
issued by the Hearing Panel on February 13, 1989;
3. Declaring as null and void the election and appointment of
respondents to the Board of Directors and executive positions of TORMIL
held on March 25, 1987, and all their acts and resolutions made for and
in behalf of TORMIL by authority of and pursuant to such invalid
appointment & election held on March 25, 1987;
CORPORATION LAW CASES SESSION 1
4. Ordering the respondents jointly and severally, to pay the complainants
the sum of ONE HUNDRED THOUSAND PESOS (P100,000.00) as and
by way of attorney's fees. 8
Petitioners promptly appealed to the SEC en banc (docketed as SEC-AC No. 339).
Thereafter, on 3 April 1991, during the pendency of said appeal, petitioner Manuel A.
Torres, Jr. died. However, notice thereof was brought to the attention of the SEC not by
petitioners' counsel but by private respondents in a Manifestation dated 24 April 1991. 9
On 8 June 1993, petitioners filed a Motion to Suspend Proceedings on grounds that no
administrator or legal representative of the late Judge Torres' estate has yet been
appointed by the Regional Trial Court of Makati where Sp. Proc. No. M-1768 ("In Matter
of the Issuance of the Last Will and Testament of Manuel A Torres, Jr.") was pending.
Two similar motions for suspension were filed by petitioners on 28 June 1993 and 9 July
1993.
On 19 July 1993, the SEC en banc issued an Order denying petitioners' aforecited
motions on the following ground:
Before the filing of these motions, the Commission en banc had already
completed all proceedings and had likewise ruled on the merits of the
appealed cases. Viewed in this light, we thus feel that there is nothing left
to be done except to deny these motions to suspend proceedings. 10
On the same date, the SEC en banc rendered a decision, the dispositive portion of which
reads, thus:
WHEREFORE, premises considered, the appealed decision of the
hearing panel is hereby affirmed and all motions pending before us
incident to this appealed case are necessarily DISMISSED.
SO ORDERED. 11
Undaunted, on 10 August 1993, petitioners proceeded to plead its cause to the Court of
Appeals by way of a petition for review (docketed as CA-G.R. SP No. 31748).
On 23 May 1994, the Court of Appeals rendered a decision, the dispositive portion of
which states:
WHEREFORE, the petition for review is DISMISSED and the appealed
decision is accordingly affirmed.
7

SO ORDERED. 12
From the said decision, petitioners filed a motion for reconsideration which was denied in
a resolution issued by the Court of Appeals dated 10 May 1995. 13
Insisting on their cause, petitioners filed the present petition for review alleging that the
Court of Appeals committed the following errors in its decision:
(1)
WHEN IT RENDERED THE MAY 23, 1994 DECISION, WHICH IS A
FULL LENGTH DECISION, WITHOUT THE EVIDENCE AND THE
ORIGINAL RECORD OF S.E.C. AC NO. 339 BEING PROPERLY
BROUGHT BEFORE IT FOR REVIEW AND RE-EXAMINATION, AN
OMISSION RESULTING IN A CLEAR TRANSGRESSION OR
CURTAILMENT OF THE RIGHTS OF THE HEREIN PETITIONERS TO
PROCEDURAL DUE PROCESS;
(2)
WHEN IT SANCTIONED THE JULY 19, 1993 DECISION OF THE
RESPONDENT S.E.C., WHICH IS VOID FOR HAVING BEEN
RENDERED WITHOUT THE PROPER SUBSTITUTION OF THE
DECEASED PRINCIPAL PARTY-RESPONDENT IN S.E.C.-AC NO. 339
AND CONSEQUENTLY, FOR WANT OF JURISDICTION OVER THE
SAID DECEASED'S TESTATE ESTATE, AND MOREOVER, WHEN IT
SOUGHT TO JUSTIFY THE NON-SUBSTITUTION BY ITS
APPLICATION OF THE CIVIL LAW CONCEPT OF NEGOTIORUM
GESTIO;
(3)
WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE
AND THE ORIGINAL RECORD OF S.E.C. AC NO. 339 NOT HAVING
ACTUALLY BEEN RE-EXAMINED, THAT S.E.C. CASE NO. 3153
INVOLVED A SITUATION WHERE PERFORMANCE WAS IMPOSSIBLE
(AS CONTEMPLATED UNDER ARTICLE 1191 OF THE CIVIL CODE)
AND WAS NOT A MERE CASE OF LESION OR INADEQUACY OF
CAUSE (UNDER ARTICLE 1355 OF THE CIVIL CODE) AS SO
ERRONEOUSLY CHARACTERIZED BY THE RESPONDENT S.E.C.;
and,
CORPORATION LAW CASES SESSION 1
(4)
WHEN IT FAILED TO SEE, AS A CONSEQUENCE OF THE EVIDENCE
AND THE ORIGINAL RECORD OF S.E.C. AC NO. 339 NOT HAVING
ACTUALLY BEEN EXAMINED, THAT THE RECORDING BY THE LATE
JUDGE MANUEL A. TORRES, JR. OF THE QUESTIONED
ASSIGNMENT OF QUALIFYING SHARES TO HIS NOMINEES, WAS
AFFIRMED IN THE STOCK AND TRANSFER BOOK BY AN ACTING
CORPORATE SECRETARY AND MOREOVER, THAT ACTUAL NOTICE
OF SAID ASSIGNMENT WAS TIMELY MADE TO THE OTHER
STOCKHOLDERS. 14
We shall resolve the issues in seriatim.
I
Petitioners insist that the failure to transmit the original records to the Court of Appeals
deprived them of procedural due process. Without the evidence and the original records
of the proceedings before the SEC, the Court of Appeals, petitioners adamantly state,
could not have possibly made a proper appreciation and correct determination of the
issues, particularly the factual issues, they had raised on appeal. Petitioners also assert
that since the Court of Appeals allegedly gave due course to their petition, the original
records should have been forwarded to said court.
Petitioners anchor their argument on Secs. 8 and 11 of SC Circular 1-91 (dated 27
February 1991) which provides that:
8. WHEN PETITION GIVEN DUE COURSE. The Court of Appeals
shall give due course to the petition only when it shows prima facie that
the court, commission, board, office or agency concerned has committed
errors of fact or law that would warrant reversal or modification of the
order, ruling or decision sought to be reviewed. The findings of fact of the
court commission, board, office or agency concerned when supported by
substantial evidence shall be final.
xxx xxx xxx
11. TRANSMITTAL OF RECORD. Within fifteen (15) days from notice
that the petition has been given due course, the court, commission,
board, office or agency concerned shall transmit to the Court of Appeals
the original or a certified copy of the entire record of the proceeding
under review. The record to be transmitted may be abridged by
8

agreement of all parties to the proceeding. The Court of Appeals may
require or permit subsequent correction or addition to the record.
Petitioners contend that the Court of Appeals had given due course to their petition as
allegedly indicated by the following acts:
a) it granted the restraining order applied for by the herein
petitioners, and after hearing, also the writ of preliminary
injunction sought by them; under the original SC Circular
No. 1-91, a petition for review may be given due course at
the onset (paragraph 8) upon a mere prima facie finding
of errors of fact or law having been committed, and
such prima facie finding is but consistent with the grant of
the extra-ordinary writ of preliminary injunction;
b) it required the parties to submit "simultaneous
memoranda" in its resolution dated October 15, 1993 (this
is in addition to the comment required to be filed by the
respondents) and furthermore declared in the same
resolution that the petition will be decided "on the merits,"
instead of outrightly dismissing the same;
c) it rendered a full length decision, wherein: (aa) it
expressly declared the respondent S.E.C. as having erred
in denying the pertinent motions to suspend proceedings;
(bb) it declared the supposed error as having become a
non-issue when the respondent C.A. "proceeded to hear
(the) appeal"; (cc) it formulated and applied its own theory
of negotiorum gestio in justifying the non-substitution of
the deceased principal party in S.E.C. AC No. 339 and
moreover, its theory of di minimis non curat lex (this,
without first determining the true extent of and the correct
legal characterization of the so-called "shortage" of Tormil
shares;
and, (dd) it expressly affirmed the assailed decision of
respondent S.E.C. 15
Petitioners' contention is unmeritorious.
There is nothing on record to show that the Court of Appeals gave due course to the
petition. The fact alone that the Court of Appeals issued a restraining order and a writ of
preliminary injunction and required the parties to submit their respective memoranda
does not indicate that the petition was given due course. The office of an injunction is
CORPORATION LAW CASES SESSION 1
merely to preserve the status quo pending the disposition of the case. The court can
require the submission of memoranda in support of the respective claims and positions
of the parties without necessarily giving due course to the petition. The matter of whether
or not to give due course to a petition lies in the discretion of the court.
It is worthy to mention that SC Circular No. 1-91 has been replaced by Revised
Administrative Circular No. 1-95 (which took effect on 1 June 1995) wherein the
procedure for appeals from quasi-judicial agencies to the Court of Appeals was clarified
thus:
10. Due course. If upon the filing of the comment or such other
pleadings or documents as may be required or allowed by the Court of
Appeals or upon the expiration of the period for the filing thereof, and on
the bases of the petition or the record the Court of Appeals finds prima
faciethat the court or agency concerned has committed errors of fact or
law that would warrant reversal or modification of the award, judgment,
final order or resolution sought to be reviewed, it may give due course to
the petition; otherwise, it shall dismiss the same. The findings of fact of
the court or agency concerned, when supported by substantial evidence,
shall be binding on the Court of Appeals.
11. Transmittal of record. Within fifteen (15) days from notice that the
petition has been given due course, the Court of Appeals may require the
court or agency concerned to transmit the original or a legible certified
true copy of the entire record of the proceeding under review. The record
to be transmitted may be abridged by agreement of all parties to the
proceeding. The Court of Appeals may require or permit subsequent
correction of or addition to the record. (Emphasis ours.)
The aforecited circular now formalizes the correct practice and clearly states that in
resolving appeals from quasi judicial agencies, it is within the discretion of the Court of
Appeals to have the original records of the proceedings under review be transmitted to it.
In this connection petitioners' claim that the Court of Appeals could not have decided the
case on the merits without the records being brought before it is patently lame.
Indubitably, the Court of Appeals decided the case on the basis of the uncontroverted
facts and admissions contained in the pleadings, that is, the petition, comment, reply,
rejoinder, memoranda, etc. filed by the parties.
II
Petitioners contend that the decisions of the SEC and the Court of Appeals are null and
void for being rendered without the necessary substitution of parties (for the deceased
9

petitioner Manuel A. Torres, Jr.) as mandated by Sec. 17, Rule 3 of the Revised Rules of
Court, which provides as follows:
Sec. 17. Death of party. After a party dies and the claim is not thereby
extinguished, the court shall order, upon proper notice, the legal
representative of the deceased to appear and to be substituted for the
deceased, within a period of thirty (30) days, or within such time as may
be granted. If the legal representative fails to appear within said time, the
court may order the opposing party to procure the appointment of a legal
representative of the deceased within a time to be specified by the court,
and the representative shall immediately appear for and on behalf of the
interest of the deceased. The court charges involved in procuring such
appointment, if defrayed by the opposing party, may be recovered as
costs. The heirs of the deceased may be allowed to be substituted for the
deceased, without requiring the appointment of an executor or
administrator and the court may appoint guardian ad litem for the minor
heirs.
Petitioners insist that the SEC en banc should have granted the motions to suspend they
filed based as they were on the ground that the Regional Trial Court of Makati, where the
probate of the late Judge Torres' will was pending, had yet to appoint an administrator or
legal representative of his estate.
We are not unaware of the principle underlying the aforequoted provision:
It has been held that when a party dies in an action that survives, and no
order is issued by the Court for the appearance of the legal
representative or of the heirs of the deceased to be substituted for the
deceased, and as a matter of fact no such substitution has ever been
effected, the trial held by the court without such legal representative or
heirs, and the judgment rendered after such trial, are null and void
because the court acquired no jurisdiction over the persons of the legal
representative or of the heirs upon whom the trial and the judgment are
not binding. 16
As early as 8 April 1988, Judge Torres instituted Special Proceedings No. M-1768 before
the Regional Trial Court of Makati for the ante-mortem probate of his holographic will
which he had executed on 31 October 1986. Testifying in the said proceedings, Judge
Torres confirmed his appointment of petitioner Edgardo D. Pabalan as the sole executor
of his will and administrator of his estate. The proceedings, however, were opposed by
the same parties, herein private respondents Antonio P. Torres, Jr., Ma. Luisa T. Morales
and Ma. Cristina T. Carlos, 17 who are nephew and nieces of Judge Torres, being the
children of his late brother Antonio A. Torres.
CORPORATION LAW CASES SESSION 1
It can readily be observed therefore that the parties involved in the present controversy
are virtually the same parties fighting over the representation of the late Judge Torres'
estate. It should be recalled that the purpose behind the rule on substitution of parties is
the protection of the right of every party to due process. It is to ensure that the deceased
party would continue to be properly represented in the suit through the duly appointed
legal representative of his estate. In the present case, this purpose has been
substantially fulfilled (despite the lack of formal substitution) in view of the peculiar fact
that both proceedings involve practically the same parties. Both parties have been
fiercely fighting in the probate proceedings of Judge Torres' holographic will for
appointment as legal representative of his estate. Since both parties claim interests over
the estate, the rights of the estate were expected to be fully protected in the proceedings
before the SEC en banc and the Court of Appeals. In either case, whoever shall be
appointed legal representative of Judge Torres' estate (petitioner Pabalan or private
respondents) would no longer be a stranger to the present case, the said parties having
voluntarily submitted to the jurisdiction of the SEC and the Court of Appeals and having
thoroughly participated in the proceedings.
The foregoing rationate finds support in the recent case of Vda. de Salazar
v. CA, 18 wherein the Court expounded thus:
The need for substitution of heirs is based on the right to due process
accruing to every party in any proceeding. The rationale underlying this
requirement in case a party dies during the pendency of proceedings of a
nature not extinguished by such death, is that . . . the exercise of judicial
power to hear and determine a cause implicitly presupposes in the trial
court, amongst other essentials, jurisdiction over the persons of the
parties. That jurisdiction was inevitably impaired upon the death of the
protestee pending the proceedings below such that unless and until a
legal representative is for him duly named and within the jurisdiction of
the trial court, no adjudication in the cause could have been accorded
any validity or binding effect upon any party, in representation of the
deceased, without trenching upon the fundamental right to a day in court
which is the very essence of the constitutionally enshrined guarantee of
due process.
We are not unaware of several cases where we have ruled that a party
having died in an action that survives, the trial held by the court without
appearance of the deceased's legal representative or substitution of heirs
and the judgment rendered after such trial, are null and void because the
court acquired no jurisdiction over the persons of the legal
representatives or of the heirs upon whom the trial and the judgment
would be binding. This general rule notwithstanding, in denying
petitioner's motion for reconsideration, the Court of Appeals correctly
10

ruled that formal substitution of heirs is not necessary when the heirs
themselves voluntarily appeared, participated in the case and presented
evidence in defense of deceased defendant. Attending the case at bench,
after all, are these particular circumstances which negate petitioner's
belated and seemingly ostensible claim of violation of her rights to due
process. We should not lose sight of the principle underlying the general
rule that formal substitution of heirs must be effectuated for them to be
bound by a subsequent judgment. Such had been the general rule
established not because the rule on substitution of heirs and that on
appointment of a legal representative are jurisdictional requirements per
se but because non-compliance therewith results in the undeniable
violation of the right to due process of those who, though not duly notified
of the proceedings, are substantially affected by the decision rendered
therein . . . .
It is appropriate to mention here that when Judge Torres died on April 3, 1991, the
SEC en banc had already fully heard the parties and what remained was the evaluation
of the evidence and rendition of the judgment.
Further, petitioners filed their motions to suspend proceedings only after more than two
(2) years from the death of Judge Torres. Petitioners' counsel was even remiss in his
duty under Sec. 16, Rule 3 of the Revised Rules of Court. 19 Instead, it was private
respondents who informed the SEC of Judge Torres' death through a manifestation dated 24
April 1991.
For the SEC en banc to have suspended the proceedings to await the appointment of the
legal representative by the estate was impractical and would have caused undue delay in
the proceedings and a denial of justice. There is no telling when the probate court will
decide the issue, which may still be appealed to the higher courts.
In any case, there has been no final disposition of the properties of the late Judge Torres
before the SEC. On the contrary, the decision of the SEC en banc as affirmed by the
Court of Appeals served to protect and preserve his estate. Consequently, the rule that
when a party dies, he should be substituted by his legal representative to protect the
interests of his estate in observance of due process was not violated in this case in view
of its peculiar situation where the estate was fully protected by the presence of the
parties who claim interests therein either as directors, stockholders or heirs.
Finally, we agree with petitioners' contention that the principle of negotiorum
gestio 20 does not apply in the present case. Said principle explicitly covers abandoned or
neglected property or business.
III
CORPORATION LAW CASES SESSION 1
Petitioners find legal basis for Judge Torres' act of revoking the assignment of his
properties in Makati and Pasay City to Tormil corporation by relying on Art. 1191 of the
Civil Code which provides that:
Art. 1191. The power to rescind obligations is implied in reciprocal ones,
in case one of the obligors should not comply with what is incumbent
upon him.
The injured party may choose between the fulfillment and the rescission
of the obligation, with the payment of damages in either case. He may
also seek rescission, even after he has chosen fulfillment, if the latter
should become impossible.
The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.
This is understood to be without prejudice to the rights of third persons
who have acquired the thing, in accordance with articles 1385 and 1388
and the Mortgage Law.
Petitioners' contentions cannot be sustained. We see no justifiable reason to disturb the
findings of SEC, as affirmed by the Court of Appeals:
We sustain the ruling of respondent SEC in the decision appealed from
(Rollo, pp. 45-46) that
. . . the shortage of 972 shares would not be valid ground
for respondent Torres to unilaterally revoke the deeds of
assignment he had executed on July 13, 1984 and July
24, 1984 wherein he voluntarily assigned to TORMIL real
properties covered by TCT No. 374079 (Makati) and TCT
No. 41527, 41528 and 41529 (Pasay) respectively.
A comparison of the number of shares that respondent
Torres received from TORMIL by virtue of the "deeds of
assignment" and the stock certificates issued by the latter
to the former readily shows that TORMIL had substantially
performed what was expected of it. In fact, the first two
issuances were in satisfaction to the properties being
revoked by respondent Torres. Hence, the shortage of
972 shares would never be a valid ground for the
11

revocation of the deeds covering Pasay and Quezon City
properties.
In Universal Food Corp. vs. CA, the Supreme Court held:
The general rule is that rescission of a
contract will not be permitted for a slight or
carnal breach, but only for such
substantial and fundamental breach as
would defeat the very object of the parties
in making the agreement.
The shortage of 972 shares definitely is not substantial
and fundamental breach as would defeat the very object
of the parties in entering into contract. Art. 1355 of the
Civil Code also provides: "Except in cases specified by
law, lesion or inadequacy of cause shall not invalidate a
contract, unless there has been fraud, mistake or undue
influences." There being no fraud, mistake or undue
influence exerted on respondent Torres by TORMIL and
the latter having already issued to the former of its
225,000 unissued shares, the most logical course of
action is to declare as null and void the deed of
revocation executed by respondent Torres. (Rollo, pp. 45-
46.) 21
The aforequoted Civil Code provision does not apply in this particular situation for the
obvious reason that a specific number of shares of stock (as evidenced by stock
certificates) had already been issued to the late Judge Torres in exchange for his Makati
and Pasay City properties. The records thus disclose:
DATE OF PROPERTY LOCATION NO. OF SHARES ORDER OF
ASSIGNMENT ASSIGNED TO BE ISSUED COMPLIANCE*
1. July 13, 1984 TCT 81834 Quezon City) 13,252 3rd
TCT 144240 Quezon City)
2. July 13, 1984 TCT 77008 Manila)
TCT 65689 Manila) 78,493 2nd
TCT 102200 Manila)
3. July 13, 1984 TCT 374079 Makati 8,307 1st
CORPORATION LAW CASES SESSION 1
4. July 24, 1984 TCT 41527 Pasay
TCT 41528 Pasay) 9,855 4th
TCT 41529 Pasay)
5. August 6, 1984 El Hogar Filipino Stocks 2,000 7th
6. August 6, 1984 Manila Jockey Club Stocks 48,737 5th
7. August 7, 1984 San Miguel Corp. Stocks 50,238 8th
8. August 7, 1984 China Banking Corp. Stocks 6,300 6th
9. August 20, 1984 Ayala Corp. Stocks 7,468.2) 9th
10. August 29, 1984 Ayala Fund Stocks 1,322.1)
TOTAL 225,972.3
*Order of stock certificate issuances by TORMIL to respondent Torres
relative to the Deeds of Assignment he executed sometime in July and
August, 1984. 22 (Emphasis ours.)
Moreover, we agree with the contention of the Solicitor General that the shortage of
shares should not have affected the assignment of the Makati and Pasay City properties
which were executed in 13 and 24 July 1984 and the consideration for which have been
duly paid or fulfilled but should have been applied logically to the last assignment of
property Judge Torres' Ayala Fund shares which was executed on 29 August
1984. 23
IV
Petitioners insist that the assignment of "qualifying shares" to the nominees of the late
Judge Torres (herein petitioners) does not partake of the real nature of a transfer or
conveyance of shares of stock as would call for the "imposition of stringent requirements
(with respect to the) recording of the transfer of said shares." Anyway, petitioners add,
there was substantial compliance with the above-stated requirement since said
assignments were entered by the late Judge Torres himself in the corporation's stock and
transfer book on 6 March 1987, prior to the 25 March 1987 annual stockholders meeting
and which entries were confirmed on 8 March 1987 by petitioner Azura who was
appointed Assistant Corporate Secretary by Judge Torres.
12

Petitioners further argue that:
10.10. Certainly, there is no legal or just basis for the respondent S.E.C.
to penalize the late Judge Torres by invalidating the questioned entries in
the stock and transfer book, simply because he initially made those
entries (they were later affirmed by an acting corporate secretary) and
because the stock and transfer book was in his possession instead of the
elected corporate secretary, if the background facts herein-before
narrated and the serious animosities that then reigned between the
deceased Judge and his relatives are to be taken into account;
xxx xxx xxx
10.12. Indeed it was a practice in the corporate respondent, a family
corporation with only a measly number of stockholders, for the late judge
to have personal custody of corporate records; as president, chairman
and majority stockholder, he had the prerogative of designating an acting
corporate secretary or to himself make the needed entries, in instances
where the regular secretary, who is a mere subordinate, is unavailable or
intentionally defaults, which was the situation that obtained immediately
prior to the 1987 annual stockholders meeting of Tormil, as the late Judge
Torres had so indicated in the stock and transfer book in the form of the
entries now in question;
10.13. Surely, it would have been futile nay foolish for him to have
insisted under those circumstances, for the regular secretary, who was
then part of a group ranged against him, to make the entries of the
assignments in favor of his nominees; 24
Petitioners' contentions lack merit.
It is precisely the brewing family discord between Judge Torres and private respondents
his nephew and nieces that should have placed Judge Torres on his guard. He should
have been more careful in ensuring that his actions (particularly the assignment of
qualifying shares to his nominees) comply with the requirements of the law. Petitioners
cannot use the flimsy excuse that it would have been a vain attempt to force the
incumbent corporate secretary to register the aforestated assignments in the stock and
transfer book because the latter belonged to the opposite faction. It is the corporate
secretary's duty and obligation to register valid transfers of stocks and if said corporate
officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel
performance. 25 In other words, there are remedies within the law that petitioners could have
availed of, instead of taking the law in their own hands, as the cliche goes.
CORPORATION LAW CASES SESSION 1
Thus, we agree with the ruling of the SEC en banc as affirmed by the Court of Appeals:
We likewise sustain respondent SEC when it ruled, interpreting Section
74 of the Corporation Code, as follows (Rollo, p. 45):
In the absence of (any) provision to the contrary, the
corporate secretary is the custodian of corporate records.
Corollarily, he keeps the stock and transfer book and
makes proper and necessary entries therein.
Contrary to the generally accepted corporate practice, the
stock and transfer book of TORMIL was not kept by Ms.
Maria Cristina T. Carlos, the corporate secretary but by
respondent Torres, the President and Chairman of the
Board of Directors of TORMIL. In contravention to the
above cited provision, the stock and transfer book was
not kept at the principal office of the corporation either but
at the place of respondent Torres.
These being the obtaining circumstances, any entries
made in the stock and transfer book on March 8, 1987 by
respondent Torres of an alleged transfer of nominal
shares to Pabalan and Co. cannot therefore be given any
valid effect. Where the entries made are not valid,
Pabalan and Co. cannot therefore be considered
stockholders of record of TORMIL. Because they are not
stockholders, they cannot therefore be elected as
directors of TORMIL. To rule otherwise would not only
encourage violation of clear mandate of Sec. 74 of the
Corporation Code that stock and transfer book shall be
kept in the principal office of the corporation but would
likewise open the flood gates of confusion in the
corporation as to who has the proper custody of the stock
and transfer book and who are the real stockholders of
records of a certain corporation as any holder of the stock
and transfer book, though not the corporate secretary, at
pleasure would make entries therein.
The fact that respondent Torres holds 81.28% of the
outstanding capital stock of TORMIL is of no moment and
is not a license for him to arrogate unto himself a duty
lodged to (sic) the corporate secretary. 26
13

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.
WHEREFORE, premises considered, the petition for review on certiorari is hereby
DENIED.
SO ORDERED.
GR No. 84132-33. December 10, 1990
NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC., Petitioners, vs.
PHILIPPINE VETERANS BANK, THE EX-OFFICIO SHERIFF and GODOFREDO
QUILING, in his capacity as Deputy Sheriff of Calamba, Laguna, Respondents.
This case involves the constitutionality of a presidential decree which, like all other
issuances of President Marcos during his regime, was at that time regarded as
sacrosanct. It is only now, in a freer atmosphere, that his acts are being tested by the
touchstone of the fundamental law that even then was supposed to limit presidential
action.
The particular enactment in question is Pres. Decree No. 1717, which ordered the
rehabilitation of the Agrix Group of Companies to be administered mainly by the National
Development Company. The law outlined the procedure for filing claims against the Agrix
companies and created a Claims Committee to process these claims. Especially relevant
to this case, and noted at the outset, is Sec. 4(1) thereof providing that "all mortgages
and other liens presently attaching to any of the assets of the dissolved corporations are
hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of private respondent
Philippine Veterans Bank a real estate mortgage dated July 7, 1978, over three (3)
parcels of land situated in Los Baos, Laguna. During the existence of the mortgage,
AGRIX went bankrupt. It was for the expressed purpose of salvaging this and the other
Agrix companies that the aforementioned decree was issued by President Marcos.
Pursuant thereto, the private respondent filed a claim with the AGRIX Claims Committee
for the payment of its loan credit. In the meantime, the New Agrix, Inc. and the National
Development Company, petitioners herein, invoking Sec. 4 (1) of the decree, filed a
petition with the Regional Trial Court of Calamba, Laguna, for the cancellation of the
mortgage lien in favor of the private respondent. For its part, the private respondent took
steps to extrajudicially foreclose the mortgage, prompting the petitioners to file a second
case with the same court to stop the foreclosure. The two cases were consolidated.
CORPORATION LAW CASES SESSION 1
After the submission by the parties of their respective pleadings, the trial court rendered
the impugned decision. Judge Francisco Ma. Guerrero annulled not only the challenged
provision, viz., Sec. 4 (1), but the entire Pres. Decree No. 1717 on the grounds that: (1)
the presidential exercise of legislative power was a violation of the principle of separation
of powers; (2) the law impaired the obligation of contracts; and (3) the decree violated
the equal protection clause. The motion for reconsideration of this decision having been
denied, the present petition was filed.:
The petition was originally assigned to the Third Division of this Court but because of the
constitutional questions involved it was transferred to the Court en banc. On August 30,
1988, the Court granted the petitioner's prayer for a temporary restraining order and
instructed the respondents to cease and desist from conducting a public auction sale of
the lands in question. After the Solicitor General and the private respondent had filed
their comments and the petitioners their reply, the Court gave due course to the petition
and ordered the parties to file simultaneous memoranda. Upon compliance by the
parties, the case was deemed submitted.
The petitioners contend that the private respondent is now estopped from contesting the
validity of the decree. In support of this contention, it cites the recent case of Mendoza v.
Agrix Marketing, Inc., 1 where the constitutionality of Pres. Decree No. 1717 was also
raised but not resolved. The Court, after noting that the petitioners had already filed their
claims with the AGRIX Claims Committee created by the decree, had simply dismissed
the petition on the ground of estoppel.
The petitioners stress that in the case at bar the private respondent also invoked the
provisions of Pres. Decree No. 1717 by filing a claim with the AGRIX Claims Committee.
Failing to get results, it sought to foreclose the real estate mortgage executed by AGRIX
in its favor, which had been extinguished by the decree. It was only when the petitioners
challenged the foreclosure on the basis of Sec. 4 (1) of the decree, that the private
respondent attacked the validity of the provision. At that stage, however, consistent with
Mendoza, the private respondent was already estopped from questioning the
constitutionality of the decree.
The Court does not agree that the principle of estoppel is applicable.
It is not denied that the private respondent did file a claim with the AGRIX Claims
Committee pursuant to this decree. It must be noted, however, that this was done in
1980, when President Marcos was the absolute ruler of this country and his decrees
were the absolute law. Any judicial challenge to them would have been futile, not to say
foolhardy. The private respondent, no less than the rest of the nation, was aware of that
reality and knew it had no choice under the circumstances but to conform.: nad
It is true that there were a few venturesome souls who dared to question the dictator's
decisions before the courts of justice then. The record will show, however, that not a
single act or issuance of President Marcos was ever declared unconstitutional, not even
by the highest court, as long as he was in power. To rule now that the private respondent
14

is estopped for having abided with the decree instead of boldly assailing it is to close our
eyes to a cynical fact of life during that repressive time.
This case must be distinguished from Mendoza, where the petitioners, after filing their
claims with the AGRIX Claims Committee, received in settlement thereof shares of stock
valued at P40,000.00 without protest or reservation. The herein private respondent has
not been paid a single centavo on its claim, which was kept pending for more than seven
years for alleged lack of supporting papers. Significantly, the validity of that claim was not
questioned by the petitioner when it sought to restrain the extrajudicial foreclosure of the
mortgage by the private respondent. The petitioner limited itself to the argument that the
private respondent was estopped from questioning the decree because of its earlier
compliance with its provisions.
Independently of these observations, there is the consideration that an affront to the
Constitution cannot be allowed to continue existing simply because of procedural
inhibitions that exalt form over substance.
The Court is especially disturbed by Section 4(1) of the decree, quoted above,
extinguishing all mortgages and other liens attaching to the assets of AGRIX. It also
notes, with equal concern, the restriction in Subsection (ii) thereof that all "unsecured
obligations shall not bear interest" and in Subsection (iii) that "all accrued interests,
penalties or charges as of date hereof pertaining to the obligations, whether secured or
unsecured, shall not be recognized."
These provisions must be read with the Bill of Rights, where it is clearly provided in
Section 1 that "no person shall be deprived of life, liberty or property without due course
of law nor shall any person be denied the equal protection of the law" and in Section 10
that "no law impairing the obligation of contracts shall be passed."
In defending the decree, the petitioners argue that property rights, like all rights, are
subject to regulation under the police power for the promotion of the common welfare.
The contention is that this inherent power of the state may be exercised at any time for
this purpose so long as the taking of the property right, even if based on contract, is done
with due process of law.
This argument is an over-simplification of the problem before us. The police power is not
a panacea for all constitutional maladies. Neither does its mere invocation conjure an
instant and automatic justification for every act of the government depriving a person of
his life, liberty or property.
A legislative act based on the police power requires the concurrence of a lawful subject
and a lawful method. In more familiar words, a) the interests of the public generally, as
distinguished from those of a particular class, should justify the interference of the state;
and b) the means employed are reasonably necessary for the accomplishment of the
purpose and not unduly oppressive upon individuals. 2
Applying these criteria to the case at bar, the Court finds first of all that the interests of
the public are not sufficiently involved to warrant the interference of the government with
CORPORATION LAW CASES SESSION 1
the private contracts of AGRIX. The decree speaks vaguely of the "public, particularly the
small investors," who would be prejudiced if the corporation were not to be assisted.
However, the record does not state how many there are of such investors, and who they
are, and why they are being preferred to the private respondent and other creditors of
AGRIX with vested property rights
The public interest supposedly involved is not identified or explained. It has not been
shown that by the creation of the New Agrix, Inc. and the extinction of the property rights
of the creditors of AGRIX, the interests of the public as a whole, as distinguished from
those of a particular class, would be promoted or protected. The indispensable link to the
welfare of the greater number has not been established. On the contrary, it would appear
that the decree was issued only to favor a special group of investors who, for reasons not
given, have been preferred to the legitimate creditors of AGRIX.
Assuming there is a valid public interest involved, the Court still finds that the means
employed to rehabilitate AGRIX fall far short of the requirement that they shall not be
unduly oppressive. The oppressiveness is patent on the face of the decree. The right to
property in all mortgages, liens, interests, penalties and charges owing to the creditors of
AGRIX is arbitrarily destroyed. No consideration is paid for the extinction of the mortgage
rights. The accrued interests and other charges are simply rejected by the decree. The
right to property is dissolved by legislative fiat without regard to the private interest
violated and, worse, in favor of another private interest.
A mortgage lien is a property right derived from contract and so comes under the
protection of the Bill of Rights. So do interests on loans, as well as penalties and
charges, which are also vested rights once they accrue. Private property cannot simply
be taken by law from one person and given to another without compensation and any
known public purpose. This is plain arbitrariness and is not permitted under the
Constitution.
And not only is there arbitrary taking, there is discrimination as well. In extinguishing the
mortgage and other liens, the decree lumps the secured creditors with the unsecured
creditors and places them on the same level in the prosecution of their respective claims.
In this respect, all of them are considered unsecured creditors. The only concession
given to the secured creditors is that their loans are allowed to earn interest from the
date of the decree, but that still does not justify the cancellation of the interests earned
before that date. Such interests, whether due to the secured or the unsecured creditors,
are all extinguished by the decree. Even assuming such cancellation to be valid, we still
cannot see why all kinds of creditors, regardless of security, are treated alike.
Under the equal protection clause, all persons or things similarly situated must be treated
alike, both in the privileges conferred and the obligations imposed. Conversely, all
persons or things differently situated should be treated differently. In the case at bar,
persons differently situated are similarly treated, in disregard of the principle that there
should be equality only among equals.- nad
15

One may also well wonder why AGRIX was singled out for government help, among
other corporations where the stockholders or investors were also swindled. It is not clear
why other companies entitled to similar concern were not similarly treated. And surely,
the stockholders of the private respondent, whose mortgage lien had been cancelled and
legitimate claims to accrued interests rejected, were no less deserving of protection,
which they did not get. The decree operated, to use the words of a celebrated case, 3
"with an evil eye and an uneven hand."
On top of all this, New Agrix, Inc. was created by special decree notwithstanding the
provision of Article XIV, Section 4 of the 1973 Constitution, then in force, that:
SEC. 4. The Batasang Pambansa shall not, except by general law, provide for the
formation, organization, or regulation of private corporations, unless such corporations
are owned or controlled by the Government or any subdivision or instrumentality thereof.
4
The new corporation is neither owned nor controlled by the government. The National
Development Corporation was merely required to extend a loan of not more than
P10,000,000.00 to New Agrix, Inc. Pending payment thereof, NDC would undertake the
management of the corporation, but with the obligation of making periodic reports to the
Agrix board of directors. After payment of the loan, the said board can then appoint its
own management. The stocks of the new corporation are to be issued to the old
investors and stockholders of AGRIX upon proof of their claims against the abolished
corporation. They shall then be the owners of the new corporation. New Agrix, Inc. is
entirely private and so should have been organized under the Corporation Law in
accordance with the above-cited constitutional provision.
The Court also feels that the decree impairs the obligation of the contract between
AGRIX and the private respondent without justification. While it is true that the police
power is superior to the impairment clause, the principle will apply only where the
contract is so related to the public welfare that it will be considered congenitally
susceptible to change by the legislature in the interest of the greater number. 5 Most
present-day contracts are of that nature. But as already observed, the contracts of loan
and mortgage executed by AGRIX are purely private transactions and have not been
shown to be affected with public interest. There was therefore no warrant to amend their
provisions and deprive the private respondent of its vested property rights.
It is worth noting that only recently in the case of the Development Bank of the
Philippines v. NLRC, 6 we sustained the preference in payment of a mortgage creditor as
against the argument that the claims of laborers should take precedence over all other
claims, including those of the government. In arriving at this ruling, the Court recognized
the mortgage lien as a property right protected by the due process and contract clauses
notwithstanding the argument that the amendment in Section 110 of the Labor Code was
a proper exercise of the police power.: nad
The Court reaffirms and applies that ruling in the case at bar.
CORPORATION LAW CASES SESSION 1
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise of the police
power, not being in conformity with the traditional requirements of a lawful subject and a
lawful method. The extinction of the mortgage and other liens and of the interest and
other charges pertaining to the legitimate creditors of AGRIX constitutes taking without
due process of law, and this is compounded by the reduction of the secured creditors to
the category of unsecured creditors in violation of the equal protection clause. Moreover,
the new corporation, being neither owned nor controlled by the Government, should have
been created only by general and not special law. And insofar as the decree also
interferes with purely private agreements without any demonstrated connection with the
public interest, there is likewise an impairment of the obligation of the contract.
With the above pronouncements, we feel there is no more need to rule on the authority
of President Marcos to promulgate Pres. Decree No. 1717 under Amendment No. 6 of
the 1973 Constitution. Even if he had such authority, the decree must fall just the same
because of its violation of the Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is declared
UNCONSTITUTIONAL. The temporary restraining order dated August 30, 1988, is
LIFTED. Costs against the petitioners.
SO ORDERED.
G.R. No. 169752 September 25, 2007
PHILIPPINE SOCIETY FOR THE PREVENTION OF CRUELTY TO ANIMALS vs.
COMMISSION ON AUDIT, DIR. RODULFO J. ARIESGA (in his official capacity as
Director of the Commission on Audit), MS. MERLE M. VALENTIN and MS. SUSAN
GUARDIAN (in their official capacities as Team Leader and Team Member,
respectively, of the audit Team of the Commission on Audit)
Before the Court is a special civil action for Certiorari and Prohibition under Rule 65 of
the Rules of Court, in relation to Section 2 of Rule 64, filed by the petitioner assailing
Office Order No. 2005-0211 dated September 14, 2005 issued by the respondents which
constituted the audit team, as well as its September 23, 2005 Letter 2 informing the
petitioner that respondents audit team shall conduct an audit survey on the petitioner for
a detailed audit of its accounts, operations, and financial transactions. No temporary
restraining order was issued.
The petitioner was incorporated as a juridical entity over one hundred years ago by virtue
of Act No. 1285, enacted on January 19, 1905, by the Philippine Commission. The
petitioner, at the time it was created, was composed of animal aficionados and animal
propagandists. The objects of the petitioner, as stated in Section 2 of its charter, shall be
to enforce laws relating to cruelty inflicted upon animals or the protection of animals in
the Philippine Islands, and generally, to do and perform all things which may tend in any
way to alleviate the suffering of animals and promote their welfare. 3
16

At the time of the enactment of Act No. 1285, the original Corporation Law, Act No. 1459,
was not yet in existence. Act No. 1285 antedated both the Corporation Law and the
constitution of the Securities and Exchange Commission. Important to note is that the
nature of the petitioner as a corporate entity is distinguished from the sociedad
anonimas under the Spanish Code of Commerce.
For the purpose of enhancing its powers in promoting animal welfare and enforcing laws
for the protection of animals, the petitioner was initially imbued under its charter with the
power to apprehend violators of animal welfare laws. In addition, the petitioner was to
share one-half (1/2) of the fines imposed and collected through its efforts for violations of
the laws related thereto. As originally worded, Sections 4 and 5 of Act No. 1285 provide:
SEC. 4. The said society is authorized to appoint not to exceed five agents in the City of
Manila, and not to exceed two in each of the provinces of the Philippine Islands who
shall have all the power and authority of a police officer to make arrests for violation of
the laws enacted for the prevention of cruelty to animals and the protection of animals,
and to serve any process in connection with the execution of such laws; and in addition
thereto, all the police force of the Philippine Islands, wherever organized, shall, as
occasion requires, assist said society, its members or agents, in the enforcement of all
such laws.
SEC. 5. One-half of all the fines imposed and collected through the efforts of said
society, its members or its agents, for violations of the laws enacted for the prevention of
cruelty to animals and for their protection, shall belong to said society and shall be used
to promote its objects.
(emphasis supplied)
Subsequently, however, the power to make arrests as well as the privilege to retain a
portion of the fines collected for violation of animal-related laws were recalled by virtue of
Commonwealth Act (C.A.) No. 148,4 which reads, in its entirety, thus:
Be it enacted by the National Assembly of the Philippines:
Section 1. Section four of Act Numbered Twelve hundred and eighty-five as amended by
Act Numbered Thirty five hundred and forty-eight, is hereby further amended so as to
read as follows:
Sec. 4. The said society is authorized to appoint not to exceed ten agents in the City of
Manila, and not to exceed one in each municipality of the Philippines who shall have the
CORPORATION LAW CASES SESSION 1
authority to denounce to regular peace officers any violation of the laws enacted for the
prevention of cruelty to animals and the protection of animals and to cooperate with said
peace officers in the prosecution of transgressors of such laws.
Sec. 2. The full amount of the fines collected for violation of the laws against cruelty to
animals and for the protection of animals, shall accrue to the general fund of the
Municipality where the offense was committed.
Sec. 3. This Act shall take effect upon its approval.
Approved, November 8, 1936. (Emphasis supplied)
Immediately thereafter, then President Manuel L. Quezon issued Executive Order (E.O.)
No. 63 dated November 12, 1936, portions of which provide:
Whereas, during the first regular session of the National Assembly, Commonwealth Act
Numbered One Hundred Forty Eight was enacted depriving the agents of the Society for
the Prevention of Cruelty to Animals of their power to arrest persons who have violated
the laws prohibiting cruelty to animals thereby correcting a serious defect in one of the
laws existing in our statute books.
xxxx
Whereas, the cruel treatment of animals is an offense against the State, penalized under
our statutes, which the Government is duty bound to enforce;
Now, therefore, I, Manuel L. Quezon, President of the Philippines, pursuant to the
authority conferred upon me by the Constitution, hereby decree, order, and direct the
Commissioner of Public Safety, the Provost Marshal General as head of the
Constabulary Division of the Philippine Army, every Mayor of a chartered city, and every
municipal president to detail and organize special members of the police force, local,
national, and the Constabulary to watch, capture, and prosecute offenders against the
laws enacted to prevent cruelty to animals. (Emphasis supplied)
On December 1, 2003, an audit team from respondent Commission on Audit (COA)
visited the office of the petitioner to conduct an audit survey pursuant to COA Office
Order No. 2003-051 dated November 18, 2003 5addressed to the petitioner. The
petitioner demurred on the ground that it was a private entity not under the jurisdiction of
COA, citing Section 2(1) of Article IX of the Constitution which specifies the general
jurisdiction of the COA, viz:
17

Section 1. General Jurisdiction. 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 post-audit basis: (a) constitutional bodies, commissions and officers
that have been granted fiscal autonomy under the Constitution; (b) autonomous state
colleges and universities; (c) other government-owned or controlled corporations and
their subsidiaries; and (d) such non-governmental 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)
Petitioner explained thus:
a. Although the petitioner was created by special legislation, this necessarily
came about because in January 1905 there was as yet neither a Corporation
Law or any other general law under which it may be organized and incorporated,
nor a Securities and Exchange Commission which would have passed upon its
organization and incorporation.
b. That Executive Order No. 63, issued during the Commonwealth period,
effectively deprived the petitioner of its power to make arrests, and that the
petitioner lost its operational funding, underscore the fact that it exercises no
governmental function. In fine, the government itself, by its overt acts, confirmed
petitioners status as a private juridical entity.
The COA General Counsel issued a Memorandum 6 dated May 6, 2004, asserting that the
petitioner was subject to its audit authority. In a letter dated May 17, 2004, 7 respondent
COA informed the petitioner of the result of the evaluation, furnishing it with a copy of
said Memorandum dated May 6, 2004 of the General Counsel.
Petitioner thereafter filed with the respondent COA a Request for Re-evaluation dated
May 19, 2004,8 insisting that it was a private domestic corporation.
CORPORATION LAW CASES SESSION 1
Acting on the said request, the General Counsel of respondent COA, in a Memorandum
dated July 13, 2004,9affirmed her earlier opinion that the petitioner was a government
entity that was subject to the audit jurisdiction of respondent COA. In a letter dated
September 14, 2004, the respondent COA informed the petitioner of the result of the re-
evaluation, maintaining its position that the petitioner was subject to its audit jurisdiction,
and requested an initial conference with the respondents.
In a Memorandum dated September 16, 2004, Director Delfin Aguilar reported to COA
Assistant Commissioner Juanito Espino, Corporate Government Sector, that the audit
survey was not conducted due to the refusal of the petitioner because the latter
maintained that it was a private corporation.
Petitioner received on September 27, 2005 the subject COA Office Order 2005-021
dated September 14, 2005 and the COA Letter dated September 23, 2005.
Hence, herein Petition on the following grounds:
A.
RESPONDENT COMMISSION ON AUDIT COMMITTED GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION WHEN
IT RULED THAT PETITIONER IS SUBJECT TO ITS AUDIT AUTHORITY.
B.
PETITIONER IS ENTITLED TO THE RELIEF SOUGHT, THERE BEING NO
APPEAL, NOR ANY PLAIN, SPEEDY AND ADEQUATE REMEDY IN THE
ORDINARY COURSE OF LAW AVAILABLE TO IT.10
The essential question before this Court is whether the petitioner qualifies as a
government agency that may be subject to audit by respondent COA.
Petitioner argues: first, even though it was created by special legislation in 1905 as there
was no general law then existing under which it may be organized or incorporated, it
exercises no governmental functions because these have been revoked by C.A. No. 148
and E.O. No. 63; second, nowhere in its charter is it indicated that it is a public
corporation, unlike, for instance, C.A. No. 111 which created the Boy Scouts of the
Philippines, defined its powers and purposes, and specifically stated that it was "An Act
to Create a Public Corporation" in which, even as amended by Presidential Decree No.
460, the law still adverted to the Boy Scouts of the Philippines as a "public corporation,"
18

all of which are not obtaining in the charter of the petitioner; third, if it were a government
body, there would have been no need for the State to grant it tax exemptions under
Republic Act No. 1178, and the fact that it was so exempted strengthens its position that
it is a private institution; fourth, the employees of the petitioner are registered and
covered by the Social Security System at the latters initiative and not through the
Government Service Insurance System, which should have been the case had the
employees been considered government employees; fifth, the petitioner does not receive
any form of financial assistance from the government, since C.A. No. 148, amending
Section 5 of Act No. 1285, states that the "full amount of the fines, collected for violation
of the laws against cruelty to animals and for the protection of animals, shall accrue to
the general fund of the Municipality where the offense was committed"; sixth, C.A. No.
148 effectively deprived the petitioner of its powers to make arrests and serve processes
as these functions were placed in the hands of the police force; seventh, no government
appointee or representative sits on the board of trustees of the petitioner; eighth, a
reading of the provisions of its charter (Act No. 1285) fails to show that any act or
decision of the petitioner is subject to the approval of or control by any government
agency, except to the extent that it is governed by the law on private corporations in
general; and finally, ninth, the Committee on Animal Welfare, under the Animal Welfare
Act of 1998, includes members from both the private and the public sectors.
The respondents contend that since the petitioner is a "body politic" created by virtue of a
special legislation and endowed with a governmental purpose, then, indubitably, the COA
may audit the financial activities of the latter. Respondents in effect divide their
contentions into six strains: first, the test to determine whether an entity is a government
corporation lies in the manner of its creation, and, since the petitioner was created by
virtue of a special charter, it is thus a government corporation subject to respondents
auditing power; second, the petitioner exercises "sovereign powers," that is, it is tasked
to enforce the laws for the protection and welfare of animals which "ultimately redound to
the public good and welfare," and, therefore, it is deemed to be a government
"instrumentality" as defined under the Administrative Code of 1987, the purpose of which
is connected with the administration of government, as purportedly affirmed by American
jurisprudence; third, by virtue of Section 23,11Title II, Book III of the same Code, the Office
of the President exercises supervision or control over the petitioner; fourth, under the
same Code, the requirement under its special charter for the petitioner to render a report
to the Civil Governor, whose functions have been inherited by the Office of the President,
clearly reflects the nature of the petitioner as a government instrumentality; fifth, despite
the passage of the Corporation Code, the law creating the petitioner had not been
abolished, nor had it been re-incorporated under any general corporation law; and
finally, sixth, Republic Act No. 8485, otherwise known as the "Animal Welfare Act of
CORPORATION LAW CASES SESSION 1
1998," designates the petitioner as a member of its Committee on Animal Welfare which
is attached to the Department of Agriculture.
In view of the phrase "One-half of all the fines imposed and collected through the efforts
of said society," the Court, in a Resolution dated January 30, 2007, required the Office of
the Solicitor General (OSG) and the parties to comment on: a) petitioner's authority to
impose fines and the validity of the provisions of Act No. 1285 and Commonwealth Act
No. 148 considering that there are no standard measures provided for in the aforecited
laws as to the manner of implementation, the specific violations of the law, the person/s
authorized to impose fine and in what amount; and, b) the effect of the 1935 and 1987
Constitutions on whether petitioner continues to exist or should organize as a private
corporation under the Corporation Code, B.P. Blg. 68 as amended.
Petitioner and the OSG filed their respective Comments. Respondents filed a
Manifestation stating that since they were being represented by the OSG which filed its
Comment, they opted to dispense with the filing of a separate one and adopt for the
purpose that of the OSG.
The petitioner avers that it does not have the authority to impose fines for violation of
animal welfare laws; it only enjoyed the privilege of sharing in the fines imposed and
collected from its efforts in the enforcement of animal welfare laws; such privilege,
however, was subsequently abolished by C.A. No. 148; that it continues to exist as a
private corporation since it was created by the Philippine Commission before the
effectivity of the Corporation law, Act No. 1459; and the 1935 and 1987 Constitutions.
The OSG submits that Act No. 1285 and its amendatory laws did not give petitioner the
authority to impose fines for violation of laws 12 relating to the prevention of cruelty to
animals and the protection of animals; that even prior to the amendment of Act No. 1285,
petitioner was only entitled to share in the fines imposed; C.A. No. 148 abolished that
privilege to share in the fines collected; that petitioner is a public corporation and has
continued to exist since Act No. 1285; petitioner was not repealed by the 1935 and 1987
Constitutions which contain transitory provisions maintaining all laws issued not
inconsistent therewith until amended, modified or repealed.
The petition is impressed with merit.
The arguments of the parties, interlaced as they are, can be disposed of in five points.
First, the Court agrees with the petitioner that the "charter test" cannot be applied.
19

Essentially, the "charter test" as it stands today provides:
[T]he test to determine whether a corporation is government owned or controlled, or
private in nature is simple. Is it created by its own charter for the exercise of a public
function, or by incorporation under the general corporation law? Those with special
charters are government corporations subject to its provisions, and its employees are
under the jurisdiction of the Civil Service Commission, and are compulsory members of
the Government Service Insurance System. xxx (Emphasis supplied) 13
The petitioner is correct in stating that the charter test is predicated, at best, on the legal
regime established by the 1935 Constitution, Section 7, Article XIII, which states:
Sec. 7. The National Assembly shall not, except by general law, provide for the
formation, organization, or regulation of private corporations, unless such corporations
are owned or controlled by the Government or any subdivision or instrumentality
thereof.14
The foregoing proscription has been carried over to the 1973 and the 1987 Constitutions.
Section 16 of Article XII of the present 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.
Section 16 is essentially a re-enactment of Section 7 of Article XVI of the 1935
Constitution and Section 4 of Article XIV of the 1973 Constitution.
During the formulation of the 1935 Constitution, the Committee on Franchises
recommended the foregoing proscription to prevent the pressure of special interests
upon the lawmaking body in the creation of corporations or in the regulation of the same.
To permit the lawmaking body by special law to provide for the organization, formation, or
regulation of private corporations would be in effect to offer to it the temptation in many
cases to favor certain groups, to the prejudice of others or to the prejudice of the
interests of the country.15
And since the underpinnings of the charter test had been introduced by the 1935
Constitution and not earlier, it follows that the test cannot apply to the petitioner, which
was incorporated by virtue of Act No. 1285, enacted on January 19, 1905. Settled is the
rule that laws in general have no retroactive effect, unless the contrary is provided. 16 All
CORPORATION LAW CASES SESSION 1
statutes are to be construed as having only a prospective operation, unless the purpose
and intention of the legislature to give them a retrospective effect is expressly declared or
is necessarily implied from the language used. In case of doubt, the doubt must be
resolved against the retrospective effect.17
There are a few exceptions. Statutes can be given retroactive effect in the following
cases: (1) when the law itself so expressly provides; (2) in case of remedial statutes; (3)
in case of curative statutes; (4) in case of laws interpreting others; and (5) in case of laws
creating new rights.18 None of the exceptions is present in the instant case.
The general principle of prospectivity of the law likewise applies to Act No. 1459,
otherwise known as the Corporation Law, which had been enacted by virtue of the
plenary powers of the Philippine Commission on March 1, 1906, a little over a year after
January 19, 1905, the time the petitioner emerged as a juridical entity. Even the
Corporation Law respects the rights and powers of juridical entities organized
beforehand, viz:
SEC. 75. Any corporation or sociedad anonima formed, organized, and existing under
the laws of the Philippine Islands and lawfully transacting business in the Philippine
Islands on the date of the passage of this Act, shall be subject to the provisions hereof so
far as such provisions may be applicable and shall be entitled at its optioneither to
continue business as such corporation or to reform and organize under and by virtue of
the provisions of this Act, transferring all corporate interests to the new corporation
which, if a stock corporation, is authorized to issue its shares of stock at par to the
stockholders or members of the old corporation according to their interests. (Emphasis
supplied).
As pointed out by the OSG, both the 1935 and 1987 Constitutions contain transitory
provisions maintaining all laws issued not inconsistent therewith until amended, modified
or repealed.19
In a legal regime where the charter test doctrine cannot be applied, the mere fact that a
corporation has been created by virtue of a special law does not necessarily qualify it as
a public corporation.
What then is the nature of the petitioner as a corporate entity? What legal regime
governs its rights, powers, and duties?
20

As stated, at the time the petitioner was formed, the applicable law was the Philippine Bill
of 1902, and, emphatically, as also stated above, no proscription similar to the charter
test can be found therein.
The textual foundation of the charter test, which placed a limitation on the power of the
legislature, first appeared in the 1935 Constitution. However, the petitioner was
incorporated in 1905 by virtue of Act No. 1258, a law antedating the Corporation Law
(Act No. 1459) by a year, and the 1935 Constitution, by thirty years. There being neither
a general law on the formation and organization of private corporations nor a restriction
on the legislature to create private corporations by direct legislation, the Philippine
Commission at that moment in history was well within its powers in 1905 to constitute the
petitioner as a private juridical entity.
1wphi1
Time and again the Court must caution even the most brilliant scholars of the law and all
constitutional historians on the danger of imposing legal concepts of a later date on facts
of an earlier date.20
The amendments introduced by C.A. No. 148 made it clear that the petitioner was a
private corporation and not an agency of the government. This was evident in Executive
Order No. 63, issued by then President of the Philippines Manuel L. Quezon, declaring
that the revocation of the powers of the petitioner to appoint agents with powers of arrest
"corrected a serious defect" in one of the laws existing in the statute books.
As a curative statute, and based on the doctrines so far discussed, C.A. No. 148 has to
be given retroactive effect, thereby freeing all doubt as to which class of corporations the
petitioner belongs, that is, it is a quasi-public corporation, a kind of private domestic
corporation, which the Court will further elaborate on under the fourth point.
Second, a reading of petitioners charter shows that it is not subject to control or
supervision by any agency of the State, unlike government-owned and -controlled
corporations. No government representative sits on the board of trustees of the
petitioner. Like all private corporations, the successors of its members are determined
voluntarily and solely by the petitioner in accordance with its by-laws, and may exercise
those powers generally accorded to private corporations, such as the powers to hold
property, to sue and be sued, to use a common seal, and so forth. It may adopt by-laws
for its internal operations: the petitioner shall be managed or operated by its officers "in
accordance with its by-laws in force." The pertinent provisions of the charter provide:
Section 1. Anna L. Ide, Kate S. Wright, John L. Chamberlain, William F. Tucker, Mary S.
Fergusson, Amasa S. Crossfield, Spencer Cosby, Sealy B. Rossiter, Richard P. Strong,
CORPORATION LAW CASES SESSION 1
Jose Robles Lahesa, Josefina R. de Luzuriaga, and such other persons as may be
associated with them in conformity with this act, and their successors, are hereby
constituted and created a body politic and corporate at law, under the name and style of
"The Philippines Society for the Prevention of Cruelty to Animals."
As incorporated by this Act, said society shall have the power to add to its organization
such and as many members as it desires, to provide for and choose such officers as it
may deem advisable, and in such manner as it may wish, and to remove members as it
shall provide.
It shall have the right to sue and be sued, to use a common seal, to receive legacies and
donations, to conduct social enterprises for the purpose of obtaining funds, to levy dues
upon its members and provide for their collection to hold real and personal estate such
as may be necessary for the accomplishment of the purposes of the society, and to
adopt such by-laws for its government as may not be inconsistent with law or this charter.
xxxx
Sec. 3. The said society shall be operated under the direction of its officers, in
accordance with its by-laws in force, and this charter.
xxxx
Sec. 6. The principal office of the society shall be kept in the city of Manila, and the
society shall have full power to locate and establish branch offices of the society
wherever it may deem advisable in the Philippine Islands, such branch offices to be
under the supervision and control of the principal office.
Third. The employees of the petitioner are registered and covered by the Social Security
System at the latters initiative, and not through the Government Service Insurance
System, which should be the case if the employees are considered government
employees. This is another indication of petitioners nature as a private entity. Section 1
of Republic Act No. 1161, as amended by Republic Act No. 8282, otherwise known as
the Social Security Act of 1997, defines the employer:
Employer Any person, natural or juridical, domestic or foreign, who carries on in the
Philippines any trade, business, industry, undertaking or activity of any kind and uses the
services of another person who is under his orders as regards the employment, except
the Government and any of its political subdivisions, branches or instrumentalities,
including corporations owned or controlled by the Government: Provided, That a self-
21

employed person shall be both employee and employer at the same time. (Emphasis
supplied)
Fourth. The respondents contend that the petitioner is a "body politic" because its
primary purpose is to secure the protection and welfare of animals which, in turn,
redounds to the public good.
This argument, is, at best, specious. The fact that a certain juridical entity is impressed
with public interest does not, by that circumstance alone, make the entity a public
corporation, inasmuch as a corporation may be private although its charter contains
provisions of a public character, incorporated solely for the public good. This class of
corporations may be considered quasi-public corporations, which are private
corporations that render public service, supply public wants, 21 or pursue other
eleemosynary objectives. While purposely organized for the gain or benefit of its
members, they are required by law to discharge functions for the public benefit.
Examples of these corporations are utility,22 railroad, warehouse, telegraph, telephone,
water supply corporations and transportation companies. 23 It must be stressed that a
quasi-public corporation is a species of private corporations, but the qualifying factor
is the type of service the former renders to the public: if it performs a public service, then
it becomes a quasi-public corporation.24 1wphi1
Authorities are of the view that the purpose alone of the corporation cannot be taken as a
safe guide, for the fact is that almost all corporations are nowadays created to promote
the interest, good, or convenience of the public. A bank, for example, is a private
corporation; yet, it is created for a public benefit. Private schools and universities are
likewise private corporations; and yet, they are rendering public service. Private hospitals
and wards are charged with heavy social responsibilities. More so with all common
carriers. On the other hand, there may exist a public corporation even if it is endowed
with gifts or donations from private individuals.
The true criterion, therefore, to determine whether a corporation is public or private is
found in the totality of the relation of the corporation to the State. If the corporation is
created by the State as the latters own agency or instrumentality to help it in carrying out
its governmental functions, then that corporation is considered public; otherwise, it is
private. Applying the above test, provinces, chartered cities, and barangays can best
exemplify public corporations. They are created by the State as its own device and
agency for the accomplishment of parts of its own public works.25
CORPORATION LAW CASES SESSION 1
It is clear that the amendments introduced by C.A. No. 148 revoked the powers of the
petitioner to arrest offenders of animal welfare laws and the power to serve processes in
connection therewith.
Fifth. The respondents argue that since the charter of the petitioner requires the latter to
render periodic reports to the Civil Governor, whose functions have been inherited by the
President, the petitioner is, therefore, a government instrumentality.
This contention is inconclusive. By virtue of the fiction that all corporations owe their very
existence and powers to the State, the reportorial requirement is applicable to all
corporations of whatever nature, whether they are public, quasi-public, or private
corporationsas creatures of the State, there is a reserved right in the legislature to
investigate the activities of a corporation to determine whether it acted within its powers.
In other words, the reportorial requirement is the principal means by which the State may
see to it that its creature acted according to the powers and functions conferred upon it.
These principles were extensively discussed in Bataan Shipyard & Engineering Co., Inc.
v. Presidential Commission on Good Government.26 Here, the Court, in holding that the
subject corporation could not invoke the right against self-incrimination whenever the
State demanded the production of its corporate books and papers, extensively discussed
the purpose of reportorial requirements, viz:
x x x The corporation is a creature of the state. It is presumed to be incorporated for the
benefit of the public. It received certain special privileges and franchises, and holds them
subject to the laws of the state and the limitations of its charter. Its powers are limited by
law. It can make no contract not authorized by its charter. Its rights to act as a
corporation are only preserved to it so long as it obeys the laws of its creation. There is a
reserve[d] right in the legislature to investigate its contracts and find out whether it has
exceeded its powers. It would be a strange anomaly to hold that a state, having
chartered a corporation to make use of certain franchises, could not, in the exercise of
sovereignty, inquire how these franchises had been employed, and whether they had
been abused, and demand the production of the corporate books and papers for that
purpose. The defense amounts to this, that an officer of the corporation which is charged
with a criminal violation of the statute may plead the criminality of such corporation as a
refusal to produce its books. To state this proposition is to answer it. While an individual
may lawfully refuse to answer incriminating questions unless protected by an immunity
statute, it does not follow that a corporation vested with special privileges and franchises
may refuse to show its hand when charged with an abuse of such privileges. (Wilson v.
United States, 55 Law Ed., 771, 780.)27
22
 CORPORATION LAW CASES SESSION 1
WHEREFORE, the petition is GRANTED. Petitioner is DECLARED a private domestic A7-191-
corporation subject to the jurisdiction of the Securities and Exchange Commission. The 1992-2001 54,454,800.00 34,115,932.20 88,570,732.20
00843
respondents are ENJOINED from investigating, examining and auditing the petitioner's
fiscal and financial affairs.
A7-191-
1992-2001 1,632,960.00 1,023,049.44 2,656,009.44
00140
SO ORDERED.
A7-191-
G.R. No. 163072 April 2, 2009 1992-2001 6,068,448.00 3,801,882.85 9,870,330.85
00139
MANILA INTERNATIONAL AIRPORT AUTHORITY vs. CITY OF PASAY,
SANGGUNIANG PANGLUNGSOD NG PASAY, CITY MAYOR OF PASAY, CITY
TREASURER OF PASAY, and CITY ASSESSOR OF PASAY, A7-183-
1992-2001 59,129,520.00 37,044,644.28 96,174,164.28
05409
This is a petition for review on certiorari 1 of the Decision2 dated 30 October 2002 and the
Resolution dated 19 March 2004 of the Court of Appeals in CA-G.R. SP No. 67416. A7-183-
1992-2001 20,619,720.00 12,918,254.58 33,537,974.58
05410
The Facts
A7-183-
1992-2001 7,908,240.00 4,954,512.36 12,862,752.36
Petitioner Manila International Airport Authority (MIAA) operates and administers the 05413
Ninoy Aquino International Airport (NAIA) Complex under Executive Order No. 903 (EO
903),3 otherwise known as the Revised Charter of the Manila International Airport A7-183-
1992-2001 18,441,981.20 11,553,901.13 29,995,882.33
Authority. EO 903 was issued on 21 July 1983 by then President Ferdinand E. Marcos. 05412
Under Sections 34 and 225 of EO 903, approximately 600 hectares of land, including the
runways, the airport tower, and other airport buildings, were transferred to MIAA. The A7-183-
1992-2001 109,946,736.00 68,881,630.13 178,828,366.13
NAIA Complex is located along the border between Pasay City and Paraaque City. 05411

On 28 August 2001, MIAA received Final Notices of Real Property Tax Delinquency from A7-183-
1992-2001 7,440,000.00 4,661,160.00 12,101,160.00
the City of Pasay for the taxable years 1992 to 2001. MIAAs real property tax 05245
delinquency for its real properties located in NAIA Complex, Ninoy Aquino Avenue,
Pasay City (NAIA Pasay properties) is tabulated as follows: GRAND TOTAL P642,747,726.20 P373,466,110.13 P1,016,213,836.33

TAX On 24 August 2001, the City of Pasay, through its City Treasurer, issued notices of levy
TAXABLE and warrants of levy for the NAIA Pasay properties. MIAA received the notices and
DECLA- TAX DUE PENALTY TOTAL
YEAR warrants of levy on 28 August 2001. Thereafter, the City Mayor of Pasay threatened to
RATION
sell at public auction the NAIA Pasay properties if the delinquent real property taxes
remain unpaid.
A7-183-
1997-2001 243,522,855.00 123,351,728.18 366,874,583.18
08346
On 29 October 2001, MIAA filed with the Court of Appeals a petition for prohibition and
injunction with prayer for preliminary injunction or temporary restraining order. The
A7-183-
1992-2001 113,582,466.00 71,159,414.98 184,741,880.98 petition sought to enjoin the City of Pasay from imposing real property taxes on, levying
05224
against, and auctioning for public sale the NAIA Pasay properties.
23

On 30 October 2002, the Court of Appeals dismissed the petition and upheld the power
of the City of Pasay to impose and collect realty taxes on the NAIA Pasay properties.
MIAA filed a motion for reconsideration, which the Court of Appeals denied. Hence, this
petition.
The Court of Appeals Ruling
The Court of Appeals held that Sections 193 and 234 of Republic Act No. 7160 or the
Local Government Code, which took effect on 1 January 1992, withdrew the exemption
from payment of real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations, except local water districts, cooperatives
duly registered under Republic Act No. 6938, non-stock and non-profit hospitals and
educational institutions. Since MIAA is a government-owned corporation, it follows that its
tax exemption under Section 21 of EO 903 has been withdrawn upon the effectivity of the
Local Government Code.
The Issue
The issue raised in this petition is whether the NAIA Pasay properties of MIAA are
exempt from real property tax.
The Courts Ruling
The petition is meritorious.
In ruling that MIAA is not exempt from paying real property tax, the Court of Appeals cited
Sections 193 and 234 of the Local Government Code which read:
SECTION 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in
this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or controlled corporations,
except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock
and non-profit hospitals and educational institutions, are hereby withdrawn upon the
effectivity of this Code.
SECTION 234. Exemptions from Real Property Tax. The following are exempted from
payment of the real property tax:
CORPORATION LAW CASES SESSION 1
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise to a taxable person;
(b) Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, non-profit or religious cemeteries and all lands, buildings and
improvements actually, directly, and exclusively used for religious, charitable or
educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used
by local water districts and government owned or controlled corporations
engaged in the supply and distribution of water and/or generation and
transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for under
R.A. No. 6938; and
(e) Machinery and equipment used for pollution control and environment
protection.
Except as provided herein, any exemption from payment of real property tax previously
granted to, or presently enjoyed by, all persons, whether natural or juridical, including all
government-owned or controlled corporations are hereby withdrawn upon the effectivity
of this Code.
The Court of Appeals held that as a government-owned corporation, MIAAs tax
exemption under Section 21 of EO 903 has already been withdrawn upon the effectivity
of the Local Government Code in 1992.
In Manila International Airport Authority v. Court of Appeals6 (2006 MIAA case), this Court
already resolved the issue of whether the airport lands and buildings of MIAA are exempt
from tax under existing laws. The 2006 MIAA case originated from a petition for
prohibition and injunction which MIAA filed with the Court of Appeals, seeking to restrain
the City of Paraaque from imposing real property tax on, levying against, and auctioning
for public sale the airport lands and buildings located in Paraaque City. The only
difference between the 2006 MIAA case and this case is that the 2006 MIAA case
involved airport lands and buildings located in Paraaque City while this case involved
airport lands and buildings located in Pasay City. The 2006 MIAA case and this case
raised the same threshold issue: whether the local government can impose real property
24

tax on the airport lands, consisting mostly of the runways, as well as the airport buildings,
of MIAA. In the 2006 MIAA case, this Court held:
To summarize, MIAA is not a government-owned or controlled corporation under Section
2(13) of the Introductory Provisions of the Administrative Code because it is not
organized as a stock or non-stock corporation. Neither is MIAA a government-owned or
controlled corporation under Section 16, Article XII of the 1987 Constitution because
MIAA is not required to meet the test of economic viability. MIAA is a government
instrumentality vested with corporate powers and performing essential public services
pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code. As a
government instrumentality, MIAA is not subject to any kind of tax by local governments
under Section 133(o) of the Local Government Code. The exception to the exemption in
Section 234(a) does not apply to MIAA because MIAA is not a taxable entity under the
Local Government Code. Such exception applies only if the beneficial use of real
property owned by the Republic is given to a taxable entity.
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public use and
thus are properties of public dominion. Properties of public dominion are owned by the
State or the Republic. Article 420 of the Civil Code provides:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers,
torrents, ports and bridges constructed by the State, banks, shores,
roadsteads, and others of similar character;
(2) Those which belong to the State, without being for public use, and
are intended for some public serviceor for the development of the national
wealth.
The term "ports x x x constructed by the State" includes airports and seaports. The
Airport Lands and Buildings of MIAA are intended for public use, and at the very least
intended for public service. Whether intended for public use or public service, the Airport
Lands and Buildings are properties of public dominion. As properties of public dominion,
the Airport Lands and Buildings are owned by the Republic and thus exempt from real
estate tax under Section 234(a) of the Local Government Code. 7 (Emphasis in the
original)
The definition of "instrumentality" under Section 2(10) of the Introductory Provisions of
the Administrative Code of 1987 uses the phrase "includes x x x government-owned or
CORPORATION LAW CASES SESSION 1
controlled corporations" which means that a government "instrumentality" may or may
not be a "government-owned or controlled corporation." Obviously, the term government
"instrumentality" is broader than the term "government-owned or controlled corporation."
Section 2(10) provides:
SEC. 2. General Terms Defined. x x x
(10) Instrumentality refers to any agency of the national Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. This term includes regulatory agencies,
chartered institutions and government-owned or controlled corporations.
The term "government-owned or controlled corporation" has a separate definition under
Section 2(13)8 of the Introductory Provisions of the Administrative Code of 1987:
SEC. 2. General Terms Defined. x x x
(13) Government-owned or controlled corporation refers to any agency organized as a
stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through
its instrumentalities either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) percent of its capital stock: Provided,
That government-owned or controlled corporations may further be categorized by the
department of Budget, the Civil Service Commission, and the Commission on Audit for
the purpose of the exercise and discharge of their respective powers, functions and
responsibilities with respect to such corporations.
The fact that two terms have separate definitions means that while a government
"instrumentality" may include a "government-owned or controlled corporation," there may
be a government "instrumentality" that will not qualify as a "government-owned or
controlled corporation."
A close scrutiny of the definition of "government-owned or controlled corporation" in
Section 2(13) will show that MIAA would not fall under such definition. MIAA is a
government "instrumentality" that does not qualify as a "government-owned or
controlled corporation." As explained in the 2006 MIAA case:
A government-owned or controlled corporation must be "organized as a stock or non-
stock corporation." MIAA is not organized as a stock or non-stock corporation. MIAA is
25

not a stock corporation because it has no capital stock divided into shares. MIAA has no
stockholders or voting shares. x x x
Section 3 of the Corporation Code defines a stock corporation as one whose "capital
stock is divided into shares and x x x authorized to distribute to the holders of such
shares dividends x x x." MIAA has capital but it is not divided into shares of stock. MIAA
has no stockholders or voting shares. Hence, MIAA is not a stock corporation.
xxx
MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation
must have members. Even if we assume that the Government is considered as the sole
member of MIAA, this will not make MIAA a non-stock corporation. Non-stock
corporations cannot distribute any part of their income to their members. Section 11 of
the MIAA Charter mandates MIAA to remit 20% of its annual gross operating income to
the National Treasury. This prevents MIAA from qualifying as a non-stock corporation.
Section 88 of the Corporation Code provides that non-stock corporations are "organized
for charitable, religious, educational, professional, cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like
chambers." MIAA is not organized for any of these purposes. MIAA, a public utility, is
organized to operate an international and domestic airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within
the National Government?
MIAA is a government instrumentality vested with corporate powers to perform efficiently
its governmental functions. MIAA is like any other government instrumentality, the only
difference is that MIAA is vested with corporate powers. x x x
When the law vests in a government instrumentality corporate powers, the
instrumentality does not become a corporation. Unless the government instrumentality is
organized as a stock or non-stock corporation, it remains a government instrumentality
exercising not only governmental but also corporate powers. Thus, MIAA exercises the
governmental powers of eminent domain, police authority and the levying of fees and
charges. At the same time, MIAA exercises "all the powers of a corporation under the
CORPORATION LAW CASES SESSION 1
Corporation Law, insofar as these powers are not inconsistent with the provisions of this
Executive Order."9
Thus, MIAA is not a government-owned or controlled corporation but a government
instrumentality which is exempt from any kind of tax from the local governments. Indeed,
the exercise of the taxing power of local government units is subject to the limitations
enumerated in Section 133 of the Local Government Code. 10 Under Section 133(o)11 of
the Local Government Code, local government units have no power to tax
instrumentalities of the national government like the MIAA. Hence, MIAA is not liable to
pay real property tax for the NAIA Pasay properties.
Furthermore, the airport lands and buildings of MIAA are properties of public dominion
intended for public use, and as such are exempt from real property tax under Section
234(a) of the Local Government Code. However, under the same provision, if MIAA
leases its real property to a taxable person, the specific property leased becomes subject
to real property tax.12 In this case, only those portions of the NAIA Pasay properties which
are leased to taxable persons like private parties are subject to real property tax by the
City of Pasay.
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision dated 30 October
2002 and the Resolution dated 19 March 2004 of the Court of Appeals in CA-G.R. SP
No. 67416. We DECLARE the NAIA Pasay properties of the Manila International Airport
Authority EXEMPT from real property tax imposed by the City of Pasay. We
declare VOID all the real property tax assessments, including the final notices of real
property tax delinquencies, issued by the City of Pasay on the NAIA Pasay properties of
the Manila International Airport Authority, except for the portions that the Manila
International Airport Authority has leased to private parties.
No costs.
SO ORDERED.
G.R. No. 177131 June 7, 2011
BSP vs. COA
The jurisdiction of the Commission on Audit (COA) over the Boy Scouts of the Philippines
(BSP) is the subject matter of this controversy that reached us via petition for
prohibition1 filed by the BSP under Rule 65 of the 1997 Rules of Court. In this petition,
the BSP seeks that the COA be prohibited from implementing its June 18, 2002
26

Decision, its February 21, 2007 Resolution, as well as all other issuances arising
2 3
therefrom, and that all of the foregoing be rendered null and void. 4
Antecedent Facts and Background of the Case
This case arose when the COA issued Resolution No. 99-0115 on August 19, 1999 ("the
COA Resolution"), with the subject "Defining the Commissions policy with respect to the
audit of the Boy Scouts of the Philippines." In its whereas clauses, the COA Resolution
stated that the BSP was created as a public corporation under Commonwealth Act No.
111, as amended by Presidential Decree No. 460 and Republic Act No. 7278; that in Boy
Scouts of the Philippines v. National Labor Relations Commission, 6 the Supreme Court
ruled that the BSP, as constituted under its charter, was a "government-controlled
corporation within the meaning of Article IX(B)(2)(1) of the Constitution"; and that "the
BSP is appropriately regarded as a government instrumentality under the 1987
Administrative Code."7 The COA Resolution also cited its constitutional mandate under
Section 2(1), Article IX (D). Finally, the COA Resolution reads:
NOW THEREFORE, in consideration of the foregoing premises, the COMMISSION
PROPER HAS RESOLVED, AS IT DOES HEREBY RESOLVE, to conduct an annual
financial audit of the Boy Scouts of the Philippines in accordance with generally accepted
auditing standards, and express an opinion on whether the financial statements which
include the Balance Sheet, the Income Statement and the Statement of Cash Flows
present fairly its financial position and results of operations.
xxxx
BE IT RESOLVED FURTHERMORE, that for purposes of audit supervision, the Boy
Scouts of the Philippines shall be classified among the government corporations
belonging to the Educational, Social, Scientific, Civic and Research Sector under the
Corporate Audit Office I, to be audited, similar to the subsidiary corporations, by
employing the team audit approach.8 (Emphases supplied.)
The BSP sought reconsideration of the COA Resolution in a letter 9 dated November 26,
1999 signed by the BSP National President Jejomar C. Binay, who is now the Vice
President of the Republic, wherein he wrote:
It is the position of the BSP, with all due respect, that it is not subject to the Commissions
jurisdiction on the following grounds:
CORPORATION LAW CASES SESSION 1
1. We reckon that the ruling in the case of Boy Scouts of the Philippines vs.
National Labor Relations Commission, et al. (G.R. No. 80767) classifying the
BSP as a government-controlled corporation is anchored on the "substantial
Government participation" in the National Executive Board of the BSP. It is to be
noted that the case was decided when the BSP Charter is defined by
Commonwealth Act No. 111 as amended by Presidential Decree 460.
However, may we humbly refer you to Republic Act No. 7278 which amended the BSPs
charter after the cited case was decided. The most salient of all amendments in RA No.
7278 is the alteration of the composition of the National Executive Board of the BSP.
The said RA virtually eliminated the "substantial government participation" in the National
Executive Board by removing: (i) the President of the Philippines and executive
secretaries, with the exception of the Secretary of Education, as members thereof; and
(ii) the appointment and confirmation power of the President of the Philippines, as Chief
Scout, over the members of the said Board.
The BSP believes that the cited case has been superseded by RA 7278. Thereby
weakening the cases conclusion that the BSP is a government-controlled corporation
(sic). The 1987 Administrative Code itself, of which the BSP vs. NLRC relied on for some
terms, defines government-owned and controlled corporations as agencies organized as
stock or non-stock corporations which the BSP, under its present charter, is not.
Also, the Government, like in other GOCCs, does not have funds invested in the BSP.
What RA 7278 only provides is that the Government or any of its subdivisions, branches,
offices, agencies and instrumentalities can from time to time donate and contribute funds
to the BSP.
xxxx
Also the BSP respectfully believes that the BSP is not "appropriately regarded as a
government instrumentality under the 1987 Administrative Code" as stated in the COA
resolution. As defined by Section 2(10) of the said code, instrumentality refers to "any
agency of the National Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy,
usually through a charter."
The BSP is not an entity administering special funds. It is not even included in the DECS
National Budget. x x x
27

It may be argued also that the BSP is not an "agency" of the Government. The 1987
Administrative Code, merely referred the BSP as an "attached agency" of the DECS as
distinguished from an actual line agency of departments that are included in the National
Budget. The BSP believes that an "attached agency" is different from an "agency."
Agency, as defined in Section 2(4) of the Administrative Code, is defined as any of the
various units of the Government including a department, bureau, office, instrumentality,
government-owned or controlled corporation or local government or distinct unit therein.
Under the above definition, the BSP is neither a unit of the Government; a department
which refers to an executive department as created by law (Section 2[7] of the
Administrative Code); nor a bureau which refers to any principal subdivision or unit of
any department (Section 2[8], Administrative Code).10
Subsequently, requests for reconsideration of the COA Resolution were also made
separately by Robert P. Valdellon, Regional Scout Director, Western Visayas Region,
Iloilo City and Eugenio F. Capreso, Council Scout Executive of Calbayog City.11
In a letter12 dated July 3, 2000, Director Crescencio S. Sunico, Corporate Audit Officer
(CAO) I of the COA, furnished the BSP with a copy of the Memorandum 13 dated June 20,
2000 of Atty. Santos M. Alquizalas, the COA General Counsel. In said Memorandum, the
COA General Counsel opined that Republic Act No. 7278 did not supersede the Courts
ruling in Boy Scouts of the Philippines v. National Labor Relations Commission, even
though said law eliminated the substantial government participation in the selection of
members of the National Executive Board of the BSP. The Memorandum further
provides:
Analysis of the said case disclosed that the substantial government participation is only
one (1) of the three (3) grounds relied upon by the Court in the resolution of the case.
Other considerations include the character of the BSPs purposes and functions which
has a public aspect and the statutory designation of the BSP as a "public corporation".
These grounds have not been deleted by R.A. No. 7278. On the contrary, these were
strengthened as evidenced by the amendment made relative to BSPs purposes stated in
Section 3 of R.A. No. 7278.
On the argument that BSP is not appropriately regarded as "a government
instrumentality" and "agency" of the government, such has already been answered and
clarified. The Supreme Court has elucidated this matter in the BSP case when it declared
that BSP is regarded as, both a "government-controlled corporation with an original
charter" and as an "instrumentality" of the Government. Likewise, it is not disputed that
the Administrative Code of 1987 designated the BSP as one of the attached agencies of
CORPORATION LAW CASES SESSION 1
DECS. Being an attached agency, however, it does not change its nature as a
government-controlled corporation with original charter and, necessarily, subject to COA
audit jurisdiction. Besides, Section 2(1), Article IX-D of the Constitution provides that
COA 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 or controlled
corporations with original charters.14
Based on the Memorandum of the COA General Counsel, Director Sunico wrote:
In view of the points clarified by said Memorandum upholding COA Resolution No. 99-
011, we have to comply with the provisions of the latter, among which is to conduct an
annual financial audit of the Boy Scouts of the Philippines. 15
In a letter dated November 20, 2000 signed by Director Amorsonia B. Escarda, CAO I,
the COA informed the BSP that a preliminary survey of its organizational structure,
operations and accounting system/records shall be conducted on November 21 to 22,
2000.16
Upon the BSPs request, the audit was deferred for thirty (30) days. The BSP then filed a
Petition for Review with Prayer for Preliminary Injunction and/or Temporary Restraining
Order before the COA. This was denied by the COA in its questioned Decision, which
held that the BSP is under its audit jurisdiction. The BSP moved for reconsideration but
this was likewise denied under its questioned Resolution. 17
This led to the filing by the BSP of this petition for prohibition with preliminary injunction
and temporary restraining order against the COA.
The Issue
As stated earlier, the sole issue to be resolved in this case is whether the BSP falls under
the COAs audit jurisdiction.
The Parties Respective Arguments
The BSP contends that Boy Scouts of the Philippines v. National Labor Relations
Commission is inapplicable for purposes of determining the audit jurisdiction of the COA
as the issue therein was the jurisdiction of the National Labor Relations Commission over
a case for illegal dismissal and unfair labor practice filed by certain BSP employees. 18
28

While the BSP concedes that its functions do relate to those that the government might
otherwise completely assume on its own, it avers that this alone was not determinative of
the COAs audit jurisdiction over it. The BSP further avers that the Court in Boy Scouts of
the Philippines v. National Labor Relations Commission "simply stated x x x that in
respect of functions, the BSP is akin to a public corporation" but this was not
synonymous to holding that the BSP is a government corporation or entity subject to
audit by the COA. 19
The BSP contends that Republic Act No. 7278 introduced crucial amendments to its
charter; hence, the findings of the Court in Boy Scouts of the Philippines v. National
Labor Relations Commission are no longer valid as the government has ceased to play a
controlling influence in it. The BSP claims that the pronouncements of the Court therein
must be taken only within the context of that case; that the Court had categorically found
that its assets were acquired from the Boy Scouts of America and not from the Philippine
government, and that its operations are financed chiefly from membership dues of the
Boy Scouts themselves as well as from property rentals; and that "the BSP may correctly
be characterized as non-governmental, and hence, beyond the audit jurisdiction of the
COA." It further claims that the designation by the Court of the BSP as a government
agency or instrumentality is mere obiter dictum.20
The BSP maintains that the provisions of Republic Act No. 7278 suggest that
"governance of BSP has come to be overwhelmingly a private affair or nature, with
government participation restricted to the seat of the Secretary of Education, Culture and
Sports."21 It cites Philippine Airlines Inc. v. Commission on Audit 22 wherein the Court
declared that, "PAL, having ceased to be a government-owned or controlled corporation
is no longer under the audit jurisdiction of the COA." 23 Claiming that the amendments
introduced by Republic Act No. 7278 constituted a supervening event that changed the
BSPs corporate identity in the same way that the governments privatization program
changed PALs, the BSP makes the case that the government no longer has control over
it; thus, the COA cannot use the Boy Scouts of the Philippines v. National Labor
Relations Commission as its basis for the exercise of its jurisdiction and the issuance of
COA Resolution No. 99-011.24 The BSP further claims as follows:
It is not far-fetched, in fact, to concede that BSPs funds and assets are private in
character. Unlike ordinary public corporations, such as provinces, cities, and
municipalities, or government-owned and controlled corporations, such as Land Bank of
the Philippines and the Development Bank of the Philippines, the assets and funds of
BSP are not derived from any government grant. For its operations, BSP is not
dependent in any way on any government appropriation; as a matter of fact, it has not
even been included in any appropriations for the government. To be sure, COA has not
CORPORATION LAW CASES SESSION 1
alleged, in its Resolution No. 99-011 or in the Memorandum of its General Counsel, that
BSP received, receives or continues to receive assets and funds from any agency of the
government. The foregoing simply point to the private nature of the funds and assets of
petitioner BSP.
xxxx
As stated in petitioners third argument, BSPs assets and funds were never acquired
from the government. Its operations are not in any way financed by the government, as
BSP has never been included in any appropriations act for the government. Neither has
the government invested funds with BSP. BSP, has not been, at any time, a user of
government property or funds; nor have properties of the government been held in trust
by BSP. This is precisely the reason why, until this time, the COA has not attempted to
subject BSP to its audit jurisdiction. x x x.25
To summarize its other arguments, the BSP contends that it is not a government-owned
or controlled corporation; neither is it an instrumentality, agency, or subdivision of the
government.
In its Comment,26 the COA argues as follows:
1. The BSP is a public corporation created under Commonwealth Act No. 111
dated October 31, 1936, and whose functions relate to the fostering of public
virtues of citizenship and patriotism and the general improvement of the moral
spirit and fiber of the youth. The manner of creation and the purpose for which
the BSP was created indubitably prove that it is a government agency.
2. Being a government agency, the funds and property owned or held in trust by
the BSP are subject to the audit authority of respondent Commission on Audit
pursuant to Section 2 (1), Article IX-D of the 1987 Constitution.
3. Republic Act No. 7278 did not change the character of the BSP as a
government-owned or controlled corporation and government instrumentality.27
The COA maintains that the functions of the BSP that include, among others, the
teaching to the youth of patriotism, courage, self-reliance, and kindred virtues, are
undeniably sovereign functions enshrined under the Constitution and discussed by the
Court in Boy Scouts of the Philippines v. National Labor Relations Commission. The COA
contends that any attempt to classify the BSP as a private corporation would be
incomprehensible since no less than the law which created it had designated it as a
29

public corporation and its statutory mandate embraces performance of sovereign
functions.28
The COA claims that the only reason why the BSP employees fell within the scope of the
Civil Service Commission even before the 1987 Constitution was the fact that it was a
government-owned or controlled corporation; that as an attached agency of the
Department of Education, Culture and Sports (DECS), the BSP is an agency of the
government; and that the BSP is a chartered institution under Section 1(12) of the
Revised Administrative Code of 1987, embraced under the term government
instrumentality.29
The COA concludes that being a government agency, the funds and property owned or
held by the BSP are subject to the audit authority of the COA pursuant to Section 2(1),
Article IX (D) of the 1987 Constitution.
In support of its arguments, the COA cites The Veterans Federation of the Philippines
(VFP) v. Reyes,30 wherein the Court held that among the reasons why the VFP is a public
corporation is that its charter, Republic Act No. 2640, designates it as one. Furthermore,
the COA quotes the Court as saying in that case:
In several cases, we have dealt with the issue of whether certain specific activities can
be classified as sovereign functions. These cases, which deal with activities not
immediately apparent to be sovereign functions, upheld the public sovereign nature of
operations needed either to promote social justice or to stimulate patriotic sentiments
and love of country.
xxxx
Petitioner claims that its funds are not public funds because no budgetary appropriations
or government funds have been released to the VFP directly or indirectly from the DBM,
and because VFP funds come from membership dues and lease rentals earned from
administering government lands reserved for the VFP.
The fact that no budgetary appropriations have been released to the VFP does not prove
that it is a private corporation. The DBM indeed did not see it fit to propose budgetary
appropriations to the VFP, having itself believed that the VFP is a private corporation. If
the DBM, however, is mistaken as to its conclusion regarding the nature of VFP's
incorporation, its previous assertions will not prevent future budgetary appropriations to
the VFP. The erroneous application of the law by public officers does not bar a
subsequent correct application of the law.31(Citations omitted.)
CORPORATION LAW CASES SESSION 1
The COA points out that the government is not precluded by law from extending financial
support to the BSP and adding to its funds, and that "as a government instrumentality
which continues to perform a vital function imbued with public interest and reflective of
the governments policy to stimulate patriotic sentiments and love of country, the BSPs
funds from whatever source are public funds, and can be used solely for public purpose
in pursuance of the provisions of Republic Act No. [7278]."32
The COA claims that the fact that it has not yet audited the BSPs funds may not bar the
subsequent exercise of its audit jurisdiction.
The BSP filed its Reply33 on August 29, 2007 maintaining that its statutory designation as
a "public corporation" and the public character of its purpose and functions are not
determinative of the COAs audit jurisdiction; reiterating its stand that Boy Scouts of the
Philippines v. National Labor Relations Commission is not applicable anymore because
the aspect of government ownership and control has been removed by Republic Act No.
7278; and concluding that the funds and property that it either owned or held in trust are
not public funds and are not subject to the COAs audit jurisdiction.
Thereafter, considering the BSPs claim that it is a private corporation, this Court, in a
Resolution34 dated July 20, 2010, required the parties to file, within a period of twenty
(20) days from receipt of said Resolution, their respective comments on the issue of
whether Commonwealth Act No. 111, as amended by Republic Act No. 7278, is
constitutional.
In compliance with the Courts resolution, the parties filed their respective Comments.
In its Comment35 dated October 22, 2010, the COA argues that the constitutionality of
Commonwealth Act No. 111, as amended, is not determinative of the resolution of the
present controversy on the COAs audit jurisdiction over petitioner, and in fact, the
controversy may be resolved on other grounds; thus, the requisites before a judicial
inquiry may be made, as set forth in Commissioner of Internal Revenue v. Court of Tax
Appeals,36 have not been fully met. 37 Moreover, the COA maintains that behind every law
lies the presumption of constitutionality.38 The COA likewise argues that contrary to the
BSPs position, repeal of a law by implication is not favored. 39 Lastly, the COA claims that
there was no violation of Section 16, Article XII of the 1987 Constitution with the creation
or declaration of the BSP as a government corporation. Citing Philippine Society for the
Prevention of Cruelty to Animals v. Commission on Audit,40 the COA further alleges:
The true criterion, therefore, to determine whether a corporation is public or private is
found in the totality of the relation of the corporation to the State. If the corporation is
30

created by the State as the latters own agency or instrumentality to help it in carrying out
its governmental functions, then that corporation is considered public; otherwise, it is
private. x x x.41
For its part, in its Comment42 filed on December 3, 2010, the BSP submits that its charter,
Commonwealth Act No. 111, as amended by Republic Act No. 7278, is constitutional as it
does not violate Section 16, Article XII of the Constitution. The BSP alleges that "while [it]
is not a public corporation within the purview of COAs audit jurisdiction, neither is it a
private corporation created by special law falling within the ambit of the constitutional
prohibition x x x."43 The BSP further alleges:
Petitioners purpose is embodied in Section 3 of C.A. No. 111, as amended by Section 1
of R.A. No. 7278, thus:
xxxx
A reading of the foregoing provision shows that petitioner was created to advance the
interest of the youth, specifically of young boys, and to mold them into becoming good
citizens. Ultimately, the creation of petitioner redounds to the benefit, not only of those
boys, but of the public good or welfare. Hence, it can be said that petitioners purpose
and functions are more of a public rather than a private character. Petitioner caters to all
boys who wish to join the organization without any distinction. It does not limit its
membership to a particular class of boys. Petitioners members are trained in scoutcraft
and taught patriotism, civic consciousness and responsibility, courage, self-reliance,
discipline and kindred virtues, and moral values, preparing them to become model
citizens and outstanding leaders of the country.44
The BSP reiterates its stand that the public character of its purpose and functions do not
place it within the ambit of the audit jurisdiction of the COA as it lacks the government
ownership or control that the Constitution requires before an entity may be subject of
said jurisdiction.45 It avers that it merely stated in its Reply that the withdrawal of
government control is akin to privatization, but it does not necessarily mean that
petitioner is a private corporation. 46 The BSP claims that it has a unique characteristic
which "neither classifies it as a purely public nor a purely private corporation"; 47 that it is
not a quasi-public corporation; and that it may belong to a different class altogether.48
The BSP claims that assuming arguendo that it is a private corporation, its creation is not
contrary to the purpose of Section 16, Article XII of the Constitution; and that the evil
sought to be avoided by said provision is inexistent in the enactment of the BSPs
charter,49 as, (i) it was not created for any pecuniary purpose; (ii) those who will primarily
CORPORATION LAW CASES SESSION 1
benefit from its creation are not its officers but its entire membership consisting of boys
being trained in scoutcraft all over the country; (iii) it caters to all boys who wish to join
the organization without any distinction; and (iv) it does not limit its membership to a
particular class or group of boys. Thus, the enactment of its charter confers no special
privilege to particular individuals, families, or groups; nor does it bring about the danger
of granting undue favors to certain groups to the prejudice of others or of the interest of
the country, which are the evils sought to be prevented by the constitutional provision
involved.50
Finally, the BSP states that the presumption of constitutionality of a legislative enactment
prevails absent any clear showing of its repugnancy to the Constitution. 51
The Ruling of the Court
After looking at the legislative history of its amended charter and carefully studying the
applicable laws and the arguments of both parties, we find that the BSP is a public
corporation and its funds are subject to the COAs audit jurisdiction.
The BSP Charter (Commonwealth Act No. 111, approved on October 31, 1936), entitled
"An Act to Create a Public Corporation to be Known as the Boy Scouts of the Philippines,
and to Define its Powers and Purposes" created the BSP as a "public corporation" to
serve the following public interest or purpose:
Sec. 3. The purpose of this corporation shall be to promote through organization and
cooperation with other agencies, the ability of boys to do useful things for themselves
and others, to train them in scoutcraft, and to inculcate in them patriotism, civic
consciousness and responsibility, courage, self-reliance, discipline and kindred virtues,
and moral values, using the method which are in common use by boy scouts.
Presidential Decree No. 460, approved on May 17, 1974, amended Commonwealth Act
No. 111 and provided substantial changes in the BSP organizational structure. Pertinent
provisions are quoted below:
Section II. Section 5 of the said Act is also amended to read as follows:
The governing body of the said corporation shall consist of a National Executive Board
composed of (a) the President of the Philippines or his representative; (b) the charter and
life members of the Boy Scouts of the Philippines; (c) the Chairman of the Board of
Trustees of the Philippine Scouting Foundation; (d) the Regional Chairman of the Scout
Regions of the Philippines; (e) the Secretary of Education and Culture, the Secretary of
31

Social Welfare, the Secretary of National Defense, the Secretary of Labor, the Secretary
of Finance, the Secretary of Youth and Sports, and the Secretary of Local Government
and Community Development; (f) an equal number of individuals from the private sector;
(g) the National President of the Girl Scouts of the Philippines; (h) one Scout of Senior
age from each Scout Region to represent the boy membership; and (i) three
representatives of the cultural minorities. Except for the Regional Chairman who shall be
elected by the Regional Scout Councils during their annual meetings, and the Scouts of
their respective regions, all members of the National Executive Board shall be either by
appointment or cooption, subject to ratification and confirmation by the Chief Scout, who
shall be the Head of State. Vacancies in the Executive Board shall be filled by a majority
vote of the remaining members, subject to ratification and confirmation by the Chief
Scout. The by-laws may prescribe the number of members of the National Executive
Board necessary to constitute a quorum of the board, which number may be less than a
majority of the whole number of the board. The National Executive Board shall have
power to make and to amend the by-laws, and, by a two-thirds vote of the whole board at
a meeting called for this purpose, may authorize and cause to be executed mortgages
and liens upon the property of the corporation.
Subsequently, on March 24, 1992, Republic Act No. 7278 further amended
Commonwealth Act No. 111 "by strengthening the volunteer and democratic character" of
the BSP and reducing government representation in its governing body, as follows:
Section 1. Sections 2 and 3 of Commonwealth Act. No. 111, as amended, is hereby
amended to read as follows:
"Sec. 2. The said corporation shall have the powers of perpetual succession, to sue and
be sued; to enter into contracts; to acquire, own, lease, convey and dispose of such real
and personal estate, land grants, rights and choses in action as shall be necessary for
corporate purposes, and to accept and receive funds, real and personal property by gift,
devise, bequest or other means, to conduct fund-raising activities; to adopt and use a
seal, and the same to alter and destroy; to have offices and conduct its business and
affairs in Metropolitan Manila and in the regions, provinces, cities, municipalities, and
barangays of the Philippines, to make and adopt by-laws, rules and regulations not
inconsistent with this Act and the laws of the Philippines, and generally to do all such
acts and things, including the establishment of regulations for the election of associates
and successors, as may be necessary to carry into effect the provisions of this Act and
promote the purposes of said corporation: Provided, That said corporation shall have no
power to issue certificates of stock or to declare or pay dividends, its objectives and
purposes being solely of benevolent character and not for pecuniary profit of its
members.
CORPORATION LAW CASES SESSION 1
"Sec. 3. The purpose of this corporation shall be to promote through organization and
cooperation with other agencies, the ability of boys to do useful things for themselves
and others, to train them in scoutcraft, and to inculcate in them patriotism, civic
consciousness and responsibility, courage, self-reliance, discipline and kindred virtues,
and moral values, using the method which are in common use by boy scouts."
Sec. 2. Section 4 of Commonwealth Act No. 111, as amended, is hereby repealed and in
lieu thereof, Section 4 shall read as follows:
"Sec. 4. The President of the Philippines shall be the Chief Scout of the Boy Scouts of
the Philippines."
Sec. 3. Sections 5, 6, 7 and 8 of Commonwealth Act No. 111, as amended, are hereby
amended to read as follows:
"Sec. 5. The governing body of the said corporation shall consist of a National Executive
Board, the members of which shall be Filipino citizens of good moral character. The
Board shall be composed of the following:
"(a) One (1) charter member of the Boy Scouts of the Philippines who shall be
elected by the members of the National Council at its meeting called for this
purpose;
"(b) The regional chairmen of the scout regions who shall be elected by the
representatives of all the local scout councils of the region during its meeting
called for this purpose: Provided, That a candidate for regional chairman need
not be the chairman of a local scout council;
"(c) The Secretary of Education, Culture and Sports;
"(d) The National President of the Girl Scouts of the Philippines;
"(e) One (1) senior scout, each from Luzon, Visayas and Mindanao areas, to be
elected by the senior scout delegates of the local scout councils to the scout
youth forums in their respective areas, in its meeting called for this purpose, to
represent the boy scout membership;
"(f) Twelve (12) regular members to be elected by the members of the National
Council in its meeting called for this purpose;
32

"(g) At least ten (10) but not more than fifteen (15) additional members from the
private sector who shall be elected by the members of the National Executive
Board referred to in the immediately preceding paragraphs (a), (b), (c), (d), (e)
and (f) at the organizational meeting of the newly reconstituted National
Executive Board which shall be held immediately after the meeting of the
National Council wherein the twelve (12) regular members and the one (1)
charter member were elected.
xxxx
"Sec. 8. Any donation or contribution which from time to time may be made to the Boy
Scouts of the Philippines by the Government or any of its subdivisions, branches, offices,
agencies or instrumentalities or by a foreign government or by private, entities and
individuals shall be expended by the National Executive Board in pursuance of this Act.
The BSP as a Public Corporation under Par. 2, Art. 2 of the Civil Code
There are three classes of juridical persons under Article 44 of the Civil Code and the
BSP, as presently constituted under Republic Act No. 7278, falls under the second
classification. Article 44 reads:
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or
purpose created by law; their personality begins as soon as they have been
constituted according to law;
(3) Corporations, partnerships and associations for private interest or
purpose to which the law grants a juridical personality, separate and distinct
from that of each shareholder, partner or member. (Emphases supplied.)
The BSP, which is a corporation created for a public interest or purpose, is subject to the
law creating it under Article 45 of the Civil Code, which provides:
Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are
governed by the laws creating or recognizing them.
Private corporations are regulated by laws of general application on the subject.
CORPORATION LAW CASES SESSION 1
Partnerships and associations for private interest or purpose are governed by the
provisions of this Code concerning partnerships. (Emphasis and underscoring supplied.)
The purpose of the BSP as stated in its amended charter shows that it was created in
order to implement a State policy declared in Article II, Section 13 of the Constitution,
which reads:
ARTICLE II - DECLARATION OF PRINCIPLES AND STATE POLICIES
Section 13. The State recognizes the vital role of the youth in nation-building and shall
promote and protect their physical, moral, spiritual, intellectual, and social well-being. It
shall inculcate in the youth patriotism and nationalism, and encourage their involvement
in public and civic affairs.
Evidently, the BSP, which was created by a special law to serve a public purpose in
pursuit of a constitutional mandate, comes within the class of "public corporations"
defined by paragraph 2, Article 44 of the Civil Code and governed by the law which
creates it, pursuant to Article 45 of the same Code.
The BSPs Classification Under the Administrative Code of 1987
The public, rather than private, character of the BSP is recognized by the fact that, along
with the Girl Scouts of the Philippines, it is classified as an attached agency of the DECS
under Executive Order No. 292, or the Administrative Code of 1987, which states:
TITLE VI EDUCATION, CULTURE AND SPORTS
Chapter 8 Attached Agencies
SEC. 20. Attached Agencies. The following agencies are hereby attached to the
Department:
xxxx
(12) Boy Scouts of the Philippines;
(13) Girl Scouts of the Philippines.
33

The administrative relationship of an attached agency to the department is defined in the
Administrative Code of 1987 as follows:
BOOK IV
THE EXECUTIVE BRANCH
Chapter 7 ADMINISTRATIVE RELATIONSHIP
SEC. 38. Definition of Administrative Relationship. Unless otherwise expressly stated in
the Code or in other laws defining the special relationships of particular agencies,
administrative relationships shall be categorized and defined as follows:
xxxx
(3) Attachment. (a) This refers to the lateral relationship between the department or its
equivalent and the attached agency or corporation for purposes of policy and program
coordination. The coordination may be accomplished by having the department
represented in the governing board of the attached agency or corporation, either as
chairman or as a member, with or without voting rights, if this is permitted by the charter;
having the attached corporation or agency comply with a system of periodic reporting
which shall reflect the progress of programs and projects; and having the department or
its equivalent provide general policies through its representative in the board, which shall
serve as the framework for the internal policies of the attached corporation or agency.
(Emphasis ours.)
As an attached agency, the BSP enjoys operational autonomy, as long as policy and
program coordination is achieved by having at least one representative of government in
its governing board, which in the case of the BSP is the DECS Secretary. In this sense,
the BSP is not under government control or "supervision and control." Still this
characteristic does not make the attached chartered agency a private corporation
covered by the constitutional proscription in question.
Art. XII, Sec. 16 of the Constitution refers to "private corporations" created by
government for proprietary or economic/business purposes
At the outset, it should be noted that the provision of Section 16 in issue is found in
Article XII of the Constitution, entitled "National Economy and Patrimony." Section 1 of
Article XII is quoted as follows:
CORPORATION LAW CASES SESSION 1
SECTION 1. The goals of the national economy are a more equitable distribution of
opportunities, income, and wealth; a sustained increase in the amount of goods and
services produced by the nation for the benefit of the people; and an expanding
productivity as the key to raising the quality of life for all, especially the underprivileged.
The State shall promote industrialization and full employment based on sound
agricultural development and agrarian reform, through industries that make full and
efficient use of human and natural resources, and which are competitive in both domestic
and foreign markets. However, the State shall protect Filipino enterprises against unfair
foreign competition and trade practices.
In the pursuit of these goals, all sectors of the economy and all regions of the country
shall be given optimum opportunity to develop. Private enterprises, including
corporations, cooperatives, and similar collective organizations, shall be encouraged to
broaden the base of their ownership.
The scope and coverage of Section 16, Article XII of the Constitution can be seen from
the aforementioned declaration of state policies and goals which pertains to national
economy and patrimony and the interests of the people in economic development.
Section 16, Article XII deals with "the formation, organization, or regulation of private
corporations,"52 which should be done through a general law enacted by Congress,
provides for an exception, that is: if the corporation is government owned or controlled;
its creation is in the interest of the common good; and it meets the test of economic
viability. The rationale behind Article XII, Section 16 of the 1987 Constitution was
explained in Feliciano v. Commission on Audit,53 in the following manner:
The Constitution emphatically prohibits the creation of private corporations except by a
general law applicable to all citizens. 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. 54(Emphasis
added.)
It may be gleaned from the above discussion that Article XII, Section 16 bans the
creation of "private corporations" by special law. The said constitutional provision should
not be construed so as to prohibit the creation of public corporations or a corporate
agency or instrumentality of the government intended to serve a public interest or
purpose, which should not be measured on the basis of economic viability, but according
to the public interest or purpose it serves as envisioned by paragraph (2), of Article 44 of
the Civil Code and the pertinent provisions of the Administrative Code of 1987.
34

The BSP is a Public Corporation Not Subject to the Test of Government Ownership or
Control and Economic Viability
The BSP is a public corporation or a government agency or instrumentality with juridical
personality, which does not fall within the constitutional prohibition in Article XII, Section
16, notwithstanding the amendments to its charter. Not all corporations, which are not
government owned or controlled, are ipso facto to be considered private corporations as
there exists another distinct class of corporations or chartered institutions which are
otherwise known as "public corporations." These corporations are treated by law as
agencies or instrumentalities of the government which are not subject to the tests of
ownership or control and economic viability but to different criteria relating to their public
purposes/interests or constitutional policies and objectives and their administrative
relationship to the government or any of its Departments or Offices.
Classification of Corporations Under Section 16, Article XII of the Constitution on
National Economy and Patrimony
The dissenting opinion of Associate Justice Antonio T. Carpio, citing a line of cases,
insists that the Constitution recognizes only two classes of corporations: private
corporations under a general law, and government-owned or controlled corporations
created by special charters.
We strongly disagree. Section 16, Article XII should not be construed so as to prohibit
Congress from creating public corporations. In fact, Congress has enacted numerous
laws creating public corporations or government agencies or instrumentalities vested
with corporate powers. Moreover, Section 16, Article XII, which relates to National
Economy and Patrimony, could not have tied the hands of Congress in creating public
corporations to serve any of the constitutional policies or objectives.
In his dissent, Justice Carpio contends that this ponente introduces "a totally different
species of corporation, which is neither a private corporation nor a government owned or
controlled corporation" and, in so doing, is missing the fact that the BSP, "which was
created as a non-stock, non-profit corporation, can only be either a private corporation or
a government owned or controlled corporation."
Note that in Boy Scouts of the Philippines v. National Labor Relations Commission, the
BSP, under its former charter, was regarded as both a government owned or controlled
corporation with original charter and a "public corporation." The said case pertinently
stated:
CORPORATION LAW CASES SESSION 1
While the BSP may be seen to be a mixed type of entity, combining aspects of both
public and private entities, we believe that considering the character of its purposes and
its functions, the statutory designation of the BSP as "a public corporation" and the
substantial participation of the Government in the selection of members of the National
Executive Board of the BSP, the BSP, as presently constituted under its charter, is a
government-controlled corporation within the meaning of Article IX (B) (2) (1) of the
Constitution.
We are fortified in this conclusion when we note that the Administrative Code of 1987
designates the BSP as one of the attached agencies of the Department of Education,
Culture and Sports ("DECS"). An "agency of the Government" is defined as referring to
any of the various units of the Government including a department, bureau, office,
instrumentality, government-owned or -controlled corporation, or local government or
distinct unit therein. "Government instrumentality" is in turn defined in the 1987
Administrative Code in the following manner:
Instrumentality - refers to any agency of the National Government, not integrated within
the department framework, vested with special functions or jurisdiction by law, endowed
with some if not all corporate powers, administering special funds, and enjoying
operational autonomy usually through a charter. This term includes regulatory agencies,
chartered institutions and government-owned or controlled corporations.
The same Code describes a "chartered institution" in the following terms:
Chartered institution - refers to any agency organized or operating under a special
charter, and vested by law with functions relating to specific constitutional policies or
objectives. This term includes the state universities and colleges, and the monetary
authority of the State.
We believe that the BSP is appropriately regarded as "a government instrumentality"
under the 1987 Administrative Code.
It thus appears that the BSP may be regarded as both a "government controlled
corporation with an original charter" and as an "instrumentality" of the Government within
the meaning of Article IX (B) (2) (1) of the Constitution. x x x. 55 (Emphases supplied.)
The existence of public or government corporate or juridical entities or chartered
institutions by legislative fiat distinct from private corporations and government owned or
controlled corporation is best exemplified by the 1987 Administrative Code cited above,
which we quote in part:
35

Sec. 2. General Terms Defined. Unless the specific words of the text, or the context as
a whole, or a particular statute, shall require a different meaning:
xxxx
(10) "Instrumentality" refers to any agency of the National Government, not integrated
within the department framework, vested with special functions or jurisdiction by law,
endowed with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. This term includes regulatory agencies,
chartered institutions and government-owned or controlled corporations.
xxxx
(12) "Chartered institution" refers to any agency organized or operating under a special
charter, and vested by law with functions relating to specific constitutional policies or
objectives. This term includes the state universities and colleges and the monetary
authority of the State.
(13) "Government-owned or controlled corporation" refers to any agency organized as a
stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through
its instrumentalities either wholly, or, where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) per cent of its capital stock: Provided,
That government-owned or controlled corporations may be further categorized by the
Department of the Budget, the Civil Service Commission, and the Commission on Audit
for purposes of the exercise and discharge of their respective powers, functions and
responsibilities with respect to such corporations.
Assuming for the sake of argument that the BSP ceases to be owned or controlled by the
government because of reduction of the number of representatives of the government in
the BSP Board, it does not follow that it also ceases to be a government instrumentality
as it still retains all the characteristics of the latter as an attached agency of the DECS
under the Administrative Code. Vesting corporate powers to an attached agency or
instrumentality of the government is not constitutionally prohibited and is allowed by the
above-mentioned provisions of the Civil Code and the 1987 Administrative Code.
Economic Viability and Ownership and Control Tests Inapplicable to Public Corporations
As presently constituted, the BSP still remains an instrumentality of the national
government. It is a public corporation created by law for a public purpose, attached to the
CORPORATION LAW CASES SESSION 1
DECS pursuant to its Charter and the Administrative Code of 1987. It is not a private
corporation which is required to be owned or controlled by the government and be
economically viable to justify its existence under a special law.
The dissent of Justice Carpio also submits that by recognizing "a new class of public
corporation(s)" created by special charter that will not be subject to the test of economic
viability, the constitutional provision will be circumvented.
However, a review of the Record of the 1986 Constitutional Convention reveals the intent
of the framers of the highest law of our land to distinguish between government
corporations performing governmental functions and corporations involved in business or
proprietary functions:
THE PRESIDENT. Commissioner Foz is recognized.
MR. FOZ. Madam President, I support the proposal to insert "ECONOMIC VIABILITY" as
one of the grounds for organizing government corporations. x x x.
MR. OPLE. Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation becomes
exempt from the test of economic performance. We know what happened in the past. If a
government corporation loses, then it makes its claim upon the taxpayers money
through new equity infusions from the government and what is always invoked is the
common good. x x x
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism to
excuse themselves from the responsibility of meeting the market test so that they
become viable. x x x.
xxxx
THE PRESIDENT. Commissioner Quesada is recognized.
MS. QUESADA. Madam President, may we be clarified by the committee on what is
meant by economic viability?
THE PRESIDENT. Please proceed.
36

MR. MONSOD. Economic viability normally is determined by cost-benefit ratio that takes
into consideration all benefits, including economic external as well as internal benefits.
These are what they call externalities in economics, so that these are not strictly financial
criteria. Economic viability involves what we call economic returns or benefits of the
country that are not quantifiable in financial terms. x x x.
xxxx
MS. QUESADA. So, would this particular formulation now really limit the entry of
government corporations into activities engaged in by corporations?
MR. MONSOD. Yes, because it is also consistent with the economic philosophy that this
Commission approved that there should be minimum government participation and
intervention in the economy.
MS. QUESDA. Sometimes this Commission would just refer to Congress to provide the
particular requirements when the government would get into corporations. But this time
around, we specifically mentioned economic viability. x x x.
MR. VILLEGAS. Commissioner Ople will restate the reason for his introducing that
amendment.
MR. OPLE. I am obliged to repeat what I said earlier in moving for this particular
amendment jointly with Commissioner Foz. During the past three decades, there had
been a proliferation of government corporations, very few of which have succeeded, and
many of which are now earmarked by the Presidential Reorganization Commission for
liquidation because they failed the economic test. x x x.
xxxx
MS. QUESADA. But would not the Commissioner say that the reason why many of the
government-owned or controlled corporations failed to come up with the economic test is
due to the management of these corporations, and not the idea itself of government
corporations? It is a problem of efficiency and effectiveness of management of these
corporations which could be remedied, not by eliminating government corporations or the
idea of getting into state-owned corporations, but improving management which our
technocrats should be able to do, given the training and the experience.
MR. OPLE. That is part of the economic viability, Madam President.
CORPORATION LAW CASES SESSION 1
MS. QUESADA. So, is the Commissioner saying then that the Filipinos will benefit more
if these government-controlled corporations were given to private hands, and that there
will be more goods and services that will be affordable and within the reach of the
ordinary citizens?
MR. OPLE. Yes. There is nothing here, Madam President, that will prevent the formation
of a government corporation in accordance with a special charter given by Congress.
However, we are raising the standard a little bit so that, in the future, corporations
established by the government will meet the test of the common good but within that
framework we should also build a certain standard of economic viability.
xxxx
THE PRESIDENT. Commissioner Padilla is recognized.
MR. PADILLA. This is an inquiry to the committee. With regard to corporations created
by a special charter for government-owned or controlled corporations, will these be in the
pioneer fields or in places where the private enterprise does not or cannot enter? Or is
this so general that these government corporations can compete with private
corporations organized under a general law?
MR. MONSOD. Madam President, x x x. There are two types of government
corporations those that are involved in performing governmental functions, like garbage
disposal, Manila waterworks, and so on; and those government corporations that are
involved in business functions. As we said earlier, there are two criteria that should be
followed for corporations that want to go into business. First is for government
corporations to first prove that they can be efficient in the areas of their proper functions.
This is one of the problems now because they go into all kinds of activities but are not
even efficient in their proper functions. Secondly, they should not go into activities that
the private sector can do better.
MR. PADILLA. There is no question about corporations performing governmental
functions or functions that are impressed with public interest. But the question is with
regard to matters that are covered, perhaps not exhaustively, by private enterprise. It
seems that under this provision the only qualification is economic viability and common
good, but shall government, through government-controlled corporations, compete with
private enterprise?
37

MR. MONSOD. No, Madam President. As we said, the government should not engage in
activities that private enterprise is engaged in and can do better. x x x. 56 (Emphases
supplied.)
Thus, the test of economic viability clearly does not apply to public corporations dealing
with governmental functions, to which category the BSP belongs. The discussion above
conveys the constitutional intent not to apply this constitutional ban on the creation of
public corporations where the economic viability test would be irrelevant. The said test
would only apply if the corporation is engaged in some economic activity or business
function for the government.
It is undisputed that the BSP performs functions that are impressed with public interest.
In fact, during the consideration of the Senate Bill that eventually became Republic Act
No. 7278, which amended the BSP Charter, one of the bills sponsors, Senator Joey
Lina, described the BSP as follows:
Senator Lina. Yes, I can only think of two organizations involving the masses of our
youth, Mr. President, that should be given this kind of a privilege the Boy Scouts of the
Philippines and the Girl Scouts of the Philippines. Outside of these two groups, I do not
think there are other groups similarly situated.
The Boy Scouts of the Philippines has a long history of providing value formation to our
young, and considering how huge the population of the young people is, at this point in
time, and also considering the importance of having an organization such as this that will
inculcate moral uprightness among the young people, and further considering that the
development of these young people at that tender age of seven to sixteen is vital in the
development of the country producing good citizens, I believe that we can make an
exception of the Boy Scouting movement of the Philippines from this general prohibition
against providing tax exemption and privileges.57
Furthermore, this Court cannot agree with the dissenting opinion which equates the
changes introduced by Republic Act No. 7278 to the BSP Charter as clear manifestation
of the intent of Congress "to return the BSP to the private sector." It was not the intent of
Congress in enacting Republic Act No. 7278 to give up all interests in this basic youth
organization, which has been its partner in forming responsible citizens for decades.
In fact, as may be seen in the deliberation of the House Bills that eventually resulted to
Republic Act No. 7278, Congress worked closely with the BSP to rejuvenate the
organization, to bring it back to its former glory reached under its original charter,
Commonwealth Act No. 111, and to correct the perceived ills introduced by the
CORPORATION LAW CASES SESSION 1
amendments to its Charter under Presidential Decree No. 460. The BSP suffered from
low morale and decrease in number because the Secretaries of the different
departments in government who were too busy to attend the meetings of the BSPs
National Executive Board ("the Board") sent representatives who, as it turned out,
changed from meeting to meeting. Thus, the Scouting Councils established in the
provinces and cities were not in touch with what was happening on the national level, but
they were left to implement what was decided by the Board.58
A portion of the legislators discussion is quoted below to clearly show their intent:
HON. DEL MAR. x x x I need not mention to you the value and the tremendous good that
the Boy Scout Movement has done not only for the youth in particular but for the country
in general. And that is why, if we look around, our past and present national leaders,
prominent men in the various fields of endeavor, public servants in government offices,
and civic leaders in the communities all over the land, and not only in our country but all
over the world many if not most of them have at one time or another been beneficiaries
of the Scouting Movement. And so, it is along this line, Mr. Chairman, that we would like
to have the early approval of this measure if only to pay back what we owe much to the
Scouting Movement. Now, going to the meat of the matter, Mr. Chairman, if I may just
the Scouting Movement was enacted into law in October 31, 1936 under Commonwealth
Act No. 111. x x x [W]e were acknowledged as the third biggest scouting organization in
the world x x x. And to our mind, Mr. Chairman, this erratic growth and this decrease in
membership [number] is because of the bad policy measures that were enunciated with
the enactment or promulgation by the President before of Presidential Decree No. 460
which we feel is the culprit of the ills that is flagging the Boy Scout Movement today. And
so, this is specifically what we are attacking, Mr. Chairman, the disenfranchisement of
the National Council in the election of the national board. x x x. And so, this is what we
would like to be appraised of by the officers of the Boy [Scouts] of the Philippines whom
we are also confident, have the best interest of the Boy Scout Movement at heart and it
is in this spirit, Mr. Chairman, that we see no impediment towards working together, the
Boy Scout of the Philippines officers working together with the House of Representatives
in coming out with a measure that will put back the vigor and enthusiasm of the Boy
Scout Movement. x x x.59 (Emphasis ours.)
The following is another excerpt from the discussion on the House version of the bill, in
the Committee on Government Enterprises:
HON. AQUINO: x x x Well, obviously, the two bills as well as the previous laws that have
created the Boy Scouts of the Philippines did not provide for any direct government
support by way of appropriation from the national budget to support the activities of this
38

organization. The point here is, and at the same time they have been subjected to a
governmental intervention, which to their mind has been inimical to the objectives and to
the institution per se, that is why they are seeking legislative fiat to restore back the
original mandate that they had under Commonwealth Act 111. Such having been the
experience in the hands of government, meaning, there has been negative interference
on their part and inasmuch as their mandate is coming from a legislative fiat, then
shouldnt it be, this rhetorical question, shouldnt it be better for this organization to seek
a mandate from, lets say, the government the Corporation Code of the Philippines and
register with the SEC as non-profit non-stock corporation so that government intervention
could be very very minimal. Maybe thats a rhetorical question, they may or they may not
answer, ano. I dont know what would be the benefit of a charter or a mandate being
provided for by way of legislation versus a registration with the SEC under the
Corporation Code of the Philippines inasmuch as they dont get anything from the
government anyway insofar as direct funding. In fact, the only thing that they got from
government was intervention in their affairs. Maybe we can solicit some commentary
comments from the resource persons. Incidentally, dont take that as an objection, Im
not objecting. Im all for the objectives of these two bills. It just occurred to me that since
you have had very bad experience in the hands of government and you will always be
open to such possible intervention even in the future as long as you have a legislative
mandate or your mandate or your charter coming from legislative action.
xxxx
MR. ESCUDERO: Mr. Chairman, there may be a disadvantage if the Boy Scouts of the
Philippines will be required to register with the SEC. If we are registered with the SEC,
there could be a danger of proliferation of scout organization. Anybody can organize and
then register with the SEC. If there will be a proliferation of this, then the organization will
lose control of the entire organization. Another disadvantage, Mr. Chairman, anybody can
file a complaint in the SEC against the Boy Scouts of the Philippines and the SEC may
suspend the operation or freeze the assets of the organization and hamper the operation
of the organization. I dont know, Mr. Chairman, how you look at it but there could be a
danger for anybody filing a complaint against the organization in the SEC and the SEC
might suspend the registration permit of the organization and we will not be able to
operate.
HON. AQUINO: Well, that I think would be a problem that will not be exclusive to
corporations registered with the SEC because even if you are government corporation,
court action may be taken against you in other judicial bodies because the SEC is simply
another quasi-judicial body. But, I think, the first point would be very interesting, the first
point that you raised. In effect, what you are saying is that with the legislative mandate
CORPORATION LAW CASES SESSION 1
creating your charter, in effect, you have been given some sort of a franchise with this
movement.
MR. ESCUDERO: Yes.
HON. AQUINO: Exclusive franchise of that movement?
MR. ESCUDERO: Yes.
HON. AQUINO: Well, thats very well taken so I will proceed with other issues, Mr.
Chairman. x x x.60 (Emphases added.)
Therefore, even though the amended BSP charter did away with most of the
governmental presence in the BSP Board, this was done to more strongly promote the
BSPs objectives, which were not supported under Presidential Decree No. 460. The
BSP objectives, as pointed out earlier, are consistent with the public purpose of the
promotion of the well-being of the youth, the future leaders of the country. The
amendments were not done with the view of changing the character of the BSP into a
privatized corporation. The BSP remains an agency attached to a department of the
government, the DECS, and it was not at all stripped of its public character.
The ownership and control test is likewise irrelevant for a public corporation like the BSP.
To reiterate, the relationship of the BSP, an attached agency, to the government, through
the DECS, is defined in the Revised Administrative Code of 1987. The BSP meets the
minimum statutory requirement of an attached government agency as the DECS
Secretary sits at the BSP Board ex officio, thus facilitating the policy and program
coordination between the BSP and the DECS.
Requisites for Declaration of Unconstitutionality Not Met in this Case
The dissenting opinion of Justice Carpio improperly raised the issue of unconstitutionality
of certain provisions of the BSP Charter. Even if the parties were asked to Comment on
the validity of the BSP charter by the Court, this alone does not comply with the
requisites for judicial review, which were clearly set forth in a recent case:
When questions of constitutional significance are raised, the Court can exercise its
power of judicial review only if the following requisites are present: (1) the existence of an
actual and appropriate case; (2) the existence of personal and substantial interest on the
part of the party raising the constitutional question; (3) recourse to judicial review is made
39

at the earliest opportunity; and (4) the constitutional question is the lis mota of the
case.61(Emphasis added.)
Thus, when it comes to the exercise of the power of judicial review, the constitutional
issue should be the very lis mota, or threshold issue, of the case, and that it should be
raised by either of the parties. These requirements would be ignored under the dissents
rather overreaching view of how this case should have been decided. True, it was the
Court that asked the parties to comment, but the Court cannot be the one to raise a
constitutional issue. Thus, the Court chooses to once more exhibit restraint in the
exercise of its power to pass upon the validity of a law.
Re: the COAs Jurisdiction
Regarding the COAs jurisdiction over the BSP, Section 8 of its amended charter allows
the BSP to receive contributions or donations from the government. Section 8 reads:
Section 8. Any donation or contribution which from time to time may be made to the Boy
Scouts of the Philippines by the Government or any of its subdivisions, branches, offices,
agencies or instrumentalities shall be expended by the Executive Board in pursuance of
this Act.
lawph!1
The sources of funds to maintain the BSP were identified before the House Committee
on Government Enterprises while the bill was being deliberated, and the pertinent portion
of the discussion is quoted below:
MR. ESCUDERO. Yes, Mr. Chairman. The question is the sources of funds of the
organization. First, Mr. Chairman, the Boy Scouts of the Philippines do not receive
annual allotment from the government. The organization has to raise its own funds
through fund drives and fund campaigns or fund raising activities. Aside from this, we
have some revenue producing projects in the organization that gives us funds to support
the operation. x x x From time to time, Mr. Chairman, when we have special activities we
request for assistance or financial assistance from government agencies, from private
business and corporations, but this is only during special activities that the Boy Scouts of
the Philippines would conduct during the year. Otherwise, we have to raise our own
funds to support the organization.62
The nature of the funds of the BSP and the COAs audit jurisdiction were likewise brought
up in said congressional deliberations, to wit:
CORPORATION LAW CASES SESSION 1
HON. AQUINO: x x x Insofar as this organization being a government created
organization, in fact, a government corporation classified as such, are your funds or your
finances subjected to the COA audit?
MR. ESCUDERO: Mr. Chairman, we are not. Our funds is not subjected. We dont fall
under the jurisdiction of the COA.
HON. AQUINO: All right, but before were you?
MR. ESCUDERO: No, Mr. Chairman.
MR. JESUS: May I? As historical backgrounder, Commonwealth Act 111 was written by
then Secretary Jorge Vargas and before and up to the middle of the Martial Law years,
the BSP was receiving a subsidy in the form of an annual a one draw from the
Sweepstakes. And, this was the case also with the Girl Scouts at the Anti-TB, but then
this was and the Boy Scouts then because of this funding partly from government was
being subjected to audit in the contributions being made in the part of the Sweepstakes.
But this was removed later during the Martial Law years with the creation of the Human
Settlements Commission. So the situation right now is that the Boy Scouts does not
receive any funding from government, but then in the case of the local councils and this
legislative charter, so to speak, enables the local councils even the national headquarters
in view of the provisions in the existing law to receive donations from the government or
any of its instrumentalities, which would be difficult if the Boy Scouts is registered as a
private corporation with the Securities and Exchange Commission. Government bodies
would be estopped from making donations to the Boy Scouts, which at present is not the
case because there is the Boy Scouts charter, this Commonwealth Act 111 as amended
by PD 463.
xxxx
HON. AMATONG: Mr. Chairman, in connection with that.
THE CHAIRMAN: Yeah, Gentleman from Zamboanga.
HON. AMATONG: There is no auditing being made because theres no money put in the
organization, but how about donated funds to this organization? What are the remedies
of the donors of how will they know how their money are being spent?
MR. ESCUDERO: May I answer, Mr. Chairman?
40

THE CHAIRMAN: Yes, gentleman.
MR. ESCUDERO: The Boy Scouts of the Philippines has an external auditor and by the
charter we are required to submit a financial report at the end of each year to the
National Executive Board. So all the funds donated or otherwise is accounted for at the
end of the year by our external auditor. In this case the SGV.63
Historically, therefore, the BSP had been subjected to government audit in so far as
public funds had been infused thereto. However, this practice should not preclude the
exercise of the audit jurisdiction of COA, clearly set forth under the Constitution, which
pertinently provides:
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 post-
audit 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 with original charters and their
subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly
or indirectly, from or through the Government, which are required by law of the granting
institution to submit to such audit as a condition of subsidy or equity. x x x. 64
Since the BSP, under its amended charter, continues to be a public corporation or a
government instrumentality, we come to the inevitable conclusion that it is subject to the
exercise by the COA of its audit jurisdiction in the manner consistent with the provisions
of the BSP Charter.
WHEREFORE, premises considered, the instant petition for prohibition is DISMISSED.
SO ORDERED.
G. R. No. 175352 January 18, 2011
DANTE V. LIBAN, REYNALDO M. BERNARDO and SALVADOR M. VIARI vs.
GORDON and RED CROSS (RESOLUTION)
This resolves the Motion for Clarification and/or for Reconsideration 1 filed on August 10,
2009 by respondent Richard J. Gordon (respondent) of the Decision promulgated by this
Court on July 15, 2009 (the Decision), the Motion for Partial Reconsideration 2 filed on
CORPORATION LAW CASES SESSION 1
August 27, 2009 by movant-intervenor Philippine National Red Cross (PNRC), and the
latters Manifestation and Motion to Admit Attached Position Paper 3 filed on December
23, 2009.
In the Decision,4 the Court held that respondent did not forfeit his seat in the Senate
when he accepted the chairmanship of the PNRC Board of Governors, as "the office of
the PNRC Chairman is not a government office or an office in a government-owned or
controlled corporation for purposes of the prohibition in Section 13, Article VI of the 1987
Constitution."5 The Decision, however, further declared void the PNRC Charter "insofar
as it creates the PNRC as a private corporation" and consequently ruled that "the PNRC
should incorporate under the Corporation Code and register with the Securities and
Exchange Commission if it wants to be a private corporation." 6 The dispositive portion of
the Decision reads as follows:
WHEREFORE, we declare that the office of the Chairman of the Philippine National Red
Cross is not a government office or an office in a government-owned or controlled
corporation for purposes of the prohibition in Section 13, Article VI of the 1987
Constitution. We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10, 11, 12, and 13
of the Charter of the Philippine National Red Cross, or Republic Act No. 95, as amended
by Presidential Decree Nos. 1264 and 1643, are VOID because they create the PNRC
as a private corporation or grant it corporate powers. 7
In his Motion for Clarification and/or for Reconsideration, respondent raises the following
grounds: (1) as the issue of constitutionality of Republic Act (R.A.) No. 95 was not raised
by the parties, the Court went beyond the case in deciding such issue; and (2) as the
Court decided that Petitioners did not have standing to file the instant Petition, the
pronouncement of the Court on the validity of R.A. No. 95 should be considered obiter.8
Respondent argues that the validity of R.A. No. 95 was a non-issue; therefore, it was
unnecessary for the Court to decide on that question. Respondent cites Laurel v.
Garcia,9 wherein the Court said that it "will not pass upon a constitutional question
although properly presented by the record if the case can be disposed of on some other
ground" and goes on to claim that since this Court, in the Decision, disposed of the
petition on some other ground, i.e., lack of standing of petitioners, there was no need for
it to delve into the validity of R.A. No. 95, and the rest of the judgment should be deemed
obiter.
In its Motion for Partial Reconsideration, PNRC prays that the Court sustain the
constitutionality of its Charter on the following grounds:
41

A. THE ASSAILED DECISION DECLARING UNCONSTITUTIONAL REPUBLIC ACT
NO. 95 AS AMENDED DEPRIVED INTERVENOR PNRC OF ITS CONSTITUTIONAL
RIGHT TO DUE PROCESS.
1. INTERVENOR PNRC WAS NEVER A PARTY TO THE INSTANT
CONTROVERSY.
2. THE CONSTITUTIONALITY OF REPUBLIC ACT NO. 95, AS AMENDED WAS
NEVER AN ISSUE IN THIS CASE.
B. THE CURRENT CHARTER OF PNRC IS PRESIDENTIAL DECREE NO. 1264 AND
NOT REPUBLIC ACT NO. 95. PRESIDENTIAL DECREE NO. 1264 WAS NOT A
CREATION OF CONGRESS.
C. PNRCS STRUCTURE IS SUI GENERIS; IT IS A CLASS OF ITS OWN. WHILE IT IS
PERFORMING HUMANITARIAN FUNCTIONS AS AN AUXILIARY TO GOVERNMENT,
IT IS A NEUTRAL ENTITY SEPARATE AND INDEPENDENT OF GOVERNMENT
CONTROL, YET IT DOES NOT QUALIFY AS STRICTLY PRIVATE IN CHARACTER.
In his Comment and Manifestation10 filed on November 9, 2009, respondent manifests:
(1) that he agrees with the position taken by the PNRC in its Motion for Partial
Reconsideration dated August 27, 2009; and (2) as of the writing of said Comment and
Manifestation, there was pending before the Congress of the Philippines a proposed bill
entitled "An Act Recognizing the PNRC as an Independent, Autonomous, Non-
Governmental Organization Auxiliary to the Authorities of the Republic of the Philippines
in the Humanitarian Field, to be Known as The Philippine Red Cross." 11
After a thorough study of the arguments and points raised by the respondent as well as
those of movant-intervenor in their respective motions, we have reconsidered our
pronouncements in our Decision dated July 15, 2009 with regard to the nature of the
PNRC and the constitutionality of some provisions of the PNRC Charter, R.A. No. 95, as
amended.
As correctly pointed out in respondents Motion, the issue of constitutionality of R.A. No.
95 was not raised by the parties, and was not among the issues defined in the body of
the Decision; thus, it was not the very lis mota of the case. We have reiterated the rule as
to when the Court will consider the issue of constitutionality in Alvarez v. PICOP
Resources, Inc.,12 thus:
CORPORATION LAW CASES SESSION 1
This Court will not touch the issue of unconstitutionality unless it is the very lis mota. It is
a well-established rule that a court should not pass upon a constitutional question and
decide a law to be unconstitutional or invalid, unless such question is raised by the
parties and that when it is raised, if the record also presents some other ground upon
which the court may [rest] its judgment, that course will be adopted and the constitutional
question will be left for consideration until such question will be unavoidable. 13
Under the rule quoted above, therefore, this Court should not have declared void certain
sections of R.A. No. 95, as amended by Presidential Decree (P.D.) Nos. 1264 and 1643,
the PNRC Charter. Instead, the Court should have exercised judicial restraint on this
matter, especially since there was some other ground upon which the Court could have
based its judgment. Furthermore, the PNRC, the entity most adversely affected by this
declaration of unconstitutionality, which was not even originally a party to this case, was
being compelled, as a consequence of the Decision, to suddenly reorganize and
incorporate under the Corporation Code, after more than sixty (60) years of existence in
this country.
Its existence as a chartered corporation remained unchallenged on ground of
unconstitutionality notwithstanding that R.A. No. 95 was enacted on March 22, 1947
during the effectivity of the 1935 Constitution, which provided for a proscription against
the creation of private corporations by special law, to wit:
SEC. 7. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are owned
and controlled by the Government or any subdivision or instrumentality thereof. (Art. XIV,
1935 Constitution.)
Similar provisions are found in Article XIV, Section 4 of the 1973 Constitution and Article
XII, Section 16 of the 1987 Constitution. The latter reads:
SECTION 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.
Since its enactment, the PNRC Charter was amended several times, particularly on June
11, 1953, August 16, 1971, December 15, 1977, and October 1, 1979, by virtue of R.A.
No. 855, R.A. No. 6373, P.D. No. 1264, and P.D. No. 1643, respectively. The passage of
several laws relating to the PNRCs corporate existence notwithstanding the effectivity of
the constitutional proscription on the creation of private corporations by law, is a
42

recognition that the PNRC is not strictly in the nature of a private corporation
contemplated by the aforesaid constitutional ban.
A closer look at the nature of the PNRC would show that there is none like it not just in
terms of structure, but also in terms of history, public service and official status accorded
to it by the State and the international community. There is merit in PNRCs contention
that its structure is sui generis.
The PNRC succeeded the chapter of the American Red Cross which was in existence in
the Philippines since 1917. It was created by an Act of Congress after the Republic of the
Philippines became an independent nation on July 6, 1946 and proclaimed on February
14, 1947 its adherence to the Convention of Geneva of July 29, 1929 for the Amelioration
of the Condition of the Wounded and Sick of Armies in the Field (the "Geneva Red Cross
Convention"). By that action the Philippines indicated its desire to participate with the
nations of the world in mitigating the suffering caused by war and to establish in the
Philippines a voluntary organization for that purpose and like other volunteer
organizations established in other countries which have ratified the Geneva Conventions,
to promote the health and welfare of the people in peace and in war.14
The provisions of R.A. No. 95, as amended by R.A. Nos. 855 and 6373, and further
amended by P.D. Nos. 1264 and 1643, show the historical background and legal basis of
the creation of the PNRC by legislative fiat, as a voluntary organization impressed with
public interest. Pertinently R.A. No. 95, as amended by P.D. 1264, provides:
WHEREAS, during the meeting in Geneva, Switzerland, on 22 August 1894, the nations
of the world unanimously agreed to diminish within their power the evils inherent in war;
WHEREAS, more than one hundred forty nations of the world have ratified or adhered to
the Geneva Conventions of August 12, 1949 for the Amelioration of the Condition of the
Wounded and Sick of Armed Forces in the Field and at Sea, The Prisoners of War, and
The Civilian Population in Time of War referred to in this Charter as the Geneva
Conventions;
WHEREAS, the Republic of the Philippines became an independent nation on July 4,
1946, and proclaimed on February 14, 1947 its adherence to the Geneva Conventions of
1929, and by the action, indicated its desire to participate with the nations of the world in
mitigating the suffering caused by war and to establish in the Philippines a voluntary
organization for that purpose as contemplated by the Geneva Conventions;
CORPORATION LAW CASES SESSION 1
WHEREAS, there existed in the Philippines since 1917 a chapter of the American
National Red Cross which was terminated in view of the independence of the Philippines;
and
WHEREAS, the volunteer organizations established in other countries which have
ratified or adhered to the Geneva Conventions assist in promoting the health and welfare
of their people in peace and in war, and through their mutual assistance and cooperation
directly and through their international organizations promote better understanding and
sympathy among the people of the world;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Philippines, by virtue
of the powers vested in me by the Constitution as Commander-in-Chief of all the Armed
Forces of the Philippines and pursuant to Proclamation No. 1081 dated September 21,
1972, and General Order No. 1 dated September 22, 1972, do hereby decree and order
that Republic Act No. 95, Charter of the Philippine National Red Cross (PNRC) as
amended by Republic Acts No. 855 and 6373, be further amended as follows:
Section 1. There is hereby created in the Republic of the Philippines a body corporate
and politic to be the voluntary organization officially designated to assist the Republic of
the Philippines in discharging the obligations set forth in the Geneva Conventions and to
perform such other duties as are inherent upon a national Red Cross Society. The
national headquarters of this Corporation shall be located in Metropolitan Manila.
(Emphasis supplied.)
The significant public service rendered by the PNRC can be gleaned from Section 3 of its
Charter, which provides:
Section 3. That the purposes of this Corporation shall be as follows:
(a) To provide volunteer aid to the sick and wounded of armed forces in time of
war, in accordance with the spirit of and under the conditions prescribed by the
Geneva Conventions to which the Republic of the Philippines proclaimed its
adherence;
(b) For the purposes mentioned in the preceding sub-section, to perform all
duties devolving upon the Corporation as a result of the adherence of the
Republic of the Philippines to the said Convention;
(c) To act in matters of voluntary relief and in accordance with the authorities of
the armed forces as a medium of communication between people of the Republic
43

of the Philippines and their Armed Forces, in time of peace and in time of war,
and to act in such matters between similar national societies of other
governments and the Governments and people and the Armed Forces of the
Republic of the Philippines;
(d) To establish and maintain a system of national and international relief in time
of peace and in time of war and apply the same in meeting and emergency
needs caused by typhoons, flood, fires, earthquakes, and other natural disasters
and to devise and carry on measures for minimizing the suffering caused by such
disasters;
(e) To devise and promote such other services in time of peace and in time of
war as may be found desirable in improving the health, safety and welfare of the
Filipino people;
(f) To devise such means as to make every citizen and/or resident of the
Philippines a member of the Red Cross.
The PNRC is one of the National Red Cross and Red Crescent Societies, which,
together with the International Committee of the Red Cross (ICRC) and the IFRC and
RCS, make up the International Red Cross and Red Crescent Movement (the
Movement). They constitute a worldwide humanitarian movement, whose mission is:
[T]o prevent and alleviate human suffering wherever it may be found, to protect life and
health and ensure respect for the human being, in particular in times of armed conflict
and other emergencies, to work for the prevention of disease and for the promotion of
health and social welfare, to encourage voluntary service and a constant readiness to
give help by the members of the Movement, and a universal sense of solidarity towards
all those in need of its protection and assistance.15
The PNRC works closely with the ICRC and has been involved in humanitarian activities
in the Philippines since 1982. Among others, these activities in the country include:
1. Giving protection and assistance to civilians displaced or otherwise affected by
armed clashes between the government and armed opposition groups, primarily
in Mindanao;
2. Working to minimize the effects of armed hostilities and violence on the
population;
CORPORATION LAW CASES SESSION 1
3. Visiting detainees; and
4. Promoting awareness of international humanitarian law in the public and
private sectors.16
National Societies such as the PNRC act as auxiliaries to the public authorities of their
own countries in the humanitarian field and provide a range of services including disaster
relief and health and social programmes.
The International Federation of Red Cross (IFRC) and Red Crescent Societies (RCS)
Position Paper,17 submitted by the PNRC, is instructive with regard to the elements of the
specific nature of the National Societies such as the PNRC, to wit:
National Societies, such as the Philippine National Red Cross and its sister Red Cross
and Red Crescent Societies, have certain specificities deriving from the 1949 Geneva
Convention and the Statutes of the International Red Cross and Red Crescent
Movement (the Movement). They are also guided by the seven Fundamental Principles
of the Red Cross and Red Crescent Movement: Humanity, Impartiality, Neutrality,
Independence, Voluntary Service, Unity and Universality.
A National Society partakes of a sui generis character. It is a protected component of the
Red Cross movement under Articles 24 and 26 of the First Geneva Convention,
especially in times of armed conflict. These provisions require that the staff of a National
Society shall be respected and protected in all circumstances. Such protection is not
ordinarily afforded by an international treaty to ordinary private entities or even non-
governmental organisations (NGOs). This sui generis character is also emphasized by
the Fourth Geneva Convention which holds that an Occupying Power cannot require any
change in the personnel or structure of a National Society. National societies are
therefore organizations that are directly regulated by international humanitarian
law, in contrast to other ordinary private entities, including NGOs.
xxxx
In addition, National Societies are not only officially recognized by their public authorities
as voluntary aid societies, auxiliary to the public authorities in the humanitarian field, but
also benefit from recognition at the International level. This is considered to be an
element distinguishing National Societies from other organisations (mainly NGOs) and
other forms of humanitarian response.
44

x x x. No other organisation belongs to a world-wide Movement in which all Societies
have equal status and share equal responsibilities and duties in helping each other. This
is considered to be the essence of the Fundamental Principle of Universality.
Furthermore, the National Societies are considered to be auxiliaries to the public
authorities in the humanitarian field. x x x.
The auxiliary status of [a] Red Cross Society means that it is at one and the same
time a private institution and a public service organization because the very nature
of its work implies cooperation with the authorities, a link with the State. In carrying
out their major functions, Red Cross Societies give their humanitarian support to official
bodies, in general having larger resources than the Societies, working towards
comparable ends in a given sector.
x x x No other organization has a duty to be its governments humanitarian partner while
remaining independent.18(Emphases ours.)
It is in recognition of this sui generis character of the PNRC that R.A. No. 95 has
remained valid and effective from the time of its enactment in March 22, 1947 under the
1935 Constitution and during the effectivity of the 1973 Constitution and the 1987
Constitution.
The PNRC Charter and its amendatory laws have not been questioned or challenged on
constitutional grounds, not even in this case before the Court now.
In the Decision, the Court, citing Feliciano v. Commission on Audit, 19 explained that the
purpose of the constitutional provision prohibiting Congress from creating private
corporations was to prevent the granting of special privileges to certain individuals,
families, or groups, which were denied to other groups. Based on the above discussion,
it can be seen that the PNRC Charter does not come within the spirit of this constitutional
provision, as it does not grant special privileges to a particular individual, family, or group,
but creates an entity that strives to serve the common good.
Furthermore, a strict and mechanical interpretation of Article XII, Section 16 of the 1987
Constitution will hinder the State in adopting measures that will serve the public good or
national interest. It should be noted that a special law, R.A. No. 9520, the Philippine
Cooperative Code of 2008, and not the general corporation code, vests corporate power
and capacities upon cooperatives which are private corporations, in order to implement
the States avowed policy.
CORPORATION LAW CASES SESSION 1
In the Decision of July 15, 2009, the Court recognized the public service rendered by the
PNRC as the governments partner in the observance of its international commitments,
to wit:
The PNRC is a non-profit, donor-funded, voluntary, humanitarian organization, whose
mission is to bring timely, effective, and compassionate humanitarian assistance for the
most vulnerable without consideration of nationality, race, religion, gender, social status,
or political affiliation. The PNRC provides six major services: Blood Services, Disaster
Management, Safety Services, Community Health and Nursing, Social Services and
Voluntary Service.
The Republic of the Philippines, adhering to the Geneva Conventions, established the
PNRC as a voluntary organization for the purpose contemplated in the Geneva
Convention of 27 July 1929. x x x.20 (Citations omitted.)
So must this Court recognize too the countrys adherence to the Geneva
Convention and respect the unique status of the PNRC in consonance with its
treaty obligations. The Geneva Convention has the force and effect of law. 21 Under the
Constitution, the Philippines adopts the generally accepted principles of international law
as part of the law of the land. 22 This constitutional provision must be reconciled and
harmonized with Article XII, Section 16 of the Constitution, instead of using the latter to
negate the former.
By requiring the PNRC to organize under the Corporation Code just like any other private
corporation, the Decision of July 15, 2009 lost sight of the PNRCs special status under
international humanitarian law and as an auxiliary of the State, designated to assist it in
discharging its obligations under the Geneva Conventions. Although the PNRC is called
to be independent under its Fundamental Principles, it interprets such independence as
inclusive of its duty to be the governments humanitarian partner. To be recognized in the
International Committee, the PNRC must have an autonomous status, and carry out its
humanitarian mission in a neutral and impartial manner.
However, in accordance with the Fundamental Principle of Voluntary Service of National
Societies of the Movement, the PNRC must be distinguished from private and profit-
making entities. It is the main characteristic of National Societies that they "are not
inspired by the desire for financial gain but by individual commitment and devotion to a
humanitarian purpose freely chosen or accepted as part of the service that National
Societies through its volunteers and/or members render to the Community." 23
45

The PNRC, as a National Society of the International Red Cross and Red Crescent
Movement, can neither "be classified as an instrumentality of the State, so as not to lose
its character of neutrality" as well as its independence, nor strictly as a private
corporation since it is regulated by international humanitarian law and is treated as an
auxiliary of the State.24
Based on the above, the sui generis status of the PNRC is now sufficiently
established. Although it is neither a subdivision, agency, or instrumentality of the
1wphi1
government, nor a government-owned or -controlled corporation or a subsidiary thereof,
as succinctly explained in the Decision of July 15, 2009, so much so that respondent,
under the Decision, was correctly allowed to hold his position as Chairman thereof
concurrently while he served as a Senator, such a conclusion does not ipso facto imply
that the PNRC is a "private corporation" within the contemplation of the provision of the
Constitution, that must be organized under the Corporation Code. As correctly mentioned
by Justice Roberto A. Abad, the sui generis character of PNRC requires us to approach
controversies involving the PNRC on a case-to-case basis.
In sum, the PNRC enjoys a special status as an important ally and auxiliary of the
government in the humanitarian field in accordance with its commitments under
international law. This Court cannot all of a sudden refuse to recognize its existence,
especially since the issue of the constitutionality of the PNRC Charter was never raised
by the parties. It bears emphasizing that the PNRC has responded to almost all national
disasters since 1947, and is widely known to provide a substantial portion of the
countrys blood requirements. Its humanitarian work is unparalleled. The Court should
not shake its existence to the core in an untimely and drastic manner that would not only
have negative consequences to those who depend on it in times of disaster and armed
hostilities but also have adverse effects on the image of the Philippines in the
international community. The sections of the PNRC Charter that were declared void must
therefore stay.
WHEREFORE, premises considered, respondent Richard J. Gordons Motion for
Clarification and/or for Reconsideration and movant-intervenor PNRCs Motion for Partial
Reconsideration of the Decision in G.R. No. 175352 dated July 15, 2009 are GRANTED.
The constitutionality of R.A. No. 95, as amended, the charter of the Philippine National
Red Cross, was not raised by the parties as an issue and should not have been passed
upon by this Court. The structure of the PNRC is sui generis being neither strictly private
nor public in nature. R.A. No. 95 remains valid and constitutional in its entirety. The
dispositive portion of the Decision should therefore be MODIFIED by deleting the second
sentence, to now read as follows:
CORPORATION LAW CASES SESSION 1
WHEREFORE, we declare that the office of the Chairman of the Philippine National Red
Cross is not a government office or an office in a government-owned or controlled
corporation for purposes of the prohibition in Section 13, Article VI of the 1987
Constitution.
SO ORDERED.
G.R. No. 175352
LIBAN vs. GORDON (DECISION)
The Case
This is a petition to declare Senator Richard J. Gordon (respondent) as having forfeited
his seat in the Senate.
The Facts
Petitioners Dante V. Liban, Reynaldo M. Bernardo, and Salvador M. Viari (petitioners)
filed with this Court a Petition to Declare Richard J. Gordon as Having Forfeited His Seat
in the Senate. Petitioners are officers of the Board of Directors of the Quezon City Red
Cross Chapter while respondent is Chairman of the Philippine National Red Cross
(PNRC) Board of Governors.
During respondents incumbency as a member of the Senate of the Philippines, 1 he was
elected Chairman of the PNRC during the 23 February 2006 meeting of the PNRC Board
of Governors. Petitioners allege that by accepting the chairmanship of the PNRC Board
of Governors, respondent has ceased to be a member of the Senate as provided in
Section 13, Article VI of the Constitution, which reads:
SEC. 13. No Senator or Member of the House of Representatives may hold any other
office or employment in the Government, or any subdivision, agency, or instrumentality
thereof, including government-owned or controlled corporations or their subsidiaries,
during his term without forfeiting his seat. Neither shall he be appointed to any office
which may have been created or the emoluments thereof increased during the term for
which he was elected.
Petitioners cite Camporedondo v. NLRC, 2 which held that the PNRC is a government-
owned or controlled corporation. Petitioners claim that in accepting and holding the
position of Chairman of the PNRC Board of Governors, respondent has automatically
forfeited his seat in the Senate, pursuant to Flores v. Drilon,3 which held that incumbent
46
 CORPORATION LAW CASES SESSION 1
national legislators lose their elective posts upon their appointment to another over this petition since it involves a legal or constitutional issue which is of
government office. transcendental importance.

In his Comment, respondent asserts that petitioners have no standing to file this petition
which appears to be an action for quo warranto, since the petition alleges that
respondent committed an act which, by provision of law, constitutes a ground for
forfeiture of his public office. Petitioners do not claim to be entitled to the Senate office of
respondent. Under Section 5, Rule 66 of the Rules of Civil Procedure, only a person
claiming to be entitled to a public office usurped or unlawfully held by another may bring
an action for quo warranto in his own name. If the petition is one for quo warranto, it is
already barred by prescription since under Section 11, Rule 66 of the Rules of Civil
Procedure, the action should be commenced within one year after the cause of the public
officers forfeiture of office. In this case, respondent has been working as a Red Cross
volunteer for the past 40 years. Respondent was already Chairman of the PNRC Board
of Governors when he was elected Senator in May 2004, having been elected Chairman
in 2003 and re-elected in 2005.
The Issues
Petitioners raise the following issues:
1. Whether the Philippine National Red Cross (PNRC) is a government- owned
or controlled corporation;
2. Whether Section 13, Article VI of the Philippine Constitution applies to the case
of respondent who is Chairman of the PNRC and at the same time a Member of
the Senate;
3. Whether respondent should be automatically removed as a Senator pursuant
to Section 13, Article VI of the Philippine Constitution; and

Respondent contends that even if the present petition is treated as a taxpayers suit,
petitioners cannot be allowed to raise a constitutional question in the absence of any
claim that they suffered some actual damage or threatened injury as a result of the
allegedly illegal act of respondent. Furthermore, taxpayers are allowed to sue only when
there is a claim of illegal disbursement of public funds, or that public money is being
diverted to any improper purpose, or where petitioners seek to restrain respondent from
enforcing an invalid law that results in wastage of public funds.
4. Whether petitioners may legally institute this petition against respondent. 4
The substantial issue boils down to whether the office of the PNRC Chairman is a
government office or an office in a government-owned or controlled corporation for
purposes of the prohibition in Section 13, Article VI of the Constitution.
The Courts Ruling

Respondent also maintains that if the petition is treated as one for declaratory relief, this
We find the petition without merit.
Court would have no jurisdiction since original jurisdiction for declaratory relief lies with
the Regional Trial Court.
Petitioners Have No Standing to File this Petition
Respondent further insists that the PNRC is not a government-owned or controlled
A careful reading of the petition reveals that it is an action for quo warranto. Section 1,
corporation and that the prohibition under Section 13, Article VI of the Constitution does
Rule 66 of the Rules of Court provides:
not apply in the present case since volunteer service to the PNRC is neither an office nor
an employment.
Section 1. Action by Government against individuals. An action for the usurpation of a
public office, position or franchise may be commenced by a verified petition brought in
In their Reply, petitioners claim that their petition is neither an action for quo warranto nor
the name of the Republic of the Philippines against:
an action for declaratory relief. Petitioners maintain that the present petition is a
taxpayers suit questioning the unlawful disbursement of funds, considering that
(a) A person who usurps, intrudes into, or unlawfully holds or exercises a public
respondent has been drawing his salaries and other compensation as a Senator even if
office, position or franchise;
he is no longer entitled to his office. Petitioners point out that this Court has jurisdiction

47

(b) A public officer who does or suffers an act which by provision of law,
constitutes a ground for the forfeiture of his office; or
(c) An association which acts as a corporation within the Philippines without
being legally incorporated or without lawful authority so to act. (Emphasis
supplied)
Petitioners allege in their petition that:
4. Respondent became the Chairman of the PNRC when he was elected as such
during the First Regular Luncheon-Meeting of the Board of Governors of the
PNRC held on February 23, 2006, the minutes of which is hereto attached and
made integral part hereof as Annex "A."
5. Respondent was elected as Chairman of the PNRC Board of Governors,
during his incumbency as a Member of the House of Senate of the Congress of
the Philippines, having been elected as such during the national elections last
May 2004.
6. Since his election as Chairman of the PNRC Board of Governors, which
position he duly accepted, respondent has been exercising the powers and
discharging the functions and duties of said office, despite the fact that he is still
a senator.
7. It is the respectful submission of the petitioner[s] that by accepting the
chairmanship of the Board of Governors of the PNRC, respondent has ceased to
be a Member of the House of Senate as provided in Section 13, Article VI of the
Philippine Constitution, x x x
xxxx
10. It is respectfully submitted that in accepting the position of Chairman of the
Board of Governors of the PNRC on February 23, 2006, respondent has
automatically forfeited his seat in the House of Senate and, therefore, has long
ceased to be a Senator, pursuant to the ruling of this Honorable Court in the case
of FLORES, ET AL. VS. DRILON AND GORDON, G.R. No. 104732, x x x
11. Despite the fact that he is no longer a senator, respondent continues to act as
such and still performs the powers, functions and duties of a senator, contrary to
the constitution, law and jurisprudence.
CORPORATION LAW CASES SESSION 1
12. Unless restrained, therefore, respondent will continue to falsely act and
represent himself as a senator or member of the House of Senate, collecting the
salaries, emoluments and other compensations, benefits and privileges
appertaining and due only to the legitimate senators, to the damage, great and
irreparable injury of the Government and the Filipino people. 5 (Emphasis
supplied)
Thus, petitioners are alleging that by accepting the position of Chairman of the PNRC
Board of Governors, respondent has automatically forfeited his seat in the Senate. In
short, petitioners filed an action for usurpation of public office against respondent, a
public officer who allegedly committed an act which constitutes a ground for the forfeiture
of his public office. Clearly, such an action is for quo warranto, specifically under Section
1(b), Rule 66 of the Rules of Court.
Quo warranto is generally commenced by the Government as the proper party plaintiff.
However, under Section 5, Rule 66 of the Rules of Court, an individual may commence
such an action if he claims to be entitled to the public office allegedly usurped by another,
in which case he can bring the action in his own name. The person instituting quo
warranto proceedings in his own behalf must claim and be able to show that he is
entitled to the office in dispute, otherwise the action may be dismissed at any stage. 6 In
the present case, petitioners do not claim to be entitled to the Senate office of
respondent. Clearly, petitioners have no standing to file the present petition.
Even if the Court disregards the infirmities of the petition and treats it as a taxpayers
suit, the petition would still fail on the merits.
PNRC is a Private Organization Performing Public Functions
On 22 March 1947, President Manuel A. Roxas signed Republic Act No. 95, 7 otherwise
known as the PNRC Charter. The PNRC is a non-profit, donor-funded, voluntary,
humanitarian organization, whose mission is to bring timely, effective, and
compassionate humanitarian assistance for the most vulnerable without consideration of
nationality, race, religion, gender, social status, or political affiliation. 8 The PNRC provides
six major services: Blood Services, Disaster Management, Safety Services, Community
Health and Nursing, Social Services and Voluntary Service. 9
The Republic of the Philippines, adhering to the Geneva Conventions, established the
PNRC as a voluntary organization for the purpose contemplated in the Geneva
Convention of 27 July 1929.10 The Whereas clauses of the PNRC Charter read:
48

WHEREAS, there was developed at Geneva, Switzerland, on August 22, 1864, a
convention by which the nations of the world were invited to join together in diminishing,
so far lies within their power, the evils inherent in war;
WHEREAS, more than sixty nations of the world have ratified or adhered to the
subsequent revision of said convention, namely the "Convention of Geneva of July 29
[sic], 1929 for the Amelioration of the Condition of the Wounded and Sick of Armies in the
Field" (referred to in this Charter as the Geneva Red Cross Convention);
WHEREAS, the Geneva Red Cross Convention envisages the establishment in each
country of a voluntary organization to assist in caring for the wounded and sick of the
armed forces and to furnish supplies for that purpose;
WHEREAS, the Republic of the Philippines became an independent nation on July 4,
1946 and proclaimed its adherence to the Geneva Red Cross Convention on February
14, 1947, and by that action indicated its desire to participate with the nations of the
world in mitigating the suffering caused by war and to establish in the Philippines a
voluntary organization for that purpose as contemplated by the Geneva Red Cross
Convention;
WHEREAS, there existed in the Philippines since 1917 a Charter of the American
National Red Cross which must be terminated in view of the independence of the
Philippines; and
WHEREAS, the volunteer organizations established in the other countries which have
ratified or adhered to the Geneva Red Cross Convention assist in promoting the health
and welfare of their people in peace and in war, and through their mutual assistance and
cooperation directly and through their international organizations promote better
understanding and sympathy among the peoples of the world. (Emphasis supplied)
The PNRC is a member National Society of the International Red Cross and Red
Crescent Movement (Movement), which is composed of the International Committee of
the Red Cross (ICRC), the International Federation of Red Cross and Red Crescent
Societies (International Federation), and the National Red Cross and Red Crescent
Societies (National Societies). The Movement is united and guided by its seven
Fundamental Principles:
1. HUMANITY The International Red Cross and Red Crescent Movement, born
of a desire to bring assistance without discrimination to the wounded on the
battlefield, endeavors, in its international and national capacity, to prevent and
CORPORATION LAW CASES SESSION 1
alleviate human suffering wherever it may be found. Its purpose is to protect life
and health and to ensure respect for the human being. It promotes mutual
understanding, friendship, cooperation and lasting peace amongst all peoples.
2. IMPARTIALITY It makes no discrimination as to nationality, race, religious
beliefs, class or political opinions. It endeavors to relieve the suffering of
individuals, being guided solely by their needs, and to give priority to the most
urgent cases of distress.
3. NEUTRALITY In order to continue to enjoy the confidence of all, the
Movement may not take sides in hostilities or engage at any time in controversies
of a political, racial, religious or ideological nature.
4. INDEPENDENCE The Movement is independent. The National Societies,
while auxiliaries in the humanitarian services of their governments and subject to
the laws of their respective countries, must always maintain their autonomy so
that they may be able at all times to act in accordance with the principles of the
Movement.
5. VOLUNTARY SERVICE It is a voluntary relief movement not prompted in
any manner by desire for gain.
6. UNITY There can be only one Red Cross or one Red Crescent Society in
any one country. It must be open to all. It must carry on its humanitarian work
throughout its territory.
7. UNIVERSALITY The International Red Cross and Red Crescent Movement,
in which all Societies have equal status and share equal responsibilities and
duties in helping each other, is worldwide. (Emphasis supplied)
The Fundamental Principles provide a universal standard of reference for all members of
the Movement. The PNRC, as a member National Society of the Movement, has the duty
to uphold the Fundamental Principles and ideals of the Movement. In order to be
recognized as a National Society, the PNRC has to be autonomous and must operate in
conformity with the Fundamental Principles of the Movement.11
The reason for this autonomy is fundamental. To be accepted by warring belligerents as
neutral workers during international or internal armed conflicts, the PNRC volunteers
must not be seen as belonging to any side of the armed conflict. In the Philippines where
there is a communist insurgency and a Muslim separatist rebellion, the PNRC cannot be
49

seen as government-owned or controlled, and neither can the PNRC volunteers be
identified as government personnel or as instruments of government policy. Otherwise,
the insurgents or separatists will treat PNRC volunteers as enemies when the volunteers
tend to the wounded in the battlefield or the displaced civilians in conflict areas.
Thus, the PNRC must not only be, but must also be seen to be, autonomous, neutral and
independent in order to conduct its activities in accordance with the Fundamental
Principles. The PNRC must not appear to be an instrument or agency that implements
government policy; otherwise, it cannot merit the trust of all and cannot effectively carry
out its mission as a National Red Cross Society.12 It is imperative that the PNRC must be
autonomous, neutral, and independent in relation to the State.
To ensure and maintain its autonomy, neutrality, and independence, the PNRC cannot be
owned or controlled by the government. Indeed, the Philippine government does not own
the PNRC. The PNRC does not have government assets and does not receive any
appropriation from the Philippine Congress.13 The PNRC is financed primarily by
contributions from private individuals and private entities obtained through solicitation
campaigns organized by its Board of Governors, as provided under Section 11 of the
PNRC Charter:
SECTION 11. As a national voluntary organization, the Philippine National Red Cross
shall be financed primarily by contributions obtained through solicitation campaigns
throughout the year which shall be organized by the Board of Governors and conducted
by the Chapters in their respective jurisdictions. These fund raising campaigns shall be
conducted independently of other fund drives by other organizations. (Emphasis
supplied)
The government does not control the PNRC. Under the PNRC Charter, as amended,
only six of the thirty members of the PNRC Board of Governors are appointed by the
President of the Philippines. Thus, twenty-four members, or four-fifths (4/5), of the PNRC
Board of Governors are not appointed by the President. Section 6 of the PNRC Charter,
as amended, provides:
SECTION 6. The governing powers and authority shall be vested in a Board of
Governors composed of thirty members, six of whom shall be appointed by the President
of the Philippines, eighteen shall be elected by chapter delegates in biennial conventions
and the remaining six shall be selected by the twenty-four members of the Board already
chosen. x x x.
CORPORATION LAW CASES SESSION 1
Thus, of the twenty-four members of the PNRC Board, eighteen are elected by the
chapter delegates of the PNRC, and six are elected by the twenty-four members already
chosen a select group where the private sector members have three-fourths majority.
Clearly, an overwhelming majority of four-fifths of the PNRC Board are elected or chosen
by the private sector members of the PNRC.
The PNRC Board of Governors, which exercises all corporate powers of the PNRC,
elects the PNRC Chairman and all other officers of the PNRC. The incumbent Chairman
of PNRC, respondent Senator Gordon, was elected, as all PNRC Chairmen are elected,
by a private sector-controlled PNRC Board four-fifths of whom are private sector
members of the PNRC. The PNRC Chairman is not appointed by the President or by any
subordinate government official.
Under Section 16, Article VII of the Constitution, 14 the President appoints all officials and
employees in the Executive branch whose appointments are vested in the President by
the Constitution or by law. The President also appoints those whose appointments are
not otherwise provided by law. Under this Section 16, the law may also authorize the
"heads of departments, agencies, commissions, or boards" to appoint officers lower in
rank than such heads of departments, agencies, commissions or boards. 15 In Rufino v.
Endriga,16 the Court explained appointments under Section 16 in this wise:
Under Section 16, Article VII of the 1987 Constitution, the President appoints three
groups of officers. The first group refers to the heads of the Executive departments,
ambassadors, other public ministers and consuls, officers of the armed forces from the
rank of colonel or naval captain, and other officers whose appointments are vested in the
President by the Constitution. The second group refers to those whom the President may
be authorized by law to appoint. The third group refers to all other officers of the
Government whose appointments are not otherwise provided by law.
Under the same Section 16, there is a fourth group of lower-ranked officers whose
appointments Congress may by law vest in the heads of departments, agencies,
commissions, or boards. x x x
xxx
In a department in the Executive branch, the head is the Secretary. The law may not
authorize the Undersecretary, acting as such Undersecretary, to appoint lower-ranked
officers in the Executive department. In an agency, the power is vested in the head of the
agency for it would be preposterous to vest it in the agency itself. In a commission, the
head is the chairperson of the commission. In a board, the head is also the chairperson
50

of the board. In the last three situations, the law may not also authorize officers other
than the heads of the agency, commission, or board to appoint lower-ranked officers.
xxx
The Constitution authorizes Congress to vest the power to appoint lower-ranked officers
specifically in the "heads" of the specified offices, and in no other person. The word
"heads" refers to the chairpersons of the commissions or boards and not to their
members, for several reasons.
The President does not appoint the Chairman of the PNRC. Neither does the head of
any department, agency, commission or board appoint the PNRC Chairman. Thus, the
PNRC Chairman is not an official or employee of the Executive branch since his
appointment does not fall under Section 16, Article VII of the Constitution. Certainly, the
PNRC Chairman is not an official or employee of the Judiciary or Legislature. This leads
us to the obvious conclusion that the PNRC Chairman is not an official or employee of
the Philippine Government. Not being a government official or employee, the PNRC
Chairman, as such, does not hold a government office or employment.
Under Section 17, Article VII of the Constitution, 17 the President exercises control
over all government offices in the Executive branch. If an office is legally not under
the control of the President, then such office is not part of the Executive
branch. In Rufino v. Endriga,18 the Court explained the Presidents power of control over
all government offices as follows:
Every government office, entity, or agency must fall under the Executive, Legislative, or
Judicial branches, or must belong to one of the independent constitutional bodies, or
must be a quasi-judicial body or local government unit. Otherwise, such government
office, entity, or agency has no legal and constitutional basis for its existence.
The CCP does not fall under the Legislative or Judicial branches of government. The
CCP is also not one of the independent constitutional bodies. Neither is the CCP a quasi-
judicial body nor a local government unit. Thus, the CCP must fall under the Executive
branch. Under the Revised Administrative Code of 1987, any agency "not placed by law
or order creating them under any specific department" falls "under the Office of the
President."
Since the President exercises control over "all the executive departments, bureaus, and
offices," the President necessarily exercises control over the CCP which is an office in
the Executive branch. In mandating that the President "shall have control of all
CORPORATION LAW CASES SESSION 1
executive . . . offices," Section 17, Article VII of the 1987 Constitution does not exempt
any executive office one performing executive functions outside of the independent
constitutional bodies from the Presidents power of control. There is no dispute that
the CCP performs executive, and not legislative, judicial, or quasi-judicial functions.
The Presidents power of control applies to the acts or decisions of all officers in the
Executive branch. This is true whether such officers are appointed by the President or by
heads of departments, agencies, commissions, or boards. The power of control means
the power to revise or reverse the acts or decisions of a subordinate officer involving the
exercise of discretion.
In short, the President sits at the apex of the Executive branch, and exercises "control of
all the executive departments, bureaus, and offices." There can be no instance under the
Constitution where an officer of the Executive branch is outside the control of the
President. The Executive branch is unitary since there is only one President vested with
executive power exercising control over the entire Executive branch. Any office in the
Executive branch that is not under the control of the President is a lost command whose
existence is without any legal or constitutional basis. (Emphasis supplied)
An overwhelming four-fifths majority of the PNRC Board are private sector individuals
elected to the PNRC Board by the private sector members of the PNRC. The PNRC
Board exercises all corporate powers of the PNRC. The PNRC is controlled by private
sector individuals. Decisions or actions of the PNRC Board are not reviewable by the
President. The President cannot reverse or modify the decisions or actions of the PNRC
Board. Neither can the President reverse or modify the decisions or actions of the PNRC
Chairman. It is the PNRC Board that can review, reverse or modify the decisions or
actions of the PNRC Chairman. This proves again that the office of the PNRC Chairman
is a private office, not a government office.
1avvphi1
Although the State is often represented in the governing bodies of a National Society,
this can be justified by the need for proper coordination with the public authorities, and
the government representatives may take part in decision-making within a National
Society. However, the freely-elected representatives of a National Societys active
members must remain in a large majority in a National Societys governing bodies. 19
The PNRC is not government-owned but privately owned. The vast majority of the
thousands of PNRC members are private individuals, including students. Under the
PNRC Charter, those who contribute to the annual fund campaign of the PNRC are
entitled to membership in the PNRC for one year. Thus, any one between 6 and 65 years
of age can be a PNRC member for one year upon contributing P35, P100, P300, P500
51

or P1,000 for the year. Even foreigners, whether residents or not, can be members of
20
the PNRC. Section 5 of the PNRC Charter, as amended by Presidential Decree No.
1264,21 reads:
SEC. 5. Membership in the Philippine National Red Cross shall be open to the entire
population in the Philippines regardless of citizenship. Any contribution to the Philippine
National Red Cross Annual Fund Campaign shall entitle the contributor to membership
for one year and said contribution shall be deductible in full for taxation purposes.
Thus, the PNRC is a privately owned, privately funded, and privately run charitable
organization. The PNRC is not a government-owned or controlled corporation.
Petitioners anchor their petition on the 1999 case of Camporedondo v. NLRC, 22 which
ruled that the PNRC is a government-owned or controlled corporation. In ruling that the
PNRC is a government-owned or controlled corporation, the simple test used was
whether the corporation was created by its own special charter for the exercise of a
public function or by incorporation under the general corporation law. Since the PNRC
was created under a special charter, the Court then ruled that it is a government
corporation. However, the Camporedondoruling failed to consider the definition of a
government-owned or controlled corporation as provided under Section 2(13) of the
Introductory Provisions of the Administrative Code of 1987:
SEC. 2. General Terms Defined. x x x
(13) Government-owned or controlled corporation refers to any agency organized as a
stock or non-stock corporation, vested with functions relating to public needs whether
governmental or proprietary in nature, and owned by the Government directly or through
its instrumentalities either wholly, or where applicable as in the case of stock
corporations, to the extent of at least fifty-one (51) percent of its capital stock: Provided,
That government-owned or controlled corporations may be further categorized by the
Department of the Budget, the Civil Service Commission, and the Commission on Audit
for purposes of the exercise and discharge of their respective powers, functions and
responsibilities with respect to such corporations.(Boldfacing and underscoring supplied)
A government-owned or controlled corporation must be owned by the government, and in
the case of a stock corporation, at least a majority of its capital stock must be owned by
the government. In the case of a non-stock corporation, by analogy at least a majority of
the members must be government officials holding such membership by appointment or
designation by the government. Under this criterion, and as discussed earlier, the
government does not own or control PNRC.
CORPORATION LAW CASES SESSION 1
The PNRC Charter is Violative of the Constitutional Proscription against the Creation of
Private Corporations by Special Law
The 1935 Constitution, as amended, was in force when the PNRC was created by
special charter on 22 March 1947. Section 7, Article XIV of the 1935 Constitution, as
amended, reads:
SEC. 7. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations, unless such corporations are owned
or controlled by the Government or any subdivision or instrumentality thereof.
The subsequent 1973 and 1987 Constitutions contain similar provisions prohibiting
Congress from creating private corporations except by general law. Section 1 of the
PNRC Charter, as amended, creates the PNRC as a "body corporate and politic," thus:
SECTION 1. There is hereby created in the Republic of the Philippines a body corporate
and politic to be the voluntary organization officially designated to assist the Republic of
the Philippines in discharging the obligations set forth in the Geneva Conventions and to
perform such other duties as are inherent upon a National Red Cross Society. The
national headquarters of this Corporation shall be located in Metropolitan Manila.
(Emphasis supplied)
In Feliciano v. Commission on Audit,23 the Court explained the constitutional provision
prohibiting Congress from creating private corporations in this wise:
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
general law applicable to all citizens. 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.
52

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, the general law is the Corporation Code,
except that the Cooperative Code governs the incorporation of cooperatives.
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.24 (Emphasis supplied)
In Feliciano, the Court held that the Local Water Districts are government-owned or
controlled corporations since they exist by virtue of Presidential Decree No. 198, which
constitutes their special charter. The seed capital assets of the Local Water Districts,
such as waterworks and sewerage facilities, were public property which were managed,
operated by or under the control of the city, municipality or province before the assets
were transferred to the Local Water Districts. The Local Water Districts also receive
subsidies and loans from the Local Water Utilities Administration (LWUA). In fact, under
the 2009 General Appropriations Act,25 the LWUA has a budget amounting
to P400,000,000 for its subsidy requirements. 26 There is no private capital invested in
the Local Water Districts. The capital assets and operating funds of the Local Water
Districts all come from the government, either through transfer of assets, loans, subsidies
or the income from such assets or funds.
The government also controls the Local Water Districts because the municipal or city
mayor, or the provincial governor, appoints all the board directors of the Local Water
Districts. Furthermore, the board directors and other personnel of the Local Water
Districts are government employees subject to civil service laws and anti-graft laws.
Clearly, the Local Water Districts are considered government-owned or controlled
corporations not only because of their creation by special charter but also because the
government in fact owns and controls the Local Water Districts.
Just like the Local Water Districts, the PNRC was created through a special charter.
However, unlike the Local Water Districts, the elements of government ownership and
control are clearly lacking in the PNRC. Thus, although the PNRC is created by a special
charter, it cannot be considered a government-owned or controlled corporation in the
absence of the essential elements of ownership and control by the government. In
creating the PNRC as a corporate entity, Congress was in fact creating a private
corporation. However, the constitutional prohibition against the creation of private
CORPORATION LAW CASES SESSION 1
corporations by special charters provides no exception even for non-profit or charitable
corporations. Consequently, the PNRC Charter, insofar as it creates the PNRC as a
private corporation and grants it corporate powers, 27 is void for being unconstitutional.
Thus, Sections 1,28 2,29 3,30 4(a),31 5,32 6,33 7,34 8,35 9,3610,37 11,38 12,39 and 1340 of the PNRC
Charter, as amended, are void.
The other provisions41 of the PNRC Charter remain valid as they can be considered as a
recognition by the State that the unincorporated PNRC is the local National Society of
the International Red Cross and Red Crescent Movement, and thus entitled to the
benefits, exemptions and privileges set forth in the PNRC Charter. The other provisions
of the PNRC Charter implement the Philippine Governments treaty obligations under
Article 4(5) of the Statutes of the International Red Cross and Red Crescent Movement,
which provides that to be recognized as a National Society, the Society must be "duly
recognized by the legal government of its country on the basis of the Geneva
Conventions and of the national legislation as a voluntary aid society, auxiliary to the
public authorities in the humanitarian field."
In sum, we hold that the office of the PNRC Chairman is not a government office or an
office in a government-owned or controlled corporation for purposes of the prohibition in
Section 13, Article VI of the 1987 Constitution. However, since the PNRC Charter is void
insofar as it creates the PNRC as a private corporation, the PNRC should incorporate
under the Corporation Code and register with the Securities and Exchange Commission
if it wants to be a private corporation.
WHEREFORE, we declare that the office of the Chairman of the Philippine National Red
Cross is not a government office or an office in a government-owned or controlled
corporation for purposes of the prohibition in Section 13, Article VI of the 1987
Constitution. We also declare that Sections 1, 2, 3, 4(a), 5, 6, 7, 8, 9, 10, 11, 12, and 13
of the Charter of the Philippine National Red Cross, or Republic Act No. 95, as amended
by Presidential Decree Nos. 1264 and 1643, are VOID because they create the PNRC
as a private corporation or grant it corporate powers.
SO ORDERED.
G.R. No. L-19891 July 31, 1964
J.R.S. BUSINESS CORPORATION, J.R. DA SILVA and A.J. BELTRAN vs. IMPERIAL
INSURANCE, INC., MACARIO M. OFILADA, Sheriff of Manila and
HON. AGUSTIN MONTESA, Judge of the Court of First Instance of Manila
53

Petitioner J. R. Da Silva, is the President of the J.R.S. Business Corporation, an
establishment duly franchised by the Congress of the Philippines, to conduct a
messenger and delivery express service. On July 12, 1961, the respondent Imperial
Insurance, Inc., presented with the CFI of Manila a complaint (Civ. Case No. 47520), for
sum of money against the petitioner corporation. After the defendants therein have
submitted their Answer, the parties entered into a Compromise Agreement, assisted by
their respective counsels, the pertinent portions of which recite:
1) WHEREAS, the DEFENDANTS admit and confess their joint and solidary
indebtedness to the PLAINTIFF in the full sum of PESOS SIXTY ONE
THOUSAND ONE HUNDRED SEVENTY-TWO & 32/100 (P61,172.32),
Philippine Currency, itemized as follows:
a) Principal P50,000.00
b) Interest at 12% per annum 5,706.14
c) Liquidated damages at 7% per annum 3,330.58
d) Costs of suit 135.60
e) Attorney's fees 2,000.00
2) WHEREAS, the DEFENDANTS bind themselves, jointly and severally, and
hereby promise to pay their aforementioned obligation to the PLAINTIFF at its
business address at 301-305 Banquero St., (Ground Floor), Regina Building,
Escolta, Manila, within sixty (60) days from March 16, 1962 or on or before May
14, 1962;
3) WHEREAS, in the event the DEFENDANTS FAIL to pay in full the total
amount of PESOS SIXTY ONE THOUSAND ONE HUNDRED SEVENTY TWO &
32/100 (P61,172.32), Philippine Currency, for any reason whatsoever, on May
14, 1962, the PLAINTIFF shall be entitled, as a matter of right, to move for the
execution of the decision to be rendered in the above-entitled case by this
Honorable Court based on this COMPROMISE AGREEMENT.
On March 17, 1962, the lower court rendered judgment embodying the contents of the
said compromise agreement, the dispositive portion of which reads
WHEREFORE, the Court hereby approves the above-quoted compromise
agreement and renders judgment in accordance therewith, enjoining the parties
to comply faithfully and strictly with the terms and conditions thereof, without
special pronouncement as to costs.
CORPORATION LAW CASES SESSION 1
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
On May 15, 1962, one day after the date fixed in the compromise agreement, within
which the judgment debt would be paid, but was not, respondent Imperial Insurance Inc.,
filed a "Motion for the Insurance of a Writ of Execution". On May 23, 1962, a Writ of
Execution was issued by respondent Sheriff of Manila and on May 26, 1962, Notices of
Sale were sent out for the auction of the personal properties of the petitioner J.R.S.
Business Corporation. On June 2, 1962, a Notice of Sale of the "whole capital stocks of
the defendants JRS Business Corporation, the business name, right of operation, the
whole assets, furnitures and equipments, the total liabilities, and Net Worth, books of
accounts, etc., etc." of the petitioner corporation was, handed down. On June 9, the
petitioner, thru counsel, presented an "Urgent Petition for Postponement of Auction Sale
and for Release of Levy on the Business Name and Right to Operate of Defendant JRS
Business Corporation", stating that petitioners were busy negotiating for a loan with
which to pay the judgment debt; that the judgment was for money only and, therefore,
plaintiff (respondent Insurance Company) was not authorized to take over and
appropriate for its own use, the business name of the defendants; that the right to
operate under the franchise, was not transferable and could not be considered a
personal or immovable, property, subject to levy and sale. On June 10, 1962, a
Supplemental Motion for Release of Execution, was filed by counsel of petitioner JRS
Business Corporation, claiming that the capital stocks thereof, could not be levied upon
and sold under execution. Under date of June 20, 1962, petitioner's counsel presented a
pleading captioned "Very Urgent Motion for Postponement of Public Auction Sale and for
Ruling on Motion for Release of Levy on the Business Name, Right to Operate and
Capital Stocks of JRS Business Corporation". The auction sale was set for June 21,
1962. In said motion, petitioners alleged that the loan they had applied for, was to be
secured within the next ten (10) days, and they would be able to discharge the judgment
debt. Respondents opposed the said motion and on June 21, 1962, the lower court
denied the motion for postponement of the auction sale.
In the sale which was conducted in the premises of the JRS Business Corporation at
1341 Perez St., Paco, Manila, all the properties of said corporation contained in the
Notices of Sale dated May 26, 1962, and June 2, 1962 (the latter notice being for the
whole capital stocks of the defendant, JRS Business Corporation, the business name,
right of operation, the whole assets, furnitures and equipments, the total liabilities and
Net Worth, books of accounts, etc., etc.), were bought by respondent Imperial Insurance,
Inc., for P10,000.00, which was the highest bid offered. Immediately after the sale,
respondent Insurance Company took possession of the proper ties and started running
the affairs and operating the business of the JRS Business Corporation. Hence, the
present appeal.
54

It would seem that the matters which need determination are (1) whether the respondent
Judge acted without or in excess of his jurisdiction or with grave abuse of discretion in
promulgating the Order of June 21, 1962, denying the motion for postponement of the
scheduled sale at public auction, of the properties of petitioner; and (2) whether the
business name or trade name, franchise (right to operate) and capital stocks of the
petitioner are properties or property rights which could be the subject of levy, execution
and sale.
The respondent Court's act of postponing the scheduled sale was within the discretion of
respondent Judge, the exercise of which, one way or the other, did not constitute grave
abuse of discretion and/or excess of jurisdiction. There was a decision rendered and the
corresponding writ of execution was issued. Respondent Judge had jurisdiction over the
matter and erroneous conclusions of law or fact, if any, committed in the exercise of such
jurisdiction are merely errors of judgment, not correctible by certiorari (Villa Rey Transit v.
Bello, et al., L-18957, April 23, 1963, and cases cited therein.)
The corporation law, on forced sale of franchises, provides
Any franchise granted to a corporation to collect tolls or to occupy, enjoy, or use
public property or any portion of the public domain or any right of way over public
property or the public domain, and any rights and privileges acquired under such
franchise may be levied upon and sold under execution, together with the
property necessary for the enjoyment, the exercise of the powers, and the receipt
of the proceeds of such franchise or right of way, in the same manner and with
like effect as any other property to satisfy any judgment against the
corporation: Provided, That the sale of the franchise or right of way and the
property necessary for the enjoyment, the exercise of the powers, and the receipt
of the proceeds of said franchise or right of way is especially decreed and
ordered in the judgment: And provided, further, That the sale shall not become
effective until confirmed by the court after due notice. (Sec. 56, Corporation Law.)
In the case of Gulf Refining Co. v. Cleveland Trust Co., 108 So., 158, it was held
The first question then for decision is the meaning of the word "franchise" in the
statute.
"A franchise is a special privilege conferred by governmental authority,
and which does not belong to citizens of the country generally as a
matter of common right. ... Its meaning depends more or less upon the
connection in which the word is employed and the property and
corporation to which it is applied. It may have different significations.
CORPORATION LAW CASES SESSION 1
"For practical purposes, franchises, so far as relating to corporations, are
divisible into (1) corporate or general franchises; and (2) special or
secondary franchises. The former is the franchise to exist as a
corporation, while the latter are certain rights and privileges conferred
upon existing corporations, such as the right to use the streets of a
municipality to lay pipes or tracks, erect poles or string wires." 2
Fletcher's Cyclopedia Corp. See. 1148; 14 C.J. p. 160; Adams v. Yazon &
M. V. R. Co., 24 So. 200, 317, 28 So. 956, 77 Miss. 253, 60 L.R.A. 33 et
seq.
The primary franchise of a corporation that is, the right to exist as such, is vested
"in the individuals who compose the corporation and not in the corporation itself"
(14 C.J. pp. 160, 161; Adams v. Railroad, supra; 2 Fletcher's Cyclopedia Corp.
Secs. 1153, 1158; 3 Thompson on Corporations 2d Ed.] Secs. 2863, 2864), and
cannot be conveyed in the absence of a legislative authority so to do (14A CJ.
543, 577; 1 Fletcher's Cyc. Corp. Sec. 1224; Memphis & L.R.R. Co. v. Berry 5 S.
Ct. 299, 112 U.S. 609, 28 L.E.d. 837; Vicksburg Waterworks Co. v. Vicksburg, 26
S. Ct. 660, 202 U.S. 453, 50 L.E.d. 1102, 6 Ann. Cas. 253; Arthur v. Commercial
& Railroad Bank, 9 Smedes & M. 394, 48 Am. Dec. 719), but the specify or
secondary franchises of a corporation are vested in the corporation and may
ordinarily be conveyed or mortgaged under a general power granted to a
corporation to dispose of its property (Adams v. Railroad, supra; 14A C.J. 542,
557; 3 Thompson on Corp. [2nd Ed.] Sec. 2909), except such special or
secondary franchises as are charged with a public use (2 Fletcher's Cyc. Corp.
see. 1225; 14A C.J. 544; 3 Thompson on Corp. [2d Ed.] sec. 2908; Arthur v.
Commercial & R.R. Bank, supra; McAllister v. Plant, 54 Miss. 106).
The right to operate a messenger and express delivery service, by virtue of a legislative
enactment, is admittedly a secondary franchise (R.A. No. 3260, entitled "An Act granting
the JRS Business Corporation a franchise to conduct a messenger and express service)"
and, as such, under our corporation law, is subject to levy and sale on execution together
and including all the property necessary for the enjoyment thereof. The law, however,
indicates the procedure under which the same (secondary franchise and the properties
necessary for its enjoyment) may be sold under execution. Said franchise can be sold
under execution, when such sale is especially decreed and ordered in the judgment and
it becomes effective only when the sale is confirmed by the Court after due notice (Sec.
56, Corp. Law). The compromise agreement and the judgment based thereon, do not
contain any special decree or order making the franchise answerable for the judgment
debt. The same thing may be stated with respect to petitioner's trade name or business
name and its capital stock. Incidentally, the trade name or business name corresponds to
the initials of the President of the petitioner corporation and there can be no serious
dispute regarding the fact that a trade name or business name and capital stock are
necessarily included in the enjoyment of the franchise. Like that of a franchise, the law
55

mandates, that property necessary for the enjoyment of said franchise, can only be sold
to satisfy a judgment debt if the decision especially so provides. As We have stated
heretofore, no such directive appears in the decision. Moreover, a trade name or
business name cannot be sold separately from the franchise, and the capital stock of the
petitioner corporation or any other corporation, for the matter, represents the interest and
is the property of stockholders in the corporation, who can only be deprived thereof in the
manner provided by law (Therbee v. Baker, 35 N.E. Eq. [8 Stew.] 501, 505; In re Wells'
Estate, 144 N.W. 174, 177, Wis. 294, cited in 6 Words and Phrases, 109).
It, therefore, results that the inclusion of the franchise, the trade name and/or business
name and the capital stock of the petitioner corporation, in the sale of the properties of
the JRS Business Corporation, has no justification. The sale of the properties of
petitioner corporation is set aside, in so far as it authorizes the levy and sale of its
franchise, trade name and capital stocks. Without pronouncement as to costs.
G.R. No. L-48930 February 23, 1944
ANTONIO VAZQUEZ vs. FRANCISCO DE BORJA
This action was commenced in the Court of First Instance of Manila by Francisco de
Borja against Antonio Vazquez and Fernando Busuego to recover from them jointly and
severally the total sum of P4,702.70 upon three alleged causes of action, to wit: First,
that in or about the month of January, 1932, the defendants jointly and severally
obligated themselves to sell to the plaintiff 4,000 cavans of palay at P2.10 per cavan, to
be delivered during the month of February, 1932, the said defendants having
subsequently received from the plaintiff in virtue of said agreement the sum of P8,400;
that the defendants delivered to the plaintiff during the months of February, March, and
April, 1932, only 2,488 cavans of palay of the value of P5,224.80 and refused to deliver
the balance of 1,512 cavans of the value of P3,175.20 notwithstanding repeated
demands. Second, that because of defendants' refusal to deliver to the plaintiff the said
1,512 cavans of palay within the period above mentioned, the plaintiff suffered damages
in the sum of P1,000. And, third, that on account of the agreement above mentioned the
plaintiff delivered to the defendants 4,000 empty sacks, of which they returned to the
plaintiff only 2,490 and refused to deliver to the plaintiff the balance of 1,510 sacks or to
pay their value amounting to P377.50; and that on account of such refusal the plaintiff
suffered damages in the sum of P150.
The defendant Antonio Vazquez answered the complaint, denying having entered into
the contract mentioned in the first cause of action in his own individual and personal
capacity, either solely or together with his codefendant Fernando Busuego, and alleging
that the agreement for the purchase of 4,000 cavans of palay and the payment of the
price of P8,400 were made by the plaintiff with and to the Natividad-Vasquez Sabani
Development Co., Inc., a corporation organized and existing under the laws of the
Philippines, of which the defendant Antonio Vazquez was the acting manager at the time
CORPORATION LAW CASES SESSION 1
the transaction took place. By way of counterclaim, the said defendant alleged that he
suffered damages in the sum of P1,000 on account of the filing of this action against him
by the plaintiff with full knowledge that the said defendant had nothing to do whatever
with any and all of the transactions mentioned in the complaint in his own individual and
personal capacity.
The trial court rendered judgment ordering the defendant Antonio Vazquez to pay to the
plaintiff the sum of P3,175.20 plus the sum of P377.50, with legal interest on both sums,
and absolving the defendant Fernando Busuego (treasurer of the corporation) from the
complaint and the plaintiff from the defendant Antonio Vazquez' counterclaim. Upon
appeal to the Court of Appeals, the latter modified that judgment by reducing it to the
total sum of P3,314.78, with legal interest thereon and the costs. But by a subsequent
resolution upon the defendant's motion for reconsideration, the Court of Appeals set
aside its judgment and ordered that the case be remanded to the court of origin for
further proceedings. The defendant Vazquez, not being agreeable to that result, filed the
present petition for certiorari (G.R. No. 48930) to review and reverse the judgment of the
Court of Appeals; and the plaintiff Francisco de Borja, excepting to the resolution of the
Court of Appeals whereby its original judgment was set aside and the case was ordered
remanded to the court of origin for further proceedings, filed a cross-petition for certiorari
(G.R. No. 48931) to maintain the original judgment of the Court of Appeals.
The original decision of the Court of Appeals and its subsequent resolutions on
reconsideration read as follows:
Es hecho no controvertido que el 25 de Febrero de 1932, el demandado-
apelante vendio al demandante 4,000 cavanes de palay al precio de P2.10 el
cavan, de los cuales, dicho demandante solamente recibio 2,583 cavanes; y que
asimismo recibio para su envase 4,000 sacos vacios. Esta provbado que de
dichos 4,000 sacos vacios solamente se entregaron, 2,583 quedando en poder
del demandado el resto, y cuyo valor es el de P0.24 cada uno. Presentada la
demanda contra los demandados Antonio Vazquez y Fernando Busuego para el
pago de la cantidad de P4,702.70, con sus intereses legales desde el 1.o de
marzo de 1932 hasta su completo pago y las costas, el Juzgado de Primera
Instancia de Manila el asunto condenando a Antonio Vazquez a pagar al
demandante la cantidad de P3,175.20, mas la cantidad de P377.50, con sus
intereses legales, absolviendo al demandado Fernando Busuego de la demanda
y al demandante de la reconvencion de los demandados, sin especial
pronunciamiento en cuanto a las costas. De dicha decision apelo el demandado
Antonio Vazquez, apuntado como principal error el de que el habia sido
condenado personalmente, y no la corporacion por el representada.
Segun la preponderancia de las pruebas, la venta hecha por Antonio Vazquez a
favor de Francisco de Borja de los 4,000 cavanes de palay fue en su capacidad
56

de Presidente interino y Manager de la corporacion Natividad-Vazquez Sabani
Development Co., Inc. Asi resulta del Exh. 1, que es la copia al carbon del recibo
otorgado por el demandado Vazquez, y cuyo original lo habia perdido el
demandante, segun el. Asi tambien consta en los libros de la corporacion arriba
mencionada, puesto que en los mismos se ha asentado tanto la entrada de los
P8,400, precio del palay, como su envio al gobierno en pago de los alquileres de
la Hacienda Sabani. Asi mismo lo admitio Francisco de Borja al abogado Sr.
Jacinto Tomacruz, posterior presidente de la corporacion sucesora en el
arrendamiento de la Sabani Estate, cuando el solicito sus buenos oficios para el
cobro del precio del palay no entregado. Asi igualmente lo declaro el que hizo
entrega de parte del palay a Borja, Felipe Veneracion, cuyo testimonio no ha
sido refutado. Y asi se deduce de la misma demanda, cuando se incluyo en ella
a Fernando Busuego, tesorero de la Natividad-Vazquez Sabani Development
Co., Inc.
Siendo esto asi, la principal responsable debe ser la Natividad-Vazquez Sabani
Development Co., Inc., que quedo insolvente y dejo de existir. El Juez
sentenciador declaro, sin embargo, al demandado Vazquez responsable del
pago de la cantidad reclamada por su negligencia al vender los referidos 4,000
cavanes de palay sin averiguar antes si o no dicha cantidad existia en las
bodegas de la corporacion.
Resulta del Exh. 8 que despues de la venta de los 4,000 cavanes de palay a
Francisco de Borja, el mismo demandado vendio a Kwong Ah Phoy 1,500
cavanes al precio de P2.00 el cavan, y decimos 'despues' porque esta ultima
venta aparece asentada despues de la primera. Segun esto, el apelante no
solamente obro con negligencia, sino interviniendo culpa de su parte, por lo que
de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser
responsable subsidiariamente del pago de la cantidad objecto de la demanda.
En meritos de todo lo expuesto, se confirma la decision apelada con la
modificacion de que el apelante debe pagar al apelado la suma de P2,295.70
como valor de los 1,417 cavanes de palay que dejo de entregar al demandante,
mas la suma de P339.08 como importe de los 1,417 sacos vacios, que dejo de
devolver, a razon de P0.24 el saco, total P3,314.78, con sus intereses legales
desde la interposicion de la demanda y las costas de ambas instancias.
Vista la mocion de reconsideracion de nuestra decision de fecha 13 de Octubre
de 1942, y alegandose en la misma que cuando el apelante vendio los 1,500
cavanes de palay a Ah Phoy, la corporacion todavia tenia bastante existencia de
dicho grano, y no estando dicho extremo suficientemente discutido y probado, y
pudiendo variar el resultado del asunto, dejamos sin efecto nuestra citada
CORPORATION LAW CASES SESSION 1
decision, y ordenamos la devolucion de la causa al Juzgado de origen para que
reciba pruebas al efecto y dicte despues la decision correspondiente.
Upon consideration of the motion of the attorney for the plaintiff-appellee in case
CA-G.R. No. 8676, Francisco de Borja vs. Antonio Vasquez et al., praying, for
the reasons therein given, that the resolution of December 22, 1942, be
reconsidered: Considering that said resolution remanding the case to the lower
court is for the benefit of the plaintiff-appellee to afford him opportunity to refute
the contention of the defendant-appellant Antonio Vazquez, motion denied.
The action is on a contract, and the only issue pleaded and tried is whether the plaintiff
entered into the contract with the defendant Antonio Vazquez in his personal capacity or
as manager of the Natividad-Vazquez Sabani Development Co., Inc. The Court of
Appeals found that according to the preponderance of the evidence "the sale made by
Antonio Vazquez in favor of Francisco de Borja of 4,000 cavans of palay was in his
capacity as acting president and manager of the corporation Natividad-Vazquez Sabani
Development Co., Inc." That finding of fact is final and, it resolving the only issue
involved, should be determinative of the result.
The Court of Appeals doubly erred in ordering that the cause be remanded to the court of
origin for further trial to determine whether the corporation had sufficient stock of palay at
the time appellant sold, 1500 cavans of palay to Kwong Ah Phoy. First, if that point was
material to the issue, it should have been proven during the trial; and the statement of
the court that it had not been sufficiently discussed and proven was no justification for
ordering a new trial, which, by the way, neither party had solicited but against which, on
the contrary, both parties now vehemently protest. Second, the point is, in any event,
beside the issue, and this we shall now discuss in connection with the original judgment
of the Court of Appeals which the plaintiff cross-petitioner seeks to maintain.
The action being on a contract, and it appearing from the preponderance of the evidence
that the party liable on the contract is the Natividad-Vazquez Sabani Development Co.,
Inc. which is not a party herein, the complaint should have been dismissed. Counsel for
the plaintiff, in his brief as respondent, argues that altho by the preponderance of the
evidence the trial court and the Court of Appeals found that Vazquez celebrated the
contract in his capacity as acting president of the corporation and altho it was the latter,
thru Vazquez, with which the plaintiff had contracted and which, thru Vazquez, had
received the sum of P8,400 from Borja, and altho that was true from the point of view of
a legal fiction, "ello no impede que tambien sea verdad lo alegado en la demanda de que
la misma persona de Vasquez fue la que contrato con Borja y que la misma persona de
Vasquez fue quien recibio la suma de P8,400." But such argument is invalid and
insufficient to show that the president of the corporation is personally liable on the
contract duly and lawfully entered into by him in its behalf.
57

It is well known that a corporation is an artificial being invested by law with a personality
of its own, separate and distinct from that of its stockholders and from that of its officers
who manage and run its affairs. The mere fact that its personality is owing to a legal
fiction and that it necessarily has to act thru its agents, does not make the latter
personally liable on a contract duly entered into, or for an act lawfully performed, by them
for an in its behalf. The legal fiction by which the personality of a corporation is created is
a practical reality and necessity. Without it no corporate entities may exists and no
corporate business may be transacted. Such legal fiction may be disregarded only when
an attempt is made to use it as a cloak to hide an unlawful or fraudulent purpose. No
such thing has been alleged or proven in this case. It has not been alleged nor even
intimated that Vazquez personally benefited by the contract of sale in question and that
he is merely invoking the legal fiction to avoid personal liability. Neither is it contended
that he entered into said contract for the corporation in bad faith and with intent to
defraud the plaintiff. We find no legal and factual basis upon which to hold him liable on
the contract either principally or subsidiarily.
The trial court found him guilty of negligence in the performance of the contract and held
him personally liable on that account. On the other hand, the Court of Appeals found that
he "no solamente obro con negligencia, sino interveniendo culpa de su parte, por lo que
de acuerdo con los arts. 1102, 1103 y 1902 del Codigo Civil, el debe ser responsable
subsidiariamente del pago de la cantidad objeto de la demanda." We think both the trial
court and the Court of Appeals erred in law in so holding. They have manifestly failed to
distinguish a contractual from an extracontractual obligation, or an obligation arising from
contract from an obligation arising from culpa aquiliana. The fault and negligence
referred to in articles 1101-1104 of the Civil Code are those incidental to the fulfillment or
nonfullfillment of a contractual obligation; while the fault or negligence referred to in
article 1902 is the culpa aquiliana of the civil law, homologous but not identical to tort of
the common law, which gives rise to an obligation independently of any contract. (Cf.
Manila R.R. Co. vs. Cia. Trasatlantica, 38 Phil., 875, 887-890; Cangco vs.Manila R.R.
Co., 38 Phil. 768.) The fact that the corporation, acting thru Vazquez as its manager, was
guilty of negligence in the fulfillment of the contract, did not make Vazquez principally or
even subsidiarily liable for such negligence. Since it was the corporation's contract, its
nonfulfillment, whether due to negligence or fault or to any other cause, made the
corporation and not its agent liable.
On the other hand if independently of the contract Vazquez by his fault or negligence
cause damaged to the plaintiff, he would be liable to the latter under article 1902 of the
Civil Code. But then the plaintiff's cause of action should be based on culpa
aquiliana and not on the contract alleged in his complaint herein; and Vazquez' liability
would be principal and not merely subsidiary, as the Court of Appeals has erroneously
held. No such cause of action was alleged in the complaint or tried by express or implied
consent of the parties by virtue of section 4 of Rule 17. Hence the trial court had no
jurisdiction over the issue and could not adjudicate upon it (Reyes vs. Diaz, G.R. No.
CORPORATION LAW CASES SESSION 1
48754.) Consequently it was error for the Court of Appeals to remand the case to the trial
court to try and decide such issue.
It only remains for us to consider petitioner's second assignment of error referring to the
lower courts' refusal to entertain his counterclaim for damages against the respondent
Borja arising from the bringing of this action. The lower courts having sustained plaintiff's
action. The finding of the Court of Appeals that according to the preponderance of the
evidence the defendant Vazquez celebrated the contract not in his personal capacity but
as acting president and manager of the corporation, does not warrant his contention that
the suit against him is malicious and tortious; and since we have to decide defendant's
counterclaim upon the facts found by the Court of Appeals, we find no sufficient basis
upon which to sustain said counterclaim. Indeed, we feel that a a matter of moral justice
we ought to state here that the indignant attitude adopted by the defendant towards the
plaintiff for having brought this action against him is in our estimation not wholly right.
Altho from the legal point of view he was not personally liable for the fulfillment of the
contract entered into by him on behalf of the corporation of which he was the acting
president and manager, we think it was his moral duty towards the party with whom he
contracted in said capacity to see to it that the corporation represented by him fulfilled
the contract by delivering the palay it had sold, the price of which it had already received.
Recreant to such duty as a moral person, he has no legitimate cause for indignation. We
feel that under the circumstances he not only has no cause of action against the plaintiff
for damages but is not even entitled to costs.
The judgment of the Court of Appeals is reversed, and the complaint is hereby
dismissed, without any finding as to costs.
G.R. No. 152542 July 8, 2004
MONFORT HERMANOS AGRICULTURAL DEVELOPMENT CORPORATION, as
represented by MA. ANTONIA M. SALVATIERRA vs. ANTONIO B. MONFORT III, MA.
LUISA MONFORT ASCALON, ILDEFONSO B. MONFORT, ALFREDO B. MONFORT,
CARLOS M. RODRIGUEZ, EMILY FRANCISCA R. DOLIQUEZ, ENCARNACION
CECILIA R. PAYLADO, JOSE MARTIN M. RODRIGUEZ and COURT OF APPEALS
Before the Court are consolidated petitions for review of the decisions of the Court of
Appeals in the complaints for forcible entry and replevin filed by Monfort Hermanos
Agricultural Development Corporation (Corporation) and Ramon H. Monfort against the
children, nephews, and nieces of its original incorporators (collectively known as "the
group of Antonio Monfort III").
The petition in G.R. No. 152542, assails the October 5, 2001 Decision 1 of the Special
Tenth Division of the Court of Appeals in CA-G.R. SP No. 53652, which ruled that Ma.
Antonia M. Salvatierra has no legal capacity to represent the Corporation in the forcible
58

entry case docketed as Civil Case No. 534-C, before the Municipal Trial Court of Cadiz
City. On the other hand, the petition in G.R. No. 155472, seeks to set aside the June 7,
2002 Decision2rendered by the Special Former Thirteenth Division of the Court of
Appeals in CA-G.R. SP No. 49251, where it refused to address, on jurisdictional
considerations, the issue of Ma. Antonia M. Salvatierra's capacity to file a complaint for
replevin on behalf of the Corporation in Civil Case No. 506-C before the Regional Trial
Court of Cadiz City, Branch 60.
Monfort Hermanos Agricultural Development Corporation, a domestic private corporation,
is the registered owner of a farm, fishpond and sugar cane plantation known as
Haciendas San Antonio II, Marapara, Pinanoag and Tinampa-an, all situated in Cadiz
City.3 It also owns one unit of motor vehicle and two units of tractors. 4 The same allowed
Ramon H. Monfort, its Executive Vice President, to breed and maintain fighting cocks in
his personal capacity at Hacienda San Antonio.5
In 1997, the group of Antonio Monfort III, through force and intimidation, allegedly took
possession of the 4 Haciendas, the produce thereon and the motor vehicle and tractors,
as well as the fighting cocks of Ramon H. Monfort.
In G.R. No. 155472:
On April 10, 1997, the Corporation, represented by its President, Ma. Antonia M.
Salvatierra, and Ramon H. Monfort, in his personal capacity, filed against the group of
Antonio Monfort III, a complaint 6 for delivery of motor vehicle, tractors and 378 fighting
cocks, with prayer for injunction and damages, docketed as Civil Case No. 506-C, before
the Regional Trial Court of Negros Occidental, Branch 60.
The group of Antonio Monfort III filed a motion to dismiss contending, inter alia, that Ma.
Antonia M. Salvatierra has no capacity to sue on behalf of the Corporation because the
March 31, 1997 Board Resolution 7 authorizing Ma. Antonia M. Salvatierra and/or Ramon
H. Monfort to represent the Corporation is void as the purported Members of the Board
who passed the same were not validly elected officers of the Corporation.
On May 4, 1998, the trial court denied the motion to dismiss. 8 The group of Antonio
Monfort III filed a petition for certiorari with the Court of Appeals but the same was
dismissed on June 7, 2002.9 The Special Former Thirteenth Division of the appellate
court did not resolve the validity of the March 31, 1997 Board Resolution and the election
of the officers who signed it, ratiocinating that the determination of said question is within
the competence of the trial court.
CORPORATION LAW CASES SESSION 1
The motion for reconsideration filed by the group of Antonio Monfort III was
denied.10 Hence, they instituted a petition for review with this Court, docketed as G.R. No.
155472.
In G.R. No. 152542:
On April 21, 1997, Ma. Antonia M. Salvatierra filed on behalf of the Corporation a
complaint for forcible entry, preliminary mandatory injunction with temporary restraining
order and damages against the group of Antonio Monfort III, before the Municipal Trial
Court (MTC) of Cadiz City.11 It contended that the latter through force and intimidation,
unlawfully took possession of the 4 Haciendas and deprived the Corporation of the
produce thereon.
In their answer,12 the group of Antonio Monfort III alleged that they are possessing and
controlling the Haciendas and harvesting the produce therein on behalf of the corporation
and not for themselves. They likewise raised the affirmative defense of lack of legal
capacity of Ma. Antonia M. Salvatierra to sue on behalf of the Corporation.
On February 18, 1998, the MTC of Cadiz City rendered a decision dismissing the
complaint.13 On appeal, the Regional Trial Court of Negros Occidental, Branch 60,
reversed the Decision of the MTCC and remanded the case for further proceedings. 14
Aggrieved, the group of Antonio Monfort III filed a petition for review with the Court of
Appeals. On October 5, 2001, the Special Tenth Division set aside the judgment of the
RTC and dismissed the complaint for forcible entry for lack of capacity of Ma. Antonia M.
Salvatierra to represent the Corporation. 15 The motion for reconsideration filed by the
latter was denied by the appellate court.16
Unfazed, the Corporation filed a petition for review with this Court, docketed as G.R. No.
152542 which was consolidated with G.R. No. 155472 per Resolution dated January 21,
2004.17
The focal issue in these consolidated petitions is whether or not Ma. Antonia M.
Salvatierra has the legal capacity to sue on behalf of the Corporation.
The group of Antonio Monfort III claims that the March 31, 1997 Board Resolution
authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the
Corporation is void because the purported Members of the Board who passed the same
were not validly elected officers of the Corporation.
59

A corporation has no power except those expressly conferred on it by the Corporation
Code and those that are implied or incidental to its existence. In turn, a corporation
exercises said powers through its board of directors and/or its duly authorized officers
and agents. Thus, it has been observed that the power of a corporation to sue and be
sued in any court is lodged with the board of directors that exercises its corporate
powers. In turn, physical acts of the corporation, like the signing of documents, can be
performed only by natural persons duly authorized for the purpose by corporate by-laws
or by a specific act of the board of directors.18
Corollary thereto, corporations are required under Section 26 of the Corporation Code to
submit to the SEC within thirty (30) days after the election the names, nationalities and
residences of the elected directors, trustees and officers of the Corporation. In order to
keep stockholders and the public transacting business with domestic corporations
properly informed of their organizational operational status, the SEC issued the following
rules:
xxx xxx xxx
2. A General Information Sheet shall be filed with this Commission within thirty
(30) days following the date of the annual stockholders' meeting. No extension of
said period shall be allowed, except for very justifiable reasons stated in writing
by the President, Secretary, Treasurer or other officers, upon which the
Commission may grant an extension for not more than ten (10) days.
2.A. Should a director, trustee or officer die, resign or in any manner,
cease to hold office, the corporation shall report such fact to the
Commission with fifteen (15) days after such death, resignation or
cessation of office.
3. If for any justifiable reason, the annual meeting has to be postponed, the
company should notify the Commission in writing of such postponement.
The General Information Sheet shall state, among others, the names of the
elected directors and officers, together with their corresponding position
title (Emphasis supplied)
In the instant case, the six signatories to the March 31, 1997 Board Resolution
authorizing Ma. Antonia M. Salvatierra and/or Ramon H. Monfort to represent the
Corporation, were: Ma. Antonia M. Salvatierra, President; Ramon H. Monfort, Executive
Vice President; Directors Paul M. Monfort, Yvete M. Benedicto and Jaqueline M. Yusay;
CORPORATION LAW CASES SESSION 1
and Ester S. Monfort, Secretary. However, the names of the last four (4) signatories to
19
the said Board Resolution do not appear in the 1996 General Information Sheet
submitted by the Corporation with the SEC. Under said General Information Sheet the
composition of the Board is as follows:
1. Ma. Antonia M. Salvatierra (Chairman);
2. Ramon H. Monfort (Member);
3. Antonio H. Monfort, Jr., (Member);
4. Joaquin H. Monfort (Member);
5. Francisco H. Monfort (Member) and
6. Jesus Antonio H. Monfort (Member).20
There is thus a doubt as to whether Paul M. Monfort, Yvete M. Benedicto, Jaqueline M.
Yusay and Ester S. Monfort, were indeed duly elected Members of the Board legally
constituted to bring suit in behalf of the Corporation. 21
In Premium Marble Resources, Inc. v. Court of Appeals,22 the Court was confronted with
the similar issue of capacity to sue of the officers of the corporation who filed a complaint
for damages. In the said case, we sustained the dismissal of the complaint because it
was not established that the Members of the Board who authorized the filing of the
complaint were the lawfully elected officers of the corporation. Thus
The only issue in this case is whether or not the filing of the case for damages
against private respondent was authorized by a duly constituted Board of
Directors of the petitioner corporation.
Petitioner, through the first set of officers, viz., Mario Zavalla, Oscar Gan, Lionel
Pengson, Jose Ma. Silva, Aderito Yujuico and Rodolfo Millare, presented the
Minutes of the meeting of its Board of Directors held on April 1, 1982, as proof
that the filing of the case against private respondent was authorized by the
Board. On the other hand, the second set of officers, viz., Saturnino G. Belen, Jr.,
Alberto C. Nograles and Jose L.R. Reyes, presented a Resolution dated July 30,
1986, to show that Premium did not authorize the filing in its behalf of any suit
against the private respondent International Corporate Bank.
60

Later on, petitioner submitted its Articles of Incorporation dated November 6,
1979 with the following as Directors: Mario C. Zavalla, Pedro C. Celso, Oscar B.
Gan, Lionel Pengson, and Jose Ma. Silva.
However, it appears from the general information sheet and the Certification
issued by the SEC on August 19, 1986 that as of March 4, 1981, the officers and
members of the board of directors of the Premium Marble Resources, Inc. were:
Alberto C. Nograles President/Director
Fernando D. Hilario Vice President/Director
Augusto I. Galace Treasurer
Jose L.R. Reyes Secretary/Director
Pido E. Aguilar Director
Saturnino G. Belen, Jr. Chairman of the Board.
While the Minutes of the Meeting of the Board on April 1, 1982 states that the
newly elected officers for the year 1982 were Oscar Gan, Mario Zavalla, Aderito
Yujuico and Rodolfo Millare, petitioner failed to show proof that this election was
reported to the SEC. In fact, the last entry in their General Information Sheet with
the SEC, as of 1986 appears to be the set of officers elected in March 1981.
We agree with the finding of public respondent Court of Appeals, that "in the
absence of any board resolution from its board of directors the [sic] authority to
act for and in behalf of the corporation, the present action must necessarily fail.
The power of the corporation to sue and be sued in any court is lodged with the
board of directors that exercises its corporate powers. Thus, the issue of
authority and the invalidity of plaintiff-appellant's subscription which is still
pending, is a matter that is also addressed, considering the premises, to the
sound judgment of the Securities & Exchange Commission."
By the express mandate of the Corporation Code (Section 26), all corporations
duly organized pursuant thereto are required to submit within the period therein
stated (30 days) to the Securities and Exchange Commission the names,
nationalities and residences of the directors, trustees and officers elected.
CORPORATION LAW CASES SESSION 1
Sec. 26 of the Corporation Code provides, thus:
"Sec. 26. Report of election of directors, trustees and officers. Within
thirty (30) days after the election of the directors, trustees and officers of
the corporation, the secretary, or any other officer of the corporation, shall
submit to the Securities and Exchange Commission, the names,
nationalities and residences of the directors, trustees and officers elected.
xxx"
Evidently, the objective sought to be achieved by Section 26 is to give the public
information, under sanction of oath of responsible officers, of the nature of
business, financial condition and operational status of the company together with
information on its key officers or managers so that those dealing with it and those
who intend to do business with it may know or have the means of knowing facts
concerning the corporation's financial resources and business responsibility.
The claim, therefore, of petitioners as represented by Atty. Dumadag, that
Zaballa, et al., are the incumbent officers of Premium has not been fully
substantiated. In the absence of an authority from the board of directors, no
person, not even the officers of the corporation, can validly bind the corporation.
In the case at bar, the fact that four of the six Members of the Board listed in the 1996
General Information Sheet23are already dead24 at the time the March 31, 1997 Board
Resolution was issued, does not automatically make the four signatories (i.e., Paul M.
Monfort, Yvete M. Benedicto, Jaqueline M. Yusay and Ester S. Monfort) to the said Board
Resolution (whose name do not appear in the 1996 General Information Sheet) as
among the incumbent Members of the Board. This is because it was not established that
they were duly elected to replace the said deceased Board Members.
To correct the alleged error in the General Information Sheet, the retained accountant of
the Corporation informed the SEC in its November 11, 1998 letter that the non-inclusion
of the lawfully elected directors in the 1996 General Information Sheet was attributable to
its oversight and not the fault of the Corporation. 25 This belated attempt, however, did not
erase the doubt as to whether an election was indeed held. As previously stated, a
corporation is mandated to inform the SEC of the names and the change in the
composition of its officers and board of directors within 30 days after election if one was
held, or 15 days after the death, resignation or cessation of office of any of its director,
trustee or officer if any of them died, resigned or in any manner, ceased to hold office.
This, the Corporation failed to do. The alleged election of the directors and officers who
signed the March 31, 1997 Board Resolution was held on October 16, 1996, but the SEC
61

was informed thereof more than two years later, or on November 11, 1998. The 4
Directors appearing in the 1996 General Information Sheet died between the years 1984
1987,26 but the records do not show if such demise was reported to the SEC.
What further militates against the purported election of those who signed the March 31,
1997 Board Resolution was the belated submission of the alleged Minutes of the October
16, 1996 meeting where the questioned officers were elected. The issue of legal capacity
of Ma. Antonia M. Salvatierra was raised before the lower court by the group of Antonio
Monfort III as early as 1997, but the Minutes of said October 16, 1996 meeting was
presented by the Corporation only in its September 29, 1999 Comment before the Court
of Appeals.27 Moreover, the Corporation failed to prove that the same October 16, 1996
Minutes was submitted to the SEC. In fact, the 1997General Information
Sheet28 submitted by the Corporation does not reflect the names of the 4 Directors
claimed to be elected on October 16, 1996.
Considering the foregoing, we find that Ma. Antonia M. Salvatierra failed to prove that
four of those who authorized her to represent the Corporation were the lawfully elected
Members of the Board of the Corporation. As such, they cannot confer valid authority for
her to sue on behalf of the corporation.
The Court notes that the complaint in Civil Case No. 506-C, for replevin before the
Regional Trial Court of Negros Occidental, Branch 60, has 2 causes of action, i.e.,
unlawful detention of the Corporation's motor vehicle and tractors, and the unlawful
detention of the of 387 fighting cocks of Ramon H. Monfort. Since Ramon sought redress
of the latter cause of action in his personal capacity, the dismissal of the complaint for
lack of capacity to sue on behalf of the corporation should be limited only to the
corporation's cause of action for delivery of motor vehicle and tractors. In view, however,
of the demise of Ramon on June 25, 1999,29 substitution by his heirs is proper.
WHEREFORE, in view of all the foregoing, the petition in G.R. No. 152542 is DENIED.
The October 5, 2001 Decision of the Special Tenth Division of the Court of Appeals in
CA-G.R. SP No. 53652, which set aside the August 14, 1998 Decision of the Regional
Trial Court of Negros Occidental, Branch 60 in Civil Case No. 822, is AFFIRMED.
In G.R. No. 155472, the petition is GRANTED and the June 7, 2002 Decision rendered
by the Special Former Thirteenth Division of the Court of Appeals in CA-G.R. SP No.
49251, dismissing the petition filed by the group of Antonio Monfort III, is REVERSED
and SET ASIDE.
CORPORATION LAW CASES SESSION 1
The complaint for forcible entry docketed as Civil Case No. 822 before the Municipal Trial
Court of Cadiz City is DISMISSED. In Civil Case No. 506-C with the Regional Trial Court
of Negros Occidental, Branch 60, the action for delivery of personal property filed by
Monfort Hermanos Agricultural Development Corporation is likewise DISMISSED. With
respect to the action filed by Ramon H. Monfort for the delivery of 387 fighting cocks, the
Regional Trial Court of Negros Occidental, Branch 60, is ordered to effect the
corresponding substitution of parties. No costs. SO ORDERED.
G.R. No. 15574 September 17, 1919
SMITH, BELL & COMPANY (LTD.) vs. JOAQUIN NATIVIDAD, Collector of Customs
of the port of Cebu
A writ of mandamus is prayed for by Smith, Bell & Co. (Ltd.), against Joaquin Natividad,
Collector of Customs of the port of Cebu, Philippine Islands, to compel him to issue a
certificate of Philippine registry to the petitioner for its motor vessel Bato. The Attorney-
General, acting as counsel for respondent, demurs to the petition on the general ground
that it does not state facts sufficient to constitute a cause of action. While the facts are
thus admitted, and while, moreover, the pertinent provisions of law are clear and
understandable, and interpretative American jurisprudence is found in abundance, yet
the issue submitted is not lightly to be resolved. The question, flatly presented, is,
whether Act. No. 2761 of the Philippine Legislature is valid or, more directly stated,
whether the Government of the Philippine Islands, through its Legislature, can deny the
registry of vessels in its coastwise trade to corporations having alien stockholders.
FACTS.
Smith, Bell & Co., (Ltd.), is a corporation organized and existing under the laws of the
Philippine Islands. A majority of its stockholders are British subjects. It is the owner of a
motor vessel known as the Bato built for it in the Philippine Islands in 1916, of more than
fifteen tons gross The Bato was brought to Cebu in the present year for the purpose of
transporting plaintiff's merchandise between ports in the Islands. Application was made
at Cebu, the home port of the vessel, to the Collector of Customs for a certificate of
Philippine registry. The Collector refused to issue the certificate, giving as his reason that
all the stockholders of Smith, Bell & Co., Ltd., were not citizens either of the United
States or of the Philippine Islands. The instant action is the result.
LAW.
The Act of Congress of April 29, 1908, repealing the Shipping Act of April 30, 1906 but
reenacting a portion of section 3 of this Law, and still in force, provides in its section 1:
62

That until Congress shall have authorized the registry as vessels of the United
States of vessels owned in the Philippine Islands, the Government of the
Philippine Islands is hereby authorized to adopt, from time to time, and enforce
regulations governing the transportation of merchandise and passengers
between ports or places in the Philippine Archipelago. (35 Stat. at L., 70; Section
3912, U. S. Comp Stat. [1916]; 7 Pub. Laws, 364.)
The Act of Congress of August 29, 1916, commonly known as the Jones Law, still in
force, provides in section 3, (first paragraph, first sentence), 6, 7, 8, 10, and 31, as
follows.
SEC. 3. That no law shall be enacted in said Islands which shall deprive any
person of life, liberty, or property without due process of law, or deny to any
person therein the equal protection of the laws. . . .
SEC. 6. That the laws now in force in the Philippines shall continue in force and
effect, except as altered, amended, or modified herein, until altered, amended, or
repealed by the legislative authority herein provided or by Act of Congress of the
United States.
SEC. 7. That the legislative authority herein provided shall have power, when not
inconsistent with this Act, by due enactment to amend, alter modify, or repeal any
law, civil or criminal, continued in force by this Act as it may from time to time see
fit
This power shall specifically extend with the limitation herein provided as to the
tariff to all laws relating to revenue provided as to the tariff to all laws relating to
revenue and taxation in effect in the Philippines.
SEC. 8. That general legislative power, except as otherwise herein provided, is
hereby granted to the Philippine Legislature, authorized by this Act.
SEC. 10. That while this Act provides that the Philippine government shall have
the authority to enact a tariff law the trade relations between the islands and the
United States shall continue to be governed exclusively by laws of the Congress
of the United States: Provided, That tariff acts or acts amendatory to the tariff of
the Philippine Islands shall not become law until they shall receive the approval
of the President of the United States, nor shall any act of the Philippine
Legislature affecting immigration or the currency or coinage laws of the
Philippines become a law until it has been approved by the President of the
CORPORATION LAW CASES SESSION 1
United States: Provided further, That the President shall approve or disapprove
any act mentioned in the foregoing proviso within six months from and after its
enactment and submission for his approval, and if not disapproved within such
time it shall become a law the same as if it had been specifically approved.
SEC. 31. That all laws or parts of laws applicable to the Philippines not in conflict
with any of the provisions of this Act are hereby continued in force and effect."
(39 Stat at L., 546.)
On February 23, 1918, the Philippine Legislature enacted Act No. 2761. The first section
of this law amended section 1172 of the Administrative Code to read as follows:
SEC. 1172. Certificate of Philippine register. Upon registration of a vessel of
domestic ownership, and of more than fifteen tons gross, a certificate of
Philippine register shall be issued for it. If the vessel is of domestic ownership
and of fifteen tons gross or less, the taking of the certificate of Philippine register
shall be optional with the owner.
"Domestic ownership," as used in this section, means ownership vested in some
one or more of the following classes of persons: (a) Citizens or native inhabitants
of the Philippine Islands; (b) citizens of the United States residing in the
Philippine Islands; (c) any corporation or company composed wholly of citizens
of the Philippine Islands or of the United States or of both, created under the laws
of the United States, or of any State thereof, or of thereof, or the managing agent
or master of the vessel resides in the Philippine Islands
Any vessel of more than fifteen gross tons which on February eighth, nineteen
hundred and eighteen, had a certificate of Philippine register under existing law,
shall likewise be deemed a vessel of domestic ownership so long as there shall
not be any change in the ownership thereof nor any transfer of stock of the
companies or corporations owning such vessel to person not included under the
last preceding paragraph.
Sections 2 and 3 of Act No. 2761 amended sections 1176 and 1202 of the Administrative
Code to read as follows:
SEC. 1176. Investigation into character of vessel. No application for a
certificate of Philippine register shall be approved until the collector of customs is
satisfied from an inspection of the vessel that it is engaged or destined to be
63

engaged in legitimate trade and that it is of domestic ownership as such
ownership is defined in section eleven hundred and seventy-two of this Code.
The collector of customs may at any time inspect a vessel or examine its owner,
master, crew, or passengers in order to ascertain whether the vessel is engaged
in legitimate trade and is entitled to have or retain the certificate of Philippine
register.
SEC. 1202. Limiting number of foreign officers and engineers on board vessels.
No Philippine vessel operating in the coastwise trade or on the high seas shall
be permitted to have on board more than one master or one mate and one
engineer who are not citizens of the United States or of the Philippine Islands,
even if they hold licenses under section one thousand one hundred and ninety-
nine hereof. No other person who is not a citizen of the United States or of the
Philippine Islands shall be an officer or a member of the crew of such vessel. Any
such vessel which fails to comply with the terms of this section shall be required
to pay an additional tonnage tax of fifty centavos per net ton per month during the
continuance of said failure.
ISSUES.
Predicated on these facts and provisions of law, the issues as above stated recur,
namely, whether Act No 2761 of the Philippine Legislature is valid in whole or in part
whether the Government of the Philippine Islands, through its Legislature, can deny the
registry of vessel in its coastwise trade to corporations having alien stockholders .
OPINION.
1. Considered from a positive standpoint, there can exist no measure of doubt as to the
power of the Philippine Legislature to enact Act No. 2761. The Act of Congress of April
29, 1908, with its specific delegation of authority to the Government of the Philippine
Islands to regulate the transportation of merchandise and passengers between ports or
places therein, the liberal construction given to the provisions of the Philippine Bill, the
Act of Congress of July 1, 1902, by the courts, and the grant by the Act of Congress of
August 29, 1916, of general legislative power to the Philippine Legislature, are certainly
superabundant authority for such a law. While the Act of the local legislature may in a
way be inconsistent with the Act of Congress regulating the coasting trade of the
Continental United States, yet the general rule that only such laws of the United States
have force in the Philippines as are expressly extended thereto, and the abnegation of
power by Congress in favor of the Philippine Islands would leave no starting point for
CORPORATION LAW CASES SESSION 1
convincing argument. As a matter of fact, counsel for petitioner does not assail legislative
action from this direction (See U. S. vs. Bull [1910], 15 Phil., 7; Sinnot vs. Davenport
[1859] 22 How., 227.)
2. It is from the negative, prohibitory standpoint that counsel argues against the
constitutionality of Act No. 2761. The first paragraph of the Philippine Bill of Rights of the
Philippine Bill, repeated again in the first paragraph of the Philippine Bill of Rights as set
forth in the Jones Law, provides "That no law shall be enacted in said Islands which shall
deprive any person of life, liberty, or property without due process of law, or deny to any
person therein the equal protection of the laws." Counsel says that Act No. 2761 denies
to Smith, Bell & Co., Ltd., the equal protection of the laws because it, in effect, prohibits
the corporation from owning vessels, and because classification of corporations based
on the citizenship of one or more of their stockholders is capricious, and that Act No.
2761 deprives the corporation of its properly without due process of law because by the
passage of the law company was automatically deprived of every beneficial attribute of
ownership in the Bato and left with the naked title to a boat it could not use .
The guaranties extended by the Congress of the United States to the Philippine Islands
have been used in the same sense as like provisions found in the United States
Constitution. While the "due process of law and equal protection of the laws" clause of
the Philippine Bill of Rights is couched in slightly different words than the corresponding
clause of the Fourteenth Amendment to the United States Constitution, the first should
be interpreted and given the same force and effect as the latter. (Kepner vs. U.S. [1904],
195 U. S., 100; Sierra vs. Mortiga [1907], 204 U. S.,.470; U. S. vs. Bull [1910], 15 Phil.,
7.) The meaning of the Fourteenth Amendment has been announced in classic decisions
of the United States Supreme Court. Even at the expense of restating what is so well
known, these basic principles must again be set down in order to serve as the basis of
this decision.
The guaranties of the Fourteenth Amendment and so of the first paragraph of the
Philippine Bill of Rights, are universal in their application to all person within the territorial
jurisdiction, without regard to any differences of race, color, or nationality. The word
"person" includes aliens. (Yick Wo vs. Hopkins [1886], 118 U. S., 356; Truax vs. Raich
[1915], 239 U. S., 33.) Private corporations, likewise, are "persons" within the scope of
the guaranties in so far as their property is concerned. (Santa Clara County vs. Southern
Pac. R. R. Co. [1886], 118.U. S., 394; Pembina Mining Co. vs. Pennsylvania [1888],.125
U. S., 181 Covington & L. Turnpike Road Co. vs. Sandford [1896], 164 U. S., 578.)
Classification with the end in view of providing diversity of treatment may be made
among corporations, but must be based upon some reasonable ground and not be a
mere arbitrary selection (Gulf, Colorado & Santa Fe Railway Co. vs. Ellis [1897],.165 U.
64

S., 150.) Examples of laws held unconstitutional because of unlawful discrimination
against aliens could be cited. Generally, these decisions relate to statutes which had
attempted arbitrarily to forbid aliens to engage in ordinary kinds of business to earn their
living. (State vs.Montgomery [1900], 94 Maine, 192, peddling but see.
Commonwealth vs. Hana [1907], 195 Mass., 262; Templar vs. Board of Examiners of
Barbers [1902], 131 Mich., 254, barbers; Yick Wo vs. Hopkins [1886], 118 U. S.,.356,
discrimination against Chinese; Truax vs. Raich [1915], 239 U. S., 33; In re Parrott
[1880], 1 Fed , 481; Fraser vs. McConway & Torley Co. [1897], 82 Fed , 257; Juniata
Limestone Co. vs. Fagley [1898], 187 Penn., 193, all relating to the employment of aliens
by private corporations.)
A literal application of general principles to the facts before us would, of course, cause
the inevitable deduction that Act No. 2761 is unconstitutional by reason of its denial to a
corporation, some of whole members are foreigners, of the equal protection of the laws.
Like all beneficient propositions, deeper research discloses provisos. Examples of a
denial of rights to aliens notwithstanding the provisions of the Fourteenth Amendment
could be cited. (Tragesser vs. Gray [1890], 73 Md., 250, licenses to sell spirituous liquors
denied to persons not citizens of the United States; Commonwealth vs. Hana [1907], 195
Mass , 262, excluding aliens from the right to peddle; Patsone vs.Commonwealth of
Pennsylvania [1914], 232 U. S. , 138, prohibiting the killing of any wild bird or animal by
any unnaturalized foreign-born resident; Ex parte Gilleti [1915], 70 Fla., 442,
discriminating in favor of citizens with reference to the taking for private use of the
common property in fish and oysters found in the public waters of the State;
Heim vs. McCall [1915], 239 U. S.,.175, and Crane vs. New York [1915], 239 U. S., 195,
limiting employment on public works by, or for, the State or a municipality to citizens of
the United States.)
One of the exceptions to the general rule, most persistent and far reaching in influence
is, that neither the Fourteenth Amendment to the United States Constitution, broad and
comprehensive as it is, nor any other amendment, "was designed to interfere with the
power of the State, sometimes termed its `police power,' to prescribe regulations to
promote the health, peace, morals, education, and good order of the people, and
legislate so as to increase the industries of the State, develop its resources and add to its
wealth and prosperity. From the very necessities of society, legislation of a special
character, having these objects in view, must often be had in certain districts."
(Barbier vs. Connolly [1884], 113 U.S., 27; New Orleans Gas Co. vs. Lousiana Light Co.
[1885], 115 U.S., 650.) This is the same police power which the United States Supreme
Court say "extends to so dealing with the conditions which exist in the state as to bring
out of them the greatest welfare in of its people." (Bacon vs.Walker [1907], 204 U.S.,
311.) For quite similar reasons, none of the provision of the Philippine Organic Law could
CORPORATION LAW CASES SESSION 1
could have had the effect of denying to the Government of the Philippine Islands, acting
through its Legislature, the right to exercise that most essential, insistent, and illimitable
of powers, the sovereign police power, in the promotion of the general welfare and the
public interest. (U. S. vs. Toribio [1910], 15 Phil., 85; Churchill and Tait vs.Rafferty [1915],
32 Phil., 580; Rubi vs. Provincial Board of Mindoro [1919], 39 Phil., 660.) Another notable
exception permits of the regulation or distribution of the public domain or the common
property or resources of the people of the State, so that use may be limited to its citizens.
(Ex parte Gilleti [1915], 70 Fla., 442; McCready vs.Virginia [1876], 94 U. S., 391;
Patsone vs. Commonwealth of Pennsylvania [1914], 232U. S., 138.) Still another
exception permits of the limitation of employment in the construction of public works by,
or for, the State or a municipality to citizens of the United States or of the State.
(Atkin vs. Kansas [1903],191 U. S., 207; Heim vs.McCall [1915], 239 U.S., 175;
Crane vs. New York [1915], 239 U. S., 195.) Even as to classification, it is admitted that a
State may classify with reference to the evil to be prevented; the question is a practical
one, dependent upon experience. (Patsone vs. Commonwealth of Pennsylvania [1914],
232 U. S., 138.)
To justify that portion of Act no. 2761 which permits corporations or companies to obtain
a certificate of Philippine registry only on condition that they be composed wholly of
citizens of the Philippine Islands or of the United States or both, as not infringing
Philippine Organic Law, it must be done under some one of the exceptions here
mentioned This must be done, moreover, having particularly in mind what is so often of
controlling effect in this jurisdiction our local experience and our peculiar local
conditions.
To recall a few facts in geography, within the confines of Philippine jurisdictional limits are
found more than three thousand islands. Literally, and absolutely, steamship lines are, for
an Insular territory thus situated, the arteries of commerce. If one be severed, the life-
blood of the nation is lost. If on the other hand these arteries are protected, then the
security of the country and the promotion of the general welfare is sustained. Time and
again, with such conditions confronting it, has the executive branch of the Government of
the Philippine Islands, always later with the sanction of the judicial branch, taken a firm
stand with reference to the presence of undesirable foreigners. The Government has
thus assumed to act for the all-sufficient and primitive reason of the benefit and
protection of its own citizens and of the self-preservation and integrity of its dominion. (In
re Patterson [1902], 1 Phil., 93; Forbes vs.Chuoco, Tiaco and Crossfield [1910], 16 Phil.,
534;.228 U.S., 549; In re McCulloch Dick [1918], 38 Phil., 41.) Boats owned by
foreigners, particularly by such solid and reputable firms as the instant claimant, might
indeed traverse the waters of the Philippines for ages without doing any particular harm.
Again, some evilminded foreigner might very easily take advantage of such lavish
65

hospitality to chart Philippine waters, to obtain valuable information for unfriendly foreign
powers, to stir up insurrection, or to prejudice Filipino or American commerce. Moreover,
under the Spanish portion of Philippine law, the waters within the domestic jurisdiction
are deemed part of the national domain, open to public use. (Book II, Tit. IV, Ch. I, Civil
Code; Spanish Law of Waters of August 3, 1866, arts 1, 2, 3.) Common carriers which in
the Philippines as in the United States and other countries are, as Lord Hale said,
"affected with a public interest," can only be permitted to use these public waters as a
privilege and under such conditions as to the representatives of the people may seem
wise. (See De Villata vs. Stanley [1915], 32 Phil., 541.)
In Patsone vs. Commonwealth of Pennsylvania ([1913], 232 U.S., 138), a case herein
before mentioned, Justice Holmes delivering the opinion of the United States Supreme
Court said:
This statute makes it unlawful for any unnaturalized foreign-born resident to kill
any wild bird or animal except in defense of person or property, and `to that end'
makes it unlawful for such foreign-born person to own or be possessed of a
shotgun or rifle; with a penalty of $25 and a forfeiture of the gun or guns. The
plaintiff in error was found guilty and was sentenced to pay the abovementioned
fine. The judgment was affirmed on successive appeals. (231 Pa., 46; 79 Atl.,
928.) He brings the case to this court on the ground that the statute is contrary to
the 14th Amendment and also is in contravention of the treaty between the
United States and Italy, to which latter country the plaintiff in error belongs .
Under the 14th Amendment the objection is twofold; unjustifiably depriving the
alien of property, and discrimination against such aliens as a class. But the
former really depends upon the latter, since it hardly can be disputed that if the
lawful object, the protection of wild life (Geer vs. Connecticut, 161 U.S., 519; 40
L. ed., 793; 16 Sup. Ct. Rep., 600), warrants the discrimination, the, means
adopted for making it effective also might be adopted. . . .
The discrimination undoubtedly presents a more difficult question. But we start
with reference to the evil to be prevented, and that if the class discriminated
against is or reasonably might be considered to define those from whom the evil
mainly is to be feared, it properly may be picked out. A lack of abstract symmetry
does not matter. The question is a practical one, dependent upon experience. . . .
The question therefore narrows itself to whether this court can say that the
legislature of Pennsylvania was not warranted in assuming as its premise for the
law that resident unnaturalized aliens were the peculiar source of the evil that it
CORPORATION LAW CASES SESSION 1
desired to prevent. (Barrett vs. Indiana,. 229 U.S., 26, 29; 57 L. ed., 1050, 1052;
33 Sup. Ct. Rep., 692.)
Obviously the question, so stated, is one of local experience, on which this court
ought to be very slow to declare that the state legislature was wrong in its facts
(Adams vs. Milwaukee, 228 U.S., 572, 583; 57 L. ed., 971,.977; 33 Sup. Ct.
Rep., 610.) If we might trust popular speech in some states it was right; but it is
enough that this court has no such knowledge of local conditions as to be able to
say that it was manifestly wrong. . . .
Judgment affirmed.
We are inclined to the view that while Smith, Bell & Co. Ltd., a corporation having alien
stockholders, is entitled to the protection afforded by the due-process of law and equal
protection of the laws clause of the Philippine Bill of Rights, nevertheless, Act No. 2761
of the Philippine Legislature, in denying to corporations such as Smith, Bell &. Co. Ltd.,
the right to register vessels in the Philippines coastwise trade, does not belong to that
vicious species of class legislation which must always be condemned, but does fall within
authorized exceptions, notably, within the purview of the police power, and so does not
offend against the constitutional provision.
This opinion might well be brought to a close at this point. It occurs to us, however, that
the legislative history of the United States and the Philippine Islands, and, probably, the
legislative history of other countries, if we were to take the time to search it out, might
disclose similar attempts at restriction on the right to enter the coastwise trade, and might
thus furnish valuable aid by which to ascertain and, if possible, effectuate legislative
intention.
3. The power to regulate commerce, expressly delegated to the Congress by the
Constitution, includes the power to nationalize ships built and owned in the
United States by registries and enrollments, and the recording of the muniments
of title of American vessels. The Congress "may encourage or it may entirely
prohibit such commerce, and it may regulate in any way it may see fit between
these two extremes." (U.S. vs. Craig [1886], 28 Fed., 795; Gibbons vs. Ogden
[1824], 9 Wheat., 1; The Passenger Cases [1849], 7 How., 283.)
Acting within the purview of such power, the first Congress of the United States had not
been long convened before it enacted on September 1, 1789, "An Act for Registering
and Clearing Vessels, Regulating the Coasting Trade, and for other purposes." Section 1
of this law provided that for any ship or vessel to obtain the benefits of American registry,
66

it must belong wholly to a citizen or citizens of the United States "and no other." (1 Stat.
at L., 55.) That Act was shortly after repealed, but the same idea was carried into the
Acts of Congress of December 31, 1792 and February 18, 1793. (1 Stat. at L., 287,
305.).Section 4 of the Act of 1792 provided that in order to obtain the registry of any
vessel, an oath shall be taken and subscribed by the owner, or by one of the owners
thereof, before the officer authorized to make such registry, declaring, "that there is no
subject or citizen of any foreign prince or state, directly or indirectly, by way of trust,
confidence, or otherwise, interested in such vessel, or in the profits or issues thereof."
Section 32 of the Act of 1793 even went so far as to say "that if any licensed ship or
vessel shall be transferred to any person who is not at the time of such transfer a citizen
of and resident within the United States, ... every such vessel with her tackle, apparel,
and furniture, and the cargo found on board her, shall be forefeited." In case of alienation
to a foreigner, Chief Justice Marshall said that all the privileges of an American bottom
were ipso facto forfeited. (U.S. vs. Willings and Francis [1807], 4 Cranch, 48.) Even as
late as 1873, the Attorney-General of the United States was of the opinion that under the
provisions of the Act of December 31, 1792, no vessel in which a foreigner is directly or
indirectly interested can lawfully be registered as a vessel of the United. States. (14 Op.
Atty.-Gen. [U.S.], 340.)
These laws continued in force without contest, although possibly the Act of March 3,
1825, may have affected them, until amended by the Act of May 28, 1896 (29 Stat. at L.,
188) which extended the privileges of registry from vessels wholly owned by a citizen or
citizens of the United States to corporations created under the laws of any of the states
thereof. The law, as amended, made possible the deduction that a vessel belonging to a
domestic corporation was entitled to registry or enrollment even though some stock of
the company be owned by aliens. The right of ownership of stock in a corporation was
thereafter distinct from the right to hold the property by the corporation
(Humphreys vs. McKissock [1890], 140 U.S., 304; Queen vs. Arnaud [1846], 9 Q. B.,
806; 29 Op. Atty.-Gen. [U.S.],188.)
On American occupation of the Philippines, the new government found a substantive law
in operation in the Islands with a civil law history which it wisely continued in force Article
fifteen of the Spanish Code of Commerce permitted any foreigner to engage in Philippine
trade if he had legal capacity to do so under the laws of his nation. When the Philippine
Commission came to enact the Customs Administrative Act (No. 355) in 1902, it returned
to the old American policy of limiting the protection and flag of the United States to
vessels owned by citizens of the United States or by native inhabitants of the Philippine
Islands (Sec. 117.) Two years later, the same body reverted to the existing
Congressional law by permitting certification to be issued to a citizen of the United States
or to a corporation or company created under the laws of the United States or of any
CORPORATION LAW CASES SESSION 1
state thereof or of the Philippine Islands (Act No. 1235, sec. 3.) The two administration
codes repeated the same provisions with the necessary amplification of inclusion of
citizens or native inhabitants of the Philippine Islands (Adm. Code of 1916, sec. 1345;
Adm. Code of 1917, sec. 1172). And now Act No. 2761 has returned to the restrictive
idea of the original Customs Administrative Act which in turn was merely a reflection of
the statutory language of the first American Congress.
Provisions such as those in Act No. 2761, which deny to foreigners the right to a
certificate of Philippine registry, are thus found not to be as radical as a first reading
would make them appear.
Without any subterfuge, the apparent purpose of the Philippine Legislature is seen to be
to enact an anti-alien shipping act. The ultimate purpose of the Legislature is to
encourage Philippine ship-building. This, without doubt, has, likewise, been the intention
of the United States Congress in passing navigation or tariff laws on different occasions.
The object of such a law, the United States Supreme Court once said, was to encourage
American trade, navigation, and ship-building by giving American ship-owners exclusive
privileges. (Old Dominion Steamship Co. vs. Virginia [1905], 198 U.S., 299; Kent's
Commentaries, Vol. 3, p. 139.)
In the concurring opinion of Justice Johnson in Gibbons vs. Ogden ([1824], 9 Wheat., 1)
is found the following:
Licensing acts, in fact, in legislation, are universally restraining acts; as, for
example, acts licensing gaming houses, retailers of spirituous liquors, etc. The
act, in this instance, is distinctly of that character, and forms part of an extensive
system, the object of which is to encourage American shipping, and place them
on an equal footing with the shipping of other nations. Almost every commercial
nation reserves to its own subjects a monopoly of its coasting trade; and a
countervailing privilege in favor of American shipping is contemplated, in the
whole legislation of the United States on this subject. It is not to give the vessel
an American character, that the license is granted; that effect has been correctly
attributed to the act of her enrollment. But it is to confer on her American
privileges, as contradistinguished from foreign; and to preserve the. Government
from fraud by foreigners, in surreptitiously intruding themselves into the American
commercial marine, as well as frauds upon the revenue in the trade coastwise,
that this whole system is projected.
The United States Congress in assuming its grave responsibility of legislating wisely for a
new country did so imbued with a spirit of Americanism. Domestic navigation and trade, it
67

decreed, could only be carried on by citizens of the United States. If the representatives
of the American people acted in this patriotic manner to advance the national policy, and
if their action was accepted without protest in the courts, who can say that they did not
enact such beneficial laws under the all-pervading police power, with the prime motive of
safeguarding the country and of promoting its prosperity? Quite similarly, the Philippine
Legislature made up entirely of Filipinos, representing the mandate of the Filipino people
and the guardian of their rights, acting under practically autonomous powers, and imbued
with a strong sense of Philippinism, has desired for these Islands safety from foreign
interlopers, the use of the common property exclusively by its citizens and the citizens of
the United States, and protection for the common good of the people. Who can say,
therefore, especially can a court, that with all the facts and circumstances affecting the
Filipino people before it, the Philippine Legislature has erred in the enactment of Act No.
2761?
Surely, the members of the judiciary are not expected to live apart from active life, in
monastic seclusion amidst dusty tomes and ancient records, but, as keen spectators of
passing events and alive to the dictates of the general the national welfare, can
incline the scales of their decisions in favor of that solution which will most effectively
promote the public policy. All the presumption is in favor of the constitutionally of the law
and without good and strong reasons, courts should not attempt to nullify the action of
the Legislature. "In construing a statute enacted by the Philippine Commission
(Legislature), we deem it our duty not to give it a construction which would be repugnant
to an Act of Congress, if the language of the statute is fairly susceptible of another
construction not in conflict with the higher law." (In re Guaria [1913], 24. Phil., 36;
U.S. vs. Ten Yu [1912], 24 Phil., 1.) That is the true construction which will best carry
legislative intention into effect.
With full consciousness of the importance of the question, we nevertheless are clearly of
the opinion that the limitation of domestic ownership for purposes of obtaining a
certificate of Philippine registry in the coastwise trade to citizens of the Philippine Islands,
and to citizens of the United States, does not violate the provisions of paragraph 1 of
section 3 of the Act of Congress of August 29, 1916 No treaty right relied upon Act No.
2761 of the Philippine Legislature is held valid and constitutional .
The petition for a writ of mandamus is denied, with costs against the petitioner. So
ordered.
G.R. No. L-19550 June 19, 1967
HARRY S. STONEHILL, ROBERT P. BROOKS, JOHN J. BROOKS and KARL BECK
vs. HON. JOSE W. DIOKNO, in his capacity as SECRETARY OF JUSTICE; JOSE
CORPORATION LAW CASES SESSION 1
LUKBAN, in his capacity as Acting Director, National Bureau of Investigation;
SPECIAL PROSECUTORS PEDRO D. CENZON, EFREN I. PLANA and MANUEL
VILLAREAL, JR. and ASST. FISCAL MANASES G. REYES; JUDGE AMADO ROAN,
Municipal Court of Manila; JUDGE ROMAN CANSINO, Municipal Court of Manila;
JUDGE HERMOGENES CALUAG, Court of First Instance of Rizal-Quezon City
Branch, and JUDGE DAMIAN JIMENEZ, Municipal Court of Quezon City
Upon application of the officers of the government named on the margin 1 hereinafter
referred to as Respondents-Prosecutors several judges 2 hereinafter referred to as
Respondents-Judges issued, on different dates,3 a total of 42 search warrants against
petitioners herein4 and/or the corporations of which they were officers, 5 directed to the
any peace officer, to search the persons above-named and/or the premises of their
offices, warehouses and/or residences, and to seize and take possession of the following
personal property to wit:
Books of accounts, financial records, vouchers, correspondence, receipts,
ledgers, journals, portfolios, credit journals, typewriters, and other documents
and/or papers showing all business transactions including disbursements
receipts, balance sheets and profit and loss statements and Bobbins (cigarette
wrappers).
as "the subject of the offense; stolen or embezzled and proceeds or fruits of the offense,"
or "used or intended to be used as the means of committing the offense," which is
described in the applications adverted to above as "violation of Central Bank Laws, Tariff
and Customs Laws, Internal Revenue (Code) and the Revised Penal Code."
Alleging that the aforementioned search warrants are null and void, as contravening the
Constitution and the Rules of Court because, inter alia: (1) they do not describe with
particularity the documents, books and things to be seized; (2) cash money, not
mentioned in the warrants, were actually seized; (3) the warrants were issued to fish
evidence against the aforementioned petitioners in deportation cases filed against them;
(4) the searches and seizures were made in an illegal manner; and (5) the documents,
papers and cash money seized were not delivered to the courts that issued the warrants,
to be disposed of in accordance with law on March 20, 1962, said petitioners filed with
the Supreme Court this original action for certiorari, prohibition, mandamus and
injunction, and prayed that, pending final disposition of the present case, a writ of
preliminary injunction be issued restraining Respondents-Prosecutors, their agents
and /or representatives from using the effects seized as aforementioned or any copies
thereof, in the deportation cases already adverted to, and that, in due course, thereafter,
decision be rendered quashing the contested search warrants and declaring the same
null and void, and commanding the respondents, their agents or representatives to return
68

to petitioners herein, in accordance with Section 3, Rule 67, of the Rules of Court, the
documents, papers, things and cash moneys seized or confiscated under the search
warrants in question.
In their answer, respondents-prosecutors alleged, 6 (1) that the contested search
warrants are valid and have been issued in accordance with law; (2) that the defects of
said warrants, if any, were cured by petitioners' consent; and (3) that, in any event, the
effects seized are admissible in evidence against herein petitioners, regardless of the
alleged illegality of the aforementioned searches and seizures.
On March 22, 1962, this Court issued the writ of preliminary injunction prayed for in the
petition. However, by resolution dated June 29, 1962, the writ was partially lifted or
dissolved, insofar as the papers, documents and things seized from the offices of the
corporations above mentioned are concerned; but, the injunction was maintained as
regards the papers, documents and things found and seized in the residences of
petitioners herein.7
Thus, the documents, papers, and things seized under the alleged authority of the
warrants in question may be split into two (2) major groups, namely: (a) those found and
seized in the offices of the aforementioned corporations, and (b) those found and seized
in the residences of petitioners herein.
As regards the first group, we hold that petitioners herein have no cause of action to
assail the legality of the contested warrants and of the seizures made in pursuance
thereof, for the simple reason that said corporations have their respective personalities,
separate and distinct from the personality of herein petitioners, regardless of the amount
of shares of stock or of the interest of each of them in said corporations, and whatever
the offices they hold therein may be. 8 Indeed, it is well settled that the legality of a seizure
can be contested only by the party whose rights have been impaired thereby,9 and that
the objection to an unlawful search and seizure is purely personal and cannot be availed
of by third parties. 10 Consequently, petitioners herein may not validly object to the use in
evidence against them of the documents, papers and things seized from the offices and
premises of the corporations adverted to above, since the right to object to the admission
of said papers in evidence belongs exclusively to the corporations, to whom the seized
effects belong, and may not be invoked by the corporate officers in proceedings against
them in their individual capacity. 11 Indeed, it has been held:
. . . that the Government's action in gaining possession of papers belonging to
the corporation did not relate to nor did it affect the personal defendants. If these
papers were unlawfully seized and thereby the constitutional rights of or any one
CORPORATION LAW CASES SESSION 1
were invaded, they were the rights of the corporation and not the rights of
the other defendants. Next, it is clear that a question of the lawfulness of a
seizure can be raised only by one whose rights have been invaded. Certainly,
such a seizure, if unlawful, could not affect the constitutional rights of
defendants whose property had not been seized or the privacy of whose homes
had not been disturbed; nor could they claim for themselves the benefits of the
Fourth Amendment, when its violation, if any, was with reference to the rights
of another. Remus vs. United States (C.C.A.)291 F. 501, 511. It follows,
therefore, that the question of the admissibility of the evidence based on an
alleged unlawful search and seizure does not extend to the personal defendants
but embraces only the corporation whose property was taken. . . . (A
Guckenheimer & Bros. Co. vs. United States, [1925] 3 F. 2d. 786, 789, Emphasis
supplied.)
With respect to the documents, papers and things seized in the residences of petitioners
herein, the aforementioned resolution of June 29, 1962, lifted the writ of preliminary
injunction previously issued by this Court, 12 thereby, in effect, restraining herein
Respondents-Prosecutors from using them in evidence against petitioners herein.
In connection with said documents, papers and things, two (2) important questions need
be settled, namely: (1) whether the search warrants in question, and the searches and
seizures made under the authority thereof, are valid or not, and (2) if the answer to the
preceding question is in the negative, whether said documents, papers and things may
be used in evidence against petitioners herein. 1wph1.t
Petitioners maintain that the aforementioned search warrants are in the nature of general
warrants and that accordingly, the seizures effected upon the authority there of are null
and void. In this connection, the Constitution 13 provides:
The right of the people to be secure in their persons, houses, papers, and effects
against unreasonable searches and seizures shall not be violated, and no
warrants shall issue but upon probable cause, to be determined by the judge
after examination under oath or affirmation of the complainant and the witnesses
he may produce, and particularly describing the place to be searched, and the
persons or things to be seized.
Two points must be stressed in connection with this constitutional mandate, namely: (1)
that no warrant shall issue but upon probable cause, to be determined by the judge in the
manner set forth in said provision; and (2) that the warrant shall particularly describe the
things to be seized.
69

None of these requirements has been complied with in the contested warrants. Indeed,
the same were issued upon applications stating that the natural and juridical person
therein named had committed a "violation of Central Ban Laws, Tariff and Customs Laws,
Internal Revenue (Code) and Revised Penal Code." In other words, no specific offense
had been alleged in said applications. The averments thereof with respect to the offense
committed were abstract. As a consequence, it was impossible for the judges who issued
the warrants to have found the existence of probable cause, for the same presupposes
the introduction of competent proof that the party against whom it is sought has
performed particular acts, or committed specific omissions, violating a given provision of
our criminal laws. As a matter of fact, the applications involved in this case do not allege
any specific acts performed by herein petitioners. It would be the legal heresy, of the
highest order, to convict anybody of a "violation of Central Bank Laws, Tariff and
Customs Laws, Internal Revenue (Code) and Revised Penal Code," as alleged in the
aforementioned applications without reference to any determinate provision of said
laws or
To uphold the validity of the warrants in question would be to wipe out completely one of
the most fundamental rights guaranteed in our Constitution, for it would place the sanctity
of the domicile and the privacy of communication and correspondence at the mercy of
the whims caprice or passion of peace officers. This is precisely the evil sought to be
remedied by the constitutional provision above quoted to outlaw the so-called general
warrants. It is not difficult to imagine what would happen, in times of keen political strife,
when the party in power feels that the minority is likely to wrest it, even though by legal
means.
Such is the seriousness of the irregularities committed in connection with the disputed
search warrants, that this Court deemed it fit to amend Section 3 of Rule 122 of the
former Rules of Court 14 by providing in its counterpart, under the Revised Rules of
Court 15 that "a search warrant shall not issue but upon probable cause in connection
with one specific offense." Not satisfied with this qualification, the Court added thereto a
paragraph, directing that "no search warrant shall issue for more than one specific
offense."
The grave violation of the Constitution made in the application for the contested search
warrants was compounded by the description therein made of the effects to be searched
for and seized, to wit:
CORPORATION LAW CASES SESSION 1
Books of accounts, financial records, vouchers, journals, correspondence,
receipts, ledgers, portfolios, credit journals, typewriters, and other documents
and/or papers showing all business transactions including disbursement receipts,
balance sheets and related profit and loss statements.
Thus, the warrants authorized the search for and seizure of records pertaining to all
business transactions of petitioners herein, regardless of whether the transactions
were legal or illegal. The warrants sanctioned the seizure of all records of the petitioners
and the aforementioned corporations, whatever their nature, thus openly contravening
the explicit command of our Bill of Rights that the things to be seized
be particularly described as well as tending to defeat its major objective: the
elimination of general warrants.
Relying upon Moncado vs. People's Court (80 Phil. 1), Respondents-Prosecutors
maintain that, even if the searches and seizures under consideration were
unconstitutional, the documents, papers and things thus seized are admissible in
evidence against petitioners herein. Upon mature deliberation, however, we are
unanimously of the opinion that the position taken in the Moncado case must be
abandoned. Said position was in line with the American common law rule, that the
criminal should not be allowed to go free merely "because the constable has
blundered," 16 upon the theory that the constitutional prohibition against unreasonable
searches and seizures is protected by means other than the exclusion of evidence
unlawfully obtained, 17 such as the common-law action for damages against the
searching officer, against the party who procured the issuance of the search warrant and
against those assisting in the execution of an illegal search, their criminal punishment,
resistance, without liability to an unlawful seizure, and such other legal remedies as may
be provided by other laws.
However, most common law jurisdictions have already given up this approach and
eventually adopted the exclusionary rule, realizing that this is the only practical means of
enforcing the constitutional injunction against unreasonable searches and seizures. In
the language of Judge Learned Hand:
As we understand it, the reason for the exclusion of evidence competent as such,
which has been unlawfully acquired, is that exclusion is the only practical way of
enforcing the constitutional privilege. In earlier times the action of trespass
against the offending official may have been protection enough; but that is true
no longer. Only in case the prosecution which itself controls the seizing officials,
knows that it cannot profit by their wrong will that wrong be repressed.18
70

In fact, over thirty (30) years before, the Federal Supreme Court had already declared:
If letters and private documents can thus be seized and held and used in
evidence against a citizen accused of an offense, the protection of the 4th
Amendment, declaring his rights to be secure against such searches and
seizures, is of no value, and, so far as those thus placed are concerned, might as
well be stricken from the Constitution. The efforts of the courts and their officials
to bring the guilty to punishment, praiseworthy as they are, are not to be aided by
the sacrifice of those great principles established by years of endeavor and
suffering which have resulted in their embodiment in the fundamental law of the
land.19
This view was, not only reiterated, but, also, broadened in subsequent decisions on the
same Federal Court. 20After reviewing previous decisions thereon, said Court held,
in Mapp vs. Ohio (supra.):
. . . Today we once again examine the Wolf's constitutional documentation of the
right of privacy free from unreasonable state intrusion, and after its dozen years
on our books, are led by it to close the only courtroom door remaining open to
evidence secured by official lawlessness in flagrant abuse of that basic right,
reserved to all persons as a specific guarantee against that very same unlawful
conduct. We hold that all evidence obtained by searches and seizures in violation
of the Constitution is, by that same authority, inadmissible in a State.
Since the Fourth Amendment's right of privacy has been declared enforceable
against the States through the Due Process Clause of the Fourteenth, it is
enforceable against them by the same sanction of exclusion as it used against
the Federal Government. Were it otherwise, then just as without the Weeks rule
the assurance against unreasonable federal searches and seizures would be "a
form of words," valueless and underserving of mention in a perpetual charter of
inestimable human liberties, so too, without that rule the freedom from state
invasions of privacy would be so ephemeral and so neatly severed from its
conceptual nexus with the freedom from all brutish means of coercing evidence
as not to permit this Court's high regard as a freedom "implicit in the concept of
ordered liberty." At the time that the Court held in Wolf that the amendment was
applicable to the States through the Due Process Clause, the cases of this Court
as we have seen, had steadfastly held that as to federal officers the Fourth
Amendment included the exclusion of the evidence seized in violation of its
provisions. Even Wolf "stoutly adhered" to that proposition. The right to when
conceded operatively enforceable against the States, was not susceptible of
CORPORATION LAW CASES SESSION 1
destruction by avulsion of the sanction upon which its protection and enjoyment
had always been deemed dependent under the Boyd, Weeks and Silverthorne
Cases. Therefore, in extending the substantive protections of due process to all
constitutionally unreasonable searches state or federal it was logically and
constitutionally necessarily that the exclusion doctrine an essential part of the
right to privacy be also insisted upon as an essential ingredient of the right
newly recognized by the Wolf Case. In short, the admission of the new
constitutional Right by Wolf could not tolerate denial of its most important
constitutional privilege, namely, the exclusion of the evidence which an accused
had been forced to give by reason of the unlawful seizure. To hold otherwise is to
grant the right but in reality to withhold its privilege and enjoyment. Only last year
the Court itself recognized that the purpose of the exclusionary rule to "is to deter
to compel respect for the constitutional guaranty in the only effectively
available way by removing the incentive to disregard it" . . . .
The ignoble shortcut to conviction left open to the State tends to destroy the
entire system of constitutional restraints on which the liberties of the people rest.
Having once recognized that the right to privacy embodied in the Fourth
Amendment is enforceable against the States, and that the right to be secure
against rude invasions of privacy by state officers is, therefore constitutional in
origin, we can no longer permit that right to remain an empty promise. Because it
is enforceable in the same manner and to like effect as other basic rights secured
by its Due Process Clause, we can no longer permit it to be revocable at the
whim of any police officer who, in the name of law enforcement itself, chooses to
suspend its enjoyment. Our decision, founded on reason and truth, gives to the
individual no more than that which the Constitution guarantees him to the police
officer no less than that to which honest law enforcement is entitled, and, to the
courts, that judicial integrity so necessary in the true administration of justice.
(emphasis ours.)
Indeed, the non-exclusionary rule is contrary, not only to the letter, but also, to the spirit
of the constitutional injunction against unreasonable searches and seizures. To be sure,
if the applicant for a search warrant has competent evidence to establish probable cause
of the commission of a given crime by the party against whom the warrant is intended,
then there is no reason why the applicant should not comply with the requirements of the
fundamental law. Upon the other hand, if he has no such competent evidence, then it
is not possible for the Judge to find that there is probable cause, and, hence, no
justification for the issuance of the warrant. The only possible explanation (not
justification) for its issuance is the necessity of fishing evidence of the commission of a
71

crime. But, then, this fishing expedition is indicative of the absence of evidence to
establish a probable cause.
Moreover, the theory that the criminal prosecution of those who secure an illegal search
warrant and/or make unreasonable searches or seizures would suffice to protect the
constitutional guarantee under consideration, overlooks the fact that violations thereof
are, in general, committed By agents of the party in power, for, certainly, those belonging
to the minority could not possibly abuse a power they do not have. Regardless of the
handicap under which the minority usually but, understandably finds itself in
prosecuting agents of the majority, one must not lose sight of the fact that the
psychological and moral effect of the possibility 21 of securing their conviction, is watered
down by the pardoning power of the party for whose benefit the illegality had been
committed.
In their Motion for Reconsideration and Amendment of the Resolution of this Court dated
June 29, 1962, petitioners allege that Rooms Nos. 81 and 91 of Carmen Apartments,
House No. 2008, Dewey Boulevard, House No. 1436, Colorado Street, and Room No.
304 of the Army-Navy Club, should be included among the premises considered in said
Resolution as residences of herein petitioners, Harry S. Stonehill, Robert P. Brook, John
J. Brooks and Karl Beck, respectively, and that, furthermore, the records, papers and
other effects seized in the offices of the corporations above referred to include personal
belongings of said petitioners and other effects under their exclusive possession and
control, for the exclusion of which they have a standing under the latest rulings of the
federal courts of federal courts of the United States. 22
We note, however, that petitioners' theory, regarding their alleged possession of and
control over the aforementioned records, papers and effects, and the alleged "personal"
nature thereof, has Been Advanced, notin their petition or amended petition herein, but in
the Motion for Reconsideration and Amendment of the Resolution of June 29, 1962. In
other words, said theory would appear to be readjustment of that followed in said
petitions, to suit the approach intimated in the Resolution sought to be reconsidered and
amended. Then, too, some of the affidavits or copies of alleged affidavits attached to said
motion for reconsideration, or submitted in support thereof, contain either inconsistent
allegations, or allegations inconsistent with the theory now advanced by petitioners
herein.
Upon the other hand, we are not satisfied that the allegations of said petitions said
motion for reconsideration, and the contents of the aforementioned affidavits and other
papers submitted in support of said motion, have sufficiently established the facts or
conditions contemplated in the cases relied upon by the petitioners; to warrant
CORPORATION LAW CASES SESSION 1
application of the views therein expressed, should we agree thereto. At any rate, we do
not deem it necessary to express our opinion thereon, it being best to leave the matter
open for determination in appropriate cases in the future.
We hold, therefore, that the doctrine adopted in the Moncado case must be, as it is
hereby, abandoned; that the warrants for the search of three (3) residences of herein
petitioners, as specified in the Resolution of June 29, 1962, are null and void; that the
searches and seizures therein made are illegal; that the writ of preliminary injunction
heretofore issued, in connection with the documents, papers and other effects thus
seized in said residences of herein petitioners is hereby made permanent; that the writs
prayed for are granted, insofar as the documents, papers and other effects so seized in
the aforementioned residences are concerned; that the aforementioned motion for
Reconsideration and Amendment should be, as it is hereby, denied; and that the petition
herein is dismissed and the writs prayed for denied, as regards the documents, papers
and other effects seized in the twenty-nine (29) places, offices and other premises
enumerated in the same Resolution, without special pronouncement as to costs.
It is so ordered.
G.R. No. 75885 May 27, 1987
BASECO vs. PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN
JOVITO SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA,
COMMISSIONER RAMON DIAZ, COMMISSIONER RAUL R. DAZA, COMMISSIONER
QUINTIN S. DOROMAL, CAPT. JORGE B. SIACUNCO, et al.
Challenged in this special civil action of certiorari and prohibition by a private corporation
known as the Bataan Shipyard and Engineering Co., Inc. are: (1) Executive Orders
Numbered 1 and 2, promulgated by President Corazon C. Aquino on February 28, 1986
and March 12, 1986, respectively, and (2) the sequestration, takeover, and other orders
issued, and acts done, in accordance with said executive orders by the Presidential
Commission on Good Government and/or its Commissioners and agents, affecting said
corporation.
1. The Sequestration, Takeover, and Other Orders Complained of
a. The Basic Sequestration Order
The sequestration order which, in the view of the petitioner corporation, initiated all its
misery was issued on April 14, 1986 by Commissioner Mary Concepcion Bautista. It was
addressed to three of the agents of the Commission, hereafter simply referred to as
PCGG. It reads as follows:
72

RE: SEQUESTRATION ORDER
By virtue of the powers vested in the Presidential Commission on Good
Government, by authority of the President of the Philippines, you are
hereby directed to sequester the following companies.
1. Bataan Shipyard and Engineering Co., Inc.
(Engineering Island Shipyard and Mariveles Shipyard)
2. Baseco Quarry
3. Philippine Jai-Alai Corporation
4. Fidelity Management Co., Inc.
5. Romson Realty, Inc.
6. Trident Management Co.
7. New Trident Management
8. Bay Transport
9. And all affiliate companies of Alfredo "Bejo" Romualdez
You are hereby ordered:
1. To implement this sequestration order with a minimum disruption of
these companies' business activities.
2. To ensure the continuity of these companies as going concerns, the
care and maintenance of these assets until such time that the Office of
the President through the Commission on Good Government should
decide otherwise.
3. To report to the Commission on Good Government periodically.
Further, you are authorized to request for Military/Security Support from
the Military/Police authorities, and such other acts essential to the
achievement of this sequestration order. 1
CORPORATION LAW CASES SESSION 1
b. Order for Production of Documents
On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the
PCGG, addressed a letter dated April 18, 1986 to the President and other officers of
petitioner firm, reiterating an earlier request for the production of certain documents, to
wit:
1. Stock Transfer Book
2. Legal documents, such as:
2.1. Articles of Incorporation
2.2. By-Laws
2.3. Minutes of the Annual Stockholders Meeting from
1973 to 1986
2.4. Minutes of the Regular and Special Meetings of the
Board of Directors from 1973 to 1986
2.5. Minutes of the Executive Committee Meetings from
1973 to 1986
2.6. Existing contracts with suppliers/contractors/others.
3. Yearly list of stockholders with their corresponding share/stockholdings
from 1973 to 1986 duly certified by the Corporate Secretary.
4. Audited Financial Statements such as Balance Sheet, Profit & Loss
and others from 1973 to December 31, 1985.
5. Monthly Financial Statements for the current year up to March 31,
1986.
6. Consolidated Cash Position Reports from January to April 15, 1986.
7. Inventory listings of assets up dated up to March 31, 1986.
8. Updated schedule of Accounts Receivable and Accounts Payable.
73

9. Complete list of depository banks for all funds with the authorized
signatories for withdrawals thereof.
10. Schedule of company investments and placements. 2
The letter closed with the warning that if the documents were not submitted within five
days, the officers would be cited for "contempt in pursuance with Presidential Executive
Order Nos. 1 and 2."
c. Orders Re Engineer Island
(1) Termination of Contract for Security Services
A third order assailed by petitioner corporation, hereafter referred to simply as BASECO,
is that issued on April 21, 1986 by a Capt. Flordelino B. Zabala, a member of the task
force assigned to carry out the basic sequestration order. He sent a letter to BASECO's
Vice-President for Finance, 3 terminating the contract for security services within the
Engineer Island compound between BASECO and "Anchor and FAIRWAYS" and "other
civilian security agencies," CAPCOM military personnel having already been assigned to the
area,
(2) Change of Mode of Payment of Entry Charges
On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to "Truck
Owners and Contractors," particularly a "Mr. Buddy Ondivilla National Marine
Corporation," advising of the amendment in part of their contracts with BASECO in the
sense that the stipulated charges for use of the BASECO road network were made
payable "upon entry and not anymore subject to monthly billing as was originally agreed
upon." 4
d. Aborted Contract for Improvement of Wharf at Engineer Island
On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in behalf of
BASECO with Deltamarine Integrated Port Services, Inc., in virtue of which the latter
undertook to introduce improvements costing approximately P210,000.00 on the
BASECO wharf at Engineer Island, allegedly then in poor condition, avowedly to
"optimize its utilization and in return maximize the revenue which would flow into the
government coffers," in consideration of Deltamarine's being granted "priority in using the
improved portion of the wharf ahead of anybody" and exemption "from the payment of
any charges for the use of wharf including the area where it may install its bagging
equipments" "until the improvement remains in a condition suitable for port
operations." 5 It seems however that this contract was never consummated. Capt. Jorge B.
CORPORATION LAW CASES SESSION 1
Siacunco, "Head- (PCGG) BASECO Management Team," advised Deltamarine by letter
dated July 30, 1986 that "the new management is not in a position to honor the said contract"
and thus "whatever improvements * * (may be introduced) shall be deemed unauthorized * *
and shall be at * * (Deltamarine's) own risk." 6
e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan
By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG
agent, Mayor Melba O. Buenaventura, "to plan and implement progress towards
maximizing the continuous operation of the BASECO Sesiman Rock Quarry * * by
conventional methods;" but afterwards, Commissioner Bautista, in representation of the
PCGG, authorized another party, A.T. Abesamis, to operate the quarry, located at
Mariveles, Bataan, an agreement to this effect having been executed by them on
September 17, 1986. 7
f. Order to Dispose of Scrap, etc.
By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor
Buenaventura was also "authorized to clean and beautify the Company's compound,"
and in this connection, to dispose of or sell "metal scraps" and other materials,
equipment and machineries no longer usable, subject to specified guidelines and
safeguards including audit and verification. 8
g. The TAKEOVER Order
By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the provisional
takeover by the PCGG of BASECO, "the Philippine Dockyard Corporation and all their
affiliated companies." 9 Diaz invoked the provisions of Section 3 (c) of Executive Order No.
1, empowering the Commission
* * To provisionally takeover in the public interest or to prevent its disposal
or dissipation, business enterprises and properties taken over by the
government of the Marcos Administration or by entities or persons close
to former President Marcos, until the transactions leading to such
acquisition by the latter can be disposed of by the appropriate authorities.
A management team was designated to implement the order, headed by Capt. Siacunco,
and was given the following powers:
1. Conducts all aspects of operation of the subject companies;
2. Installs key officers, hires and terminates personnel as necessary;
74

3. Enters into contracts related to management and operation of the
companies;
4. Ensures that the assets of the companies are not dissipated and used
effectively and efficiently; revenues are duly accounted for; and disburses
funds only as may be necessary;
5. Does actions including among others, seeking of military support as
may be necessary, that will ensure compliance to this order;
6. Holds itself fully accountable to the Presidential Commission on Good
Government on all aspects related to this take-over order.
h. Termination of Services of BASECO Officers
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza, Moises
M. Valdez, Gilberto Pasimanero, and Benito R. Cuesta I, advising of the termination of
their services by the PCGG. 10
2. Petitioner's Plea and Postulates
It is the foregoing specific orders and acts of the PCGG and its members and agents
which, to repeat, petitioner BASECO would have this Court nullify. More particularly,
BASECO prays that this Court-
1) declare unconstitutional and void Executive Orders Numbered 1 and 2;
2) annul the sequestration order dated April- 14, 1986, and all other orders subsequently
issued and acts done on the basis thereof, inclusive of the takeover order of July 14,
1986 and the termination of the services of the BASECO executives. 11
a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover
Orders
While BASECO concedes that "sequestration without resorting to judicial action, might
be made within the context of Executive Orders Nos. 1 and 2 before March 25,
1986 when the Freedom Constitution was promulgated, under the principle that the law
promulgated by the ruler under a revolutionary regime is the law of the land, it ceased to
be acceptable when the same ruler opted to promulgate the Freedom Constitution on
March 25, 1986 wherein under Section I of the same, Article IV (Bill of Rights) of the
1973 Constitution was adopted providing, among others, that "No person shall be
CORPORATION LAW CASES SESSION 1
deprived of life, liberty and property without due process of law." (Const., Art. I V, Sec.
1)." 12
It declares that its objection to the constitutionality of the Executive Orders "as well as
the Sequestration Order * * and Takeover Order * * issued purportedly under the
authority of said Executive Orders, rests on four fundamental considerations: First, no
notice and hearing was accorded * * (it) before its properties and business were taken
over; Second, the PCGG is not a court, but a purely investigative agency and therefore
not competent to act as prosecutor and judge in the same cause; Third, there is nothing
in the issuances which envisions any proceeding, process or remedy by which petitioner
may expeditiously challenge the validity of the takeover after the same has been
effected; and Fourthly, being directed against specified persons, and in disregard of the
constitutional presumption of innocence and general rules and procedures, they
constitute a Bill of Attainder." 13
b. Re Order to Produce Documents
It argues that the order to produce corporate records from 1973 to 1986, which it has
apparently already complied with, was issued without court authority and infringed its
constitutional right against self-incrimination, and unreasonable search and seizure. 14
c. Re PCGG's Exercise of Right of Ownership and Management
BASECO further contends that the PCGG had unduly interfered with its right of dominion
and management of its business affairs by
1) terminating its contract for security services with Fairways & Anchor, without the
consent and against the will of the contracting parties; and amending the mode of
payment of entry fees stipulated in its Lease Contract with National Stevedoring &
Lighterage Corporation, these acts being in violation of the non-impairment clause of the
constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract" with
Deltamarine Integrated Port Services, Inc., giving the latter free use of BASECO
premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate its rock
quarry at Sesiman, Mariveles; 17
4) authorizing the same mayor to sell or dispose of its metal scrap, equipment,
machinery and other materials; 18
75

5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all their
affiliated companies;
6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP
Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero; Legal
Dept. Mgr. Benito R. Cuesta I; 19
7) planning to elect its own Board of Directors; 20
8) allowing willingly or unwillingly its personnel to take, steal, carry away from petitioner's
premises at Mariveles * * rolls of cable wires, worth P600,000.00 on May 11, 1986; 21
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars supposed to
have been buried therein. 22
3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders
Many misconceptions and much doubt about the matter of sequestration, takeover and
freeze orders have been engendered by misapprehension, or incomplete comprehension
if not indeed downright ignorance of the law governing these remedies. It is needful that
these misconceptions and doubts be dispelled so that uninformed and useless debates
about them may be avoided, and arguments tainted b sophistry or intellectual dishonesty
be quickly exposed and discarded. Towards this end, this opinion will essay an
exposition of the law on the matter. In the process many of the objections raised by
BASECO will be dealt with.
4. The Governing Law
a. Proclamation No. 3
The impugned executive orders are avowedly meant to carry out the explicit command of
the Provisional Constitution, ordained by Proclamation No. 3, 23 that the President-in the
exercise of legislative power which she was authorized to continue to wield "(until a
legislature is elected and convened under a new Constitution" "shall give priority to
measures to achieve the mandate of the people," among others to (r)ecover ill-gotten
properties amassed by the leaders and supporters of the previous regime and protect the
interest of the people through orders of sequestration or freezing of assets or accounts." 24
b. Executive Order No. 1
Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth," and
postulates that "vast resources of the government have been amassed by former
CORPORATION LAW CASES SESSION 1
President Ferdinand E. Marcos, his immediate family, relatives, and close associates
both here and abroad." 25 Upon these premises, the Presidential Commission on Good
Government was created, 26 "charged with the task of assisting the President in regard to
(certain specified) matters," among which was precisely-
* * The recovery of all in-gotten wealth accumulated by former President
Ferdinand E. Marcos, his immediate family, relatives, subordinates and
close associates, whether located in the Philippines or abroad, including
the takeover or sequestration of all business enterprises and entities
owned or controlled by them, during his administration, directly or through
nominees, by taking undue advantage of their public office and/or using
their powers, authority, influence, connections or relationship. 27
In relation to the takeover or sequestration that it was authorized to undertake in the
fulfillment of its mission, the PCGG was granted "power and authority" to do the following
particular acts, to wit:
1. To sequester or place or cause to be placed under its control or
possession any building or office wherein any ill-gotten wealth or
properties may be found, and any records pertaining thereto, in order to
prevent their destruction, concealment or disappearance which would
frustrate or hamper the investigation or otherwise prevent the
Commission from accomplishing its task.
2. To provisionally take over in the public interest or to prevent the
disposal or dissipation, business enterprises and properties taken over by
the government of the Marcos Administration or by entities or persons
close to former President Marcos, until the transactions leading to such
acquisition by the latter can be disposed of by the appropriate authorities.
3. To enjoin or restrain any actual or threatened commission of acts by
any person or entity that may render moot and academic, or frustrate or
otherwise make ineffectual the efforts of the Commission to carry out its
task under this order. 28
So that it might ascertain the facts germane to its objectives, it was granted power to
conduct investigations; require submission of evidence by subpoenae ad
testificandum and duces tecum; administer oaths; punish for contempt. 29 It was given
power also to promulgate such rules and regulations as may be necessary to carry out the
purposes of * * (its creation). 30
c. Executive Order No. 2
76

Executive Order No. 2 gives additional and more specific data and directions respecting
"the recovery of ill-gotten properties amassed by the leaders and supporters of the
previous regime." It declares that:
1) * * the Government of the Philippines is in possession of evidence
showing that there are assets and properties purportedly pertaining to
former Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates,
dummies, agents or nominees which had been or were acquired by them
directly or indirectly, through or as a result of the improper or illegal use of
funds or properties owned by the government of the Philippines or any of
its branches, instrumentalities, enterprises, banks or financial institutions,
or by taking undue advantage of their office, authority, influence,
connections or relationship, resulting in their unjust enrichment and
causing grave damage and prejudice to the Filipino people and the
Republic of the Philippines:" and
2) * * said assets and properties are in the form of bank accounts,
deposits, trust accounts, shares of stocks, buildings, shopping centers,
condominiums, mansions, residences, estates, and other kinds of real
and personal properties in the Philippines and in various countries of the
world." 31
Upon these premises, the President-
1) froze "all assets and properties in the Philippines in which former
President Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their
close relatives, subordinates, business associates, dummies, agents, or
nominees have any interest or participation;
2) prohibited former President Ferdinand Marcos and/or his wife * *, their
close relatives, subordinates, business associates, duties, agents, or
nominees from transferring, conveying, encumbering, concealing or
dissipating said assets or properties in the Philippines and abroad,
pending the outcome of appropriate proceedings in the Philippines to
determine whether any such assets or properties were acquired by them
through or as a result of improper or illegal use of or the conversion of
funds belonging to the Government of the Philippines or any of its
branches, instrumentalities, enterprises, banks or financial institutions, or
by taking undue advantage of their official position, authority, relationship,
connection or influence to unjustly enrich themselves at the expense and
to the grave damage and prejudice of the Filipino people and the
Republic of the Philippines;
CORPORATION LAW CASES SESSION 1
3) prohibited "any person from transferring, conveying, encumbering or
otherwise depleting or concealing such assets and properties or from
assisting or taking part in their transfer, encumbrance, concealment or
dissipation under pain of such penalties as are prescribed by law;" and
4) required "all persons in the Philippines holding such assets or
properties, whether located in the Philippines or abroad, in their names
as nominees, agents or trustees, to make full disclosure of the same to
the Commission on Good Government within thirty (30) days from
publication of * (the) Executive Order, * *. 32
d. Executive Order No. 14
A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG is
empowered, "with the assistance of the Office of the Solicitor General and other government
agencies, * * to file and prosecute all cases investigated by it * * as may be warranted by its
findings." 34 All such cases, whether civil or criminal, are to be filed "with
the Sandiganbayanwhich shall have exclusive and original jurisdiction thereof." 35 Executive
Order No. 14 also pertinently provides that civil suits for restitution, reparation of damages, or
indemnification for consequential damages, forfeiture proceedings provided for under
Republic Act No. 1379, or any other civil actions under the Civil Code or other existing laws,
in connection with * * (said Executive Orders Numbered 1 and 2) may be filed separately from
and proceed independently of any criminal proceedings and may be proved by a
preponderance of evidence;" and that, moreover, the "technical rules of procedure and
evidence shall not be strictly applied to* * (said)civil cases." 36
5. Contemplated Situations
The situations envisaged and sought to be governed are self-evident, these being:
1) that "(i)ll-gotten properties (were) amassed by the leaders and
supporters of the previous regime"; 37
a) more particularly, that ill-gotten wealth (was) accumulated by former
President Ferdinand E. Marcos, his immediate family, relatives, subordinates
and close associates, * * located in the Philippines or abroad, * * (and)
business enterprises and entities (came to be) owned or controlled by them,
during * * (the Marcos) administration, directly or through nominees, by
taking undue advantage of their public office and/or using their powers,
authority, influence, Connections or relationship; 38
b) otherwise stated, that "there are assets and properties purportedly
pertaining to former President Ferdinand E. Marcos, and/or his wife Mrs.
77

Imelda Romualdez Marcos, their close relatives, subordinates, business
associates, dummies, agents or nominees which had been or were
acquired by them directly or indirectly, through or as a result of the
improper or illegal use of funds or properties owned by the Government
of the Philippines or any of its branches, instrumentalities, enterprises,
banks or financial institutions, or by taking undue advantage of their
office, authority, influence, connections or relationship, resulting in their
unjust enrichment and causing grave damage and prejudice to the
Filipino people and the Republic of the Philippines"; 39
c) that "said assets and properties are in the form of bank accounts.
deposits, trust. accounts, shares of stocks, buildings, shopping centers,
condominiums, mansions, residences, estates, and other kinds of real
and personal properties in the Philippines and in various countries of the
world;" 40 and
2) that certain "business enterprises and properties (were) taken over by
the government of the Marcos Administration or by entities or persons
close to former President Marcos. 41
6. Government's Right and Duty to Recover All Ill-gotten Wealth
There can be no debate about the validity and eminent propriety of the Government's
plan "to recover all ill-gotten wealth."
Neither can there be any debate about the proposition that assuming the above
described factual premises of the Executive Orders and Proclamation No. 3 to be true, to
be demonstrable by competent evidence, the recovery from Marcos, his family and his
dominions of the assets and properties involved, is not only a right but a duty on the part
of Government.
But however plain and valid that right and duty may be, still a balance must be sought
with the equally compelling necessity that a proper respect be accorded and adequate
protection assured, the fundamental rights of private property and free enterprise which
are deemed pillars of a free society such as ours, and to which all members of that
society may without exception lay claim.
* * Democracy, as a way of life enshrined in the Constitution, embraces
as its necessary components freedom of conscience, freedom of
expression, and freedom in the pursuit of happiness. Along with these
freedoms are included economic freedom and freedom of
enterprise within reasonable bounds and under proper control. * *
CORPORATION LAW CASES SESSION 1
Evincing much concern for the protection of property, the Constitution
distinctly recognizes the preferred position which real estate has
occupied in law for ages. Property is bound up with every aspect of social
life in a democracy as democracy is conceived in the Constitution. The
Constitution realizes the indispensable role which property, owned in
reasonable quantities and used legitimately, plays in the stimulation to
economic effort and the formation and growth of a solid social middle
class that is said to be the bulwark of democracy and the backbone of
every progressive and happy country. 42
a. Need of Evidentiary Substantiation in Proper Suit
Consequently, the factual premises of the Executive Orders cannot simply be assumed.
They will have to be duly established by adequate proof in each case, in a proper judicial
proceeding, so that the recovery of the ill-gotten wealth may be validly and properly
adjudged and consummated; although there are some who maintain that the fact-that an
immense fortune, and "vast resources of the government have been amassed by former
President Ferdinand E. Marcos, his immediate family, relatives, and close associates
both here and abroad," and they have resorted to all sorts of clever schemes and
manipulations to disguise and hide their illicit acquisitions-is within the realm of judicial
notice, being of so extensive notoriety as to dispense with proof thereof, Be this as it
may, the requirement of evidentiary substantiation has been expressly acknowledged,
and the procedure to be followed explicitly laid down, in Executive Order No. 14.
b. Need of Provisional Measures to Collect and Conserve Assets
Pending Suits
Nor may it be gainsaid that pending the institution of the suits for the recovery of such "ill-
gotten wealth" as the evidence at hand may reveal, there is an obvious and imperative
need for preliminary, provisional measures to prevent the concealment, disappearance,
destruction, dissipation, or loss of the assets and properties subject of the suits, or to
restrain or foil acts that may render moot and academic, or effectively hamper, delay, or
negate efforts to recover the same.
7. Provisional Remedies Prescribed by Law
To answer this need, the law has prescribed three (3) provisional remedies. These are:
(1) sequestration; (2) freeze orders; and (3) provisional takeover.
Sequestration and freezing are remedies applicable generally to unearthed instances of
"ill-gotten wealth." The remedy of "provisional takeover" is peculiar to cases where
78

"business enterprises and properties (were) taken over by the government of the Marcos
Administration or by entities or persons close to former President Marcos." 43
a. Sequestration
By the clear terms of the law, the power of the PCGG to sequester property claimed to
be "ill-gotten" means to place or cause to be placed under its possession or control said
property, or any building or office wherein any such property and any records pertaining
thereto may be found, including "business enterprises and entities,"-for the purpose of
preventing the destruction, concealment or dissipation of, and otherwise conserving and
preserving, the same-until it can be determined, through appropriate judicial
proceedings, whether the property was in truth will- gotten," i.e., acquired through or as a
result of improper or illegal use of or the conversion of funds belonging to the
Government or any of its branches, instrumentalities, enterprises, banks or financial
institutions, or by taking undue advantage of official position, authority relationship,
connection or influence, resulting in unjust enrichment of the ostensible owner and grave
damage and prejudice to the State. 44 And this, too, is the sense in which the term is
commonly understood in other jurisdictions. 45
b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of property alleged to
constitute "ill-gotten wealth" "from transferring, conveying, encumbering or otherwise
depleting or concealing such property, or from assisting or taking part in its transfer,
encumbrance, concealment, or dissipation." 46 In other words, it commands the possessor
to hold the property and conserve it subject to the orders and disposition of the authority
decreeing such freezing. In this sense, it is akin to a garnishment by which the possessor or
ostensible owner of property is enjoined not to deliver, transfer, or otherwise dispose of any
effects or credits in his possession or control, and thus becomes in a sense an involuntary
depositary thereof. 47
c. Provisional Takeover
In providing for the remedy of "provisional takeover," the law acknowledges the apparent
distinction between "ill gotten" "business enterprises and entities" (going concerns,
businesses in actual operation), generally, as to which the remedy of sequestration
applies, it being necessarily inferred that the remedy entails no interference, or the least
possible interference with the actual management and operations thereof; and "business
enterprises which were taken over by the government government of the Marcos
Administration or by entities or persons close to him," in particular, as to which a
"provisional takeover" is authorized, "in the public interest or to prevent disposal or
dissipation of the enterprises." 48 Such a "provisional takeover" imports something more
than sequestration or freezing, more than the placing of the business under physical
CORPORATION LAW CASES SESSION 1
possession and control, albeit without or with the least possible interference with the
management and carrying on of the business itself. In a "provisional takeover," what is taken
into custody is not only the physical assets of the business enterprise or entity, but the
business operation as well. It is in fine the assumption of control not only over things, but over
operations or on- going activities. But, to repeat, such a "provisional takeover" is allowed only
as regards "business enterprises * * taken over by the government of the Marcos
Administration or by entities or persons close to former President Marcos."
d. No Divestment of Title Over Property Seized
It may perhaps be well at this point to stress once again the provisional, contingent
character of the remedies just described. Indeed the law plainly qualifies the remedy of
take-over by the adjective, "provisional." These remedies may be resorted to only for a
particular exigency: to prevent in the public interest the disappearance or dissipation of
property or business, and conserve it pending adjudgment in appropriate proceedings of
the primary issue of whether or not the acquisition of title or other right thereto by the
apparent owner was attended by some vitiating anomaly. None of the remedies is meant
to deprive the owner or possessor of his title or any right to the property sequestered,
frozen or taken over and vest it in the sequestering agency, the Government or other
person. This can be done only for the causes and by the processes laid down by law.
That this is the sense in which the power to sequester, freeze or provisionally take over is
to be understood and exercised, the language of the executive orders in question leaves
no doubt. Executive Order No. 1 declares that the sequestration of property the
acquisition of which is suspect shall last "until the transactions leading to such
acquisition * * can be disposed of by the appropriate authorities." 49 Executive Order No. 2
declares that the assets or properties therein mentioned shall remain frozen "pending the
outcome of appropriate proceedings in the Philippines to determine whether any such assets
or properties were acquired" by illegal means. Executive Order No. 14 makes clear that
judicial proceedings are essential for the resolution of the basic issue of whether or not
particular assets are "ill-gotten," and resultant recovery thereof by the Government is
warranted.
e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional
Command
There is thus no cause for the apprehension voiced by BASECO 50 that sequestration,
freezing or provisional takeover is designed to be an end in itself, that it is the device through
which persons may be deprived of their property branded as "ill-gotten," that it is intended to
bring about a permanent, rather than a passing, transitional state of affairs. That this is not so
is quite explicitly declared by the governing rules.
79

Be this as it may, the 1987 Constitution should allay any lingering fears about the
duration of these provisional remedies. Section 26 of its Transitory Provisions, 51 lays
down the relevant rule in plain terms, apart from extending ratification or confirmation
(although not really necessary) to the institution by presidential fiat of the remedy of
sequestration and freeze orders:
SEC. 26. The authority to issue sequestration or freeze orders under
Proclamation No. 3 dated March 25, 1986 in relation to the recovery of ill-
gotten wealth shag remain operative for not more than eighteen
months after the ratification of this Constitution. However, in the national
interest, as certified by the President, the Congress may extend said
period.
A sequestration or freeze order shall be issued only upon showing of
a prima facie case. The order and the list of the sequestered or frozen
properties shall forthwith be registered with the proper court. For orders
issued before the ratification of this Constitution, the corresponding
judicial action or proceeding shall be filed within six months from its
ratification. For those issued after such ratification, the judicial action or
proceeding shall be commenced within six months from the issuance
thereof.
The sequestration or freeze order is deemed automatically lifted if no
judicial action or proceeding is commenced as herein provided. 52
f. Kinship to Attachment Receivership
As thus described, sequestration, freezing and provisional takeover are akin to the
provisional remedy of preliminary attachment, or receivership. 53 By attachment, a sheriff
seizes property of a defendant in a civil suit so that it may stand as security for the
satisfaction of any judgment that may be obtained, and not disposed of, or dissipated, or lost
intentionally or otherwise, pending the action. 54 By receivership, property, real or personal,
which is subject of litigation, is placed in the possession and control of a receiver appointed
by the Court, who shall conserve it pending final determination of the title or right of
possession over it. 55 All these remedies sequestration, freezing, provisional, takeover,
attachment and receivership are provisional, temporary, designed for-particular exigencies,
attended by no character of permanency or finality, and always subject to the control of the
issuing court or agency.
g. Remedies, Non-Judicial
Parenthetically, that writs of sequestration or freeze or takeover orders are not issued by
a court is of no moment. The Solicitor General draws attention to the writ of distraint and
CORPORATION LAW CASES SESSION 1
levy which since 1936 the Commissioner of Internal Revenue has been by law
authorized to issue against property of a delinquent taxpayer. 56 BASECO itself declares
that it has not manifested "a rigid insistence on sequestration as a purely judicial remedy * *
(as it feels) that the law should not be ossified to a point that makes it insensitive to change."
What it insists on, what it pronounces to be its "unyielding position, is that any change in
procedure, or the institution of a new one, should conform to due process and the other
prescriptions of the Bill of Rights of the Constitution." 57 It is, to be sure, a proposition on
which there can be no disagreement.
h. Orders May Issue Ex Parte
Like the remedy of preliminary attachment and receivership, as well as delivery of
personal property in replevinsuits, sequestration and provisional takeover writs may
issue ex parte. 58 And as in preliminary attachment, receivership, and delivery of personality,
no objection of any significance may be raised to the ex parte issuance of an order of
sequestration, freezing or takeover, given its fundamental character of temporariness or
conditionality; and taking account specially of the constitutionally expressed "mandate of the
people to recover ill-gotten properties amassed by the leaders and supporters of the previous
regime and protect the interest of the people;" 59 as well as the obvious need to avoid alerting
suspected possessors of "ill-gotten wealth" and thereby cause that disappearance or loss of
property precisely sought to be prevented, and the fact, just as self-evident, that "any transfer,
disposition, concealment or disappearance of said assets and properties would frustrate,
obstruct or hamper the efforts of the Government" at the just recovery thereof. 60
8. Requisites for Validity
What is indispensable is that, again as in the case of attachment and receivership, there
exist a prima facie factual foundation, at least, for the sequestration, freeze or takeover
order, and adequate and fair opportunity to contest it and endeavor to cause its negation
or nullification. 61
Both are assured under the executive orders in question and the rules and regulations
promulgated by the PCGG.
a. Prima Facie Evidence as Basis for Orders
Executive Order No. 14 enjoins that there be "due regard to the requirements of fairness
and due process." 62Executive Order No. 2 declares that with respect to claims on allegedly
"ill-gotten" assets and properties, "it is the position of the new democratic government that
President Marcos * * (and other parties affected) be afforded fair opportunity to contest these
claims before appropriate Philippine authorities." 63 Section 7 of the Commission's Rules and
Regulations provides that sequestration or freeze (and takeover) orders issue upon the
authority of at least two commissioners, based on the affirmation or complaint of an
80

interested party, or motu proprio when the Commission has reasonable grounds to believe
that the issuance thereof is warranted. 64 A similar requirement is now found in Section 26,
Art. XVIII of the 1987 Constitution, which requires that a "sequestration or freeze order shall
be issued only upon showing of a prima facie case." 65
b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the procedure by
which a party may seek to set aside a writ of sequestration or freeze order, viz:
SECTION 5. Who may contend.-The person against whom a writ of
sequestration or freeze or hold order is directed may request the lifting
thereof in writing, either personally or through counsel within five (5) days
from receipt of the writ or order, or in the case of a hold order, from date
of knowledge thereof.
SECTION 6. Procedure for review of writ or order.-After due hearing or
motu proprio for good cause shown, the Commission may lift the writ or
order unconditionally or subject to such conditions as it may deem
necessary, taking into consideration the evidence and the circumstance
of the case. The resolution of the commission may be appealed by the
party concerned to the Office of the President of the Philippines within
fifteen (15) days from receipt thereof.
Parenthetically, even if the requirement for a prima facie showing of "ill- gotten wealth"
were not expressly imposed by some rule or regulation as a condition to warrant the
sequestration or freezing of property contemplated in the executive orders in question, it
would nevertheless be exigible in this jurisdiction in which the Rule of Law prevails and
official acts which are devoid of rational basis in fact or law, or are whimsical and
capricious, are condemned and struck down. 66
9. Constitutional Sanction of Remedies
If any doubt should still persist in the face of the foregoing considerations as to the
validity and propriety of sequestration, freeze and takeover orders, it should be dispelled
by the fact that these particular remedies and the authority of the PCGG to issue them
have received constitutional approbation and sanction. As already mentioned, the
Provisional or "Freedom" Constitution recognizes the power and duty of the President to
enact "measures to achieve the mandate of the people to * * * (recover ill- gotten
properties amassed by the leaders and supporters of the previous regime and protect the
interest of the people through orders of sequestration or freezing of assets or
accounts." And as also already adverted to, Section 26, Article XVIII of the 1987
CORPORATION LAW CASES SESSION 1
Constitution treats of, and ratifies the "authority to issue sequestration or freeze orders
67
under Proclamation No. 3 dated March 25, 1986."
The institution of these provisional remedies is also premised upon the State's inherent
police power, regarded, as t lie power of promoting the public welfare by restraining and
regulating the use of liberty and property," 68 and as "the most essential, insistent and
illimitable of powers * * in the promotion of general welfare and the public interest," 69 and said
to be co-extensive with self-protection and * * not inaptly termed (also) the'law of overruling
necessity." " 70
10. PCGG not a "Judge"; General Functions
It should also by now be reasonably evident from what has thus far been said that the
PCGG is not, and was never intended to act as, a judge. Its general function is to
conduct investigations in order to collect evidenceestablishing instances of "ill-gotten
wealth;" issue sequestration, and such orders as may be warranted by the evidence thus
collected and as may be necessary to preserve and conserve the assets of which it takes
custody and control and prevent their disappearance, loss or dissipation; and
eventually file and prosecute in the proper court of competent jurisdiction all cases
investigated by it as may be warranted by its findings. It does not try and decide, or hear
and determine, or adjudicate with any character of finality or compulsion, cases involving
the essential issue of whether or not property should be forfeited and transferred to the
State because "ill-gotten" within the meaning of the Constitution and the executive
orders. This function is reserved to the designated court, in this case, the
Sandiganbayan. 71 There can therefore be no serious regard accorded to the accusation,
leveled by BASECO, 72 that the PCGG plays the perfidious role of prosecutor and judge at the
same time.
11. Facts Preclude Grant of Relief to Petitioner
Upon these premises and reasoned conclusions, and upon the facts disclosed by the
record, hereafter to be discussed, the petition cannot succeed. The writs of certiorari and
prohibition prayed for will not be issued.
The facts show that the corporation known as BASECO was owned or controlled by
President Marcos "during his administration, through nominees, by taking undue
advantage of his public office and/or using his powers, authority, or influence, " and that it
was by and through the same means, that BASECO had taken over the business and/or
assets of the National Shipyard and Engineering Co., Inc., and other government-owned
or controlled entities.
12. Organization and Stock Distribution of BASECO
81
 CORPORATION LAW CASES SESSION 1
BASECO describes itself in its petition as "a shiprepair and shipbuilding company * *
incorporated as a domestic private corporation * * (on Aug. 30, 1972) by a consortium of
Filipino shipowners and shipping executives. Its main office is at Engineer Island, Port 6. Manuel S. 96 shares
Area, Manila, where its Engineer Island Shipyard is housed, and its main shipyard is Mendoza
located at Mariveles Bataan." 73 Its Articles of Incorporation disclose that its authorized
capital stock is P60,000,000.00 divided into 60,000 shares, of which 12,000 shares with a
value of P12,000,000.00 have been subscribed, and on said subscription, the aggregate sum
of P3,035,000.00 has been paid by the incorporators. 74 The same articles Identify the 7. Anthony P. Lee 1,248 shares
incorporators, numbering fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3)
Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T. Yap, (7)
Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10) Jose Francisco, (11)
Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S. Mendoza, (14) Magiliw Torres, and 8. Hilario M. Ruiz 32 shares
(15) Rodolfo Torres.

By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be
stockholders, namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias Amante, 9. Constante L. 8 shares
(4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo Torres. As of this year, 1986, Farias
there were twenty (20) stockholders listed in BASECO's Stock and Transfer Book. 75 Their
names and the number of shares respectively held by them are as follows:

10. Fidelity 65,882

1. Jose A. Rojas 1,248 shares Management, Inc. shares

2. Severino G. de 1,248 shares 11. Trident 7,412 shares

la Cruz Management

3. Emilio T. Yap 2,508 shares 12. United Phil. 1,240 shares

Lines

4. Jose 1,248 shares

Fernandez 13. Renato M. 8 shares
Tanseco

5. Jose Francisco 128 shares

14. Fidel Ventura 8 shares

82
 CORPORATION LAW CASES SESSION 1
plants, equipment and facilities, in stock or in transit. This it did in virtue of a "Contract of
Purchase and Sale with Chattel Mortgage" executed on February 13, 1973. The price
15. Metro Bay 136,370 was P52,000,000.00. As partial payment thereof, BASECO delivered to NASSCO a cash
Drydock shares bond of P11,400,000.00, convertible into cash within twenty-four (24) hours from
completion of the inventory undertaken pursuant to the contract. The balance of
P41,600,000.00, with interest at seven percent (7%) per annum, compounded semi-
annually, was stipulated to be paid in equal semi-annual installments over a term of nine
16. Manuel Jacela 1 share (9) years, payment to commence after a grace period of two (2) years from date of
turnover of the shipyard to BASECO. 76

14. Subsequent Reduction of Price; Intervention of Marcos

17. Jonathan G. 1 share
Lu Unaccountably, the price of P52,000,000.00 was reduced by more than one-half, to
P24,311,550.00, about eight (8) months later. A document to this effect was executed on
October 9, 1973, entitled "Memorandum Agreement," and was signed for NASSCO by
Arturo Pacificador, as Presiding Officer of the Board of Directors, and David R. Ines, as
18. Jose J. 1 share General Manager. 77 This agreement bore, at the top right corner of the first page, the word
Tanchanco "APPROVED" in the handwriting of President Marcos, followed by his usual full signature.
The document recited that a down payment of P5,862,310.00 had been made by BASECO,
and the balance of P19,449,240.00 was payable in equal semi-annual installments over nine
(9) years after a grace period of two (2) years, with interest at 7% per annum.
19. Dioscoro 128 shares
Papa 15. Acquisition of 300 Hectares from Export Processing Zone Authority

On October 1, 1974, BASECO acquired three hundred (300) hectares of land in

Mariveles from the Export Processing Zone Authority for the price of P10,047,940.00 of
20. Edward T. 4 shares which, as set out in the document of sale, P2,000.000.00 was paid upon its execution,
Marcelo and the balance stipulated to be payable in installments. 78

16. Acquisition of Other Assets of NASSCO; Intervention of Marcos

TOTAL 218,819
shares.
13 Acquisition of NASSCO by BASECO
Barely six months after its incorporation, BASECO acquired from National Shipyard &
Steel Corporation, or NASSCO, a government-owned or controlled corporation, the
latter's shipyard at Mariveles, Bataan, known as the Bataan National Shipyard (BNS),
and except for NASSCO's Engineer Island Shops and certain equipment of the BNS,
consigned for future negotiation all its structures, buildings, shops, quarters, houses,
Some nine months afterwards, or on July 15, 1975, to be precise, BASECO, again with
the intervention of President Marcos, acquired ownership of the rest of the assets of
NASSCO which had not been included in the first two (2) purchase documents. This was
accomplished by a deed entitled "Contract of Purchase and Sale," 79 which, like the
Memorandum of Agreement dated October 9, 1973 supra also bore at the upper right-hand
corner of its first page, the handwritten notation of President Marcos reading, "APPROVED,
July 29, 1973," and underneath it, his usual full signature. Transferred to BASECO were
NASSCO's "ownership and all its titles, rights and interests over all equipment and facilities
including structures, buildings, shops, quarters, houses, plants and expendable or semi-
expendable assets, located at the Engineer Island, known as the Engineer Island Shops,
including all the equipment of the Bataan National Shipyards (BNS) which were excluded
from the sale of NBS to BASECO but retained by BASECO and all other selected equipment

83

and machineries of NASSCO at J. Panganiban Smelting Plant." In the same deed, NASSCO
committed itself to cooperate with BASECO for the acquisition from the National Government
or other appropriate Government entity of Engineer Island. Consideration for the sale was set
at P5,000,000.00; a down payment of P1,000,000.00 appears to have been made, and the
balance was stipulated to be paid at 7% interest per annum in equal semi annual installments
over a term of nine (9) years, to commence after a grace period of two (2) years. Mr. Arturo
Pacificador again signed for NASSCO, together with the general manager, Mr. David R. Ines.
17. Loans Obtained
It further appears that on May 27, 1975 BASECO obtained a loan from the NDC, taken
from "the last available Japanese war damage fund of $19,000,000.00," to pay for
"Japanese made heavy equipment (brand new)." 80 On September 3, 1975, it got another
loan also from the NDC in the amount of P30,000,000.00 (id.). And on January 28, 1976, it
got still another loan, this time from the GSIS, in the sum of P12,400,000.00. 81 The claim has
been made that not a single centavo has been paid on these loans. 82
18. Reports to President Marcos
In September, 1977, two (2) reports were submitted to President Marcos regarding
BASECO. The first was contained in a letter dated September 5, 1977 of Hilario M. Ruiz,
BASECO president. 83 The second was embodied in a confidential memorandum dated
September 16, 1977 of Capt. A.T. Romualdez. 84 They further disclose the fine hand of
Marcos in the affairs of BASECO, and that of a Romualdez, a relative by affinity.
a. BASECO President's Report
In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos that
there had been "no orders or demands for ship construction" for some time and
expressed the fear that if that state of affairs persisted, BASECO would not be able to
pay its debts to the Government, which at the time stood at the not inconsiderable
amount of P165,854,000.00. 85 He suggested that, to "save the situation," there be a "spin-
off (of their) shipbuilding activities which shall be handled exclusively by an entirely new
corporation to be created;" and towards this end, he informed Marcos that BASECO was
* * inviting NDC and LUSTEVECO to participate by converting the NDC
shipbuilding loan to BASECO amounting to P341.165M and assuming
and converting a portion of BASECO's shipbuilding loans from
REPACOM amounting to P52.2M or a total of P83.365M as NDC's equity
contribution in the new corporation. LUSTEVECO will participate by
absorbing and converting a portion of the REPACOM loan of Bay
Shipyard and Drydock, Inc., amounting to P32.538M. 86
CORPORATION LAW CASES SESSION 1
b. Romualdez' Report
Capt. A.T. Romualdez' report to the President was submitted eleven (11) days later. It
opened with the following caption:
MEMORANDUM:
FOR : The President
SUBJECT: An Evaluation and Re-assessment of a Performance of a
Mission
FROM: Capt. A.T. Romualdez.
Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its loan
obligations due chiefly to the fact that "orders to build ships as expected * * did not
materialize."
He advised that five stockholders had "waived and/or assigned their holdings
inblank," these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo Torres, (4)
Magiliw Torres, and (5) Anthony P. Lee. Pointing out that "Mr. Magiliw Torres * * is already
dead and Mr. Jose A. Rojas had a major heart attack," he made the following quite
revealing, and it may be added, quite cynical and indurate recommendation, to wit:
* * (that) their replacements (be effected) so we can register their names
in the stock book prior to the implementation of your instructions to pass
a board resolution to legalize the transfers under SEC regulations;
2. By getting their replacements, the families cannot question us later
on; and
3. We will owe no further favors from them. 87
He also transmitted to Marcos, together with the report, the following documents: 88
1. Stock certificates indorsed and assigned in blank with assignments
and waivers; 89
2. The articles of incorporation, the amended articles, and the by-laws of
BASECO;
84

3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of
land in "Engineer Island", Port Area, Manila;
4. Transfer Certificate of Title No. 124822 in the name of BASECO,
covering "Engineer Island";
5. Contract dated October 9, 1973, between NASSCO and BASECO re-
structure and equipment at Mariveles, Bataan;
6. Contract dated July 16, 1975, between NASSCO and BASECO re-
structure and equipment at Engineer Island, Port Area Manila;
7. Contract dated October 1, 1974, between EPZA and BASECO re 300
hectares of land at Mariveles, Bataan;
8. List of BASECO's fixed assets;
9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC
of P30,000,000.00;
10. BASECO-REPACOM Agreement dated May 27, 1975;
11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for
the housing facilities for BASECO's rank-and-file employees. 90
Capt. Romualdez also recommended that BASECO's loans be restructured "until such
period when BASECO will have enough orders for ships in order for the company to
meet loan obligations," and that
An LOI may be issued to government agencies using floating equipment,
that a linkage scheme be applied to a certain percent of BASECO's net
profit as part of BASECO's amortization payments to make it justifiable
for you, Sir. 91
It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or officer
of BASECO, yet he has presented a report on BASECO to President Marcos, and his
report demonstrates intimate familiarity with the firm's affairs and problems.
19. Marcos' Response to Reports
CORPORATION LAW CASES SESSION 1
President Marcos lost no time in acting on his subordinates' recommendations,
particularly as regards the "spin-off" and the "linkage scheme" relative to "BASECO's
amortization payments."
a. Instructions re "Spin-Off"
Under date of September 28, 1977, he addressed a Memorandum to Secretary
Geronimo Velasco of the Philippine National Oil Company and Chairman Constante
Farias of the National Development Company, directing them "to participate in the
formation of a new corporation resulting from the spin-off of the shipbuilding component
of BASECO along the following guidelines:
a. Equity participation of government shall be through LUSTEVECO and
NDC in the amount of P115,903,000 consisting of the
following obligations of BASECO which are hereby authorized to be
converted to equity of the said new corporation, to wit:
1. NDC P83,865,000 (P31.165M loan & P52.2M
Reparation)
2. LUSTEVECO P32,538,000 (Reparation)
b. Equity participation of government shall be in the form of non- voting
shares.
For immediate compliance. 92
Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-two (22)
days after receiving their president's memorandum, Messrs. Hilario M. Ruiz, Constante
L. Farias and Geronimo Z. Velasco, in representation of their respective corporations,
executed a PRE-INCORPORATION AGREEMENT dated October 20, 1977. 93 In it, they
undertook to form a shipbuilding corporation to be known as "PHIL-ASIA SHIPBUILDING
CORPORATION," to bring to realization their president's instructions. It would seem that the
new corporation ultimately formed was actually named "Philippine Dockyard Corporation
(PDC)." 94
b. Letter of Instructions No. 670
Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of instructions.
On February 14, 1978, he issued Letter of Instructions No. 670 addressed to the
Reparations Commission REPACOM the Philippine National Oil Company (PNOC), the
Luzon Stevedoring Company (LUSTEVECO), and the National Development Company
85

(NDC). What is commanded therein is summarized by the Solicitor General, with pithy
and not inaccurate observations as to the effects thereof (in italics), as follows:
* * 1) the shipbuilding equipment procured by BASECO through
reparations be transferred to NDC subject to reimbursement by NDC to
BASECO (of) the amount of s allegedly representing the handling and
incidental expenses incurred by BASECO in the installation of said
equipment (so instead of NDC getting paid on its loan to BASECO, it was
made to pay BASECO instead the amount of P18.285M); 2) the
shipbuilding equipment procured from reparations through EPZA, now in
the possession of BASECO and BSDI (Bay Shipyard & Drydocking, Inc.)
be transferred to LUSTEVECO through PNOC; and 3) the shipbuilding
equipment (thus) transferred be invested by LUSTEVECO, acting
through PNOC and NDC, as the government's equity participation in a
shipbuilding corporation to be established in partnership with the private
sector.
xxx xxx xxx
And so, through a simple letter of instruction and memorandum,
BASECO's loan obligation to NDC and REPACOM * * in the total amount
of P83.365M and BSD's REPACOM loan of P32.438M were wiped out
and converted into non-voting preferred shares. 95
20. Evidence of Marcos'
Ownership of BASECO
It cannot therefore be gainsaid that, in the context of the proceedings at bar, the actuality
of the control by President Marcos of BASECO has been sufficiently shown.
Other evidence submitted to the Court by the Solicitor General proves that President
Marcos not only exercised control over BASECO, but also that he actually owns well nigh
one hundred percent of its outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986, there were
218,819 shares of stock outstanding, ostensibly owned by twenty (20)
stockholders. 96 Four of these twenty are juridical persons: (1) Metro Bay Drydock, recorded
as holding 136,370 shares; (2) Fidelity Management, Inc., 65,882 shares; (3) Trident
Management, 7,412 shares; and (4) United Phil. Lines, 1,240 shares. The first three
corporations, among themselves, own an aggregate of 209,664 shares of BASECO stock, or
95.82% of the outstanding stock.
CORPORATION LAW CASES SESSION 1
Now, the Solicitor General has drawn the Court's attention to the intriguing circumstance
that found in Malacanang shortly after the sudden flight of President Marcos, were
certificates corresponding to more than ninety-five percent (95%) of all the outstanding
shares of stock of BASECO, endorsed in blank, together with deeds of assignment of
practically all the outstanding shares of stock of the three (3) corporations above
mentioned (which hold 95.82% of all BASECO stock), signed by the owners thereof
although not notarized. 97
More specifically, found in Malacanang (and now in the custody of the PCGG) were:
1) the deeds of assignment of all 600 outstanding shares of Fidelity
Management Inc. which supposedly owns as aforesaid 65,882 shares
of BASECO stock;
2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding
shares of Metro Bay Drydock Corporation which allegedly owns
136,370 shares of BASECO stock;
3) the deeds of assignment of 800 outstanding shares of Trident
Management Co., Inc. which allegedly owns 7,412 shares of BASECO
stock, assigned in blank; 98 and
4) stock certificates corresponding to 207,725 out of the 218,819
outstanding shares of BASECO stock; that is, all but 5 % all endorsed
in blank. 99
While the petitioner's counsel was quick to dispute this asserted fact, assuring this Court
that the BASECO stockholders were still in possession of their respective stock
certificates and had "never endorsed * * them in blank or to anyone else," 100 that denial is
exposed by his own prior and subsequent recorded statements as a mere gesture of defiance rather than a verifiable factual
declaration.
By resolution dated September 25, 1986, this Court granted BASECO's counsel a period
of 10 days "to SUBMIT, as undertaken by him, * * the certificates of stock issued to the
stockholders of * * BASECO as of April 23, 1986, as listed in Annex 'P' of the
petition.' 101 Counsel thereafter moved for extension; and in his motion dated October 2, 1986, he declared inter alia that
"said certificates of stock are in the possession of third parties, among whom being the respondents themselves * *
and petitioner is still endeavoring to secure copies thereof from them." 102 On the same day he filed another motion praying
that he be allowed "to secure copies of the Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other
Certificates, of Stock of petitioner's stockholders in possession of respondents." 103
In a Manifestation dated October 10, 1986,, 104 the Solicitor General not unreasonably argued that
counsel's aforestated motion to secure copies of the stock certificates "confirms the fact that stockholders of petitioner
corporation are not in possession of * * (their) certificates of stock," and the reason, according to him, was "that 95% of said
shares * * have been endorsed in blank and found in Malacaang after the former President and his family fled the country."
86

To this manifestation BASECO's counsel replied on November 5, 1986, as already mentioned, Stubbornly insisting that the
firm's stockholders had not really assigned their stock. 105
In view of the parties' conflicting declarations, this Court resolved on November 27, 1986
among other things "to require * * the petitioner * * to deposit upon proper receipt with
Clerk of Court Juanito Ranjo the originals of the stock certificates alleged to be in its
possession or accessible to it, mentioned and described in Annex 'P' of its petition, (and
other pleadings) * * within ten (10) days from notice." 106 In a motion filed on December 5,
1986, 107 BASECO's counsel made the statement, quite surprising in the premises, that "it will negotiate with the owners (of
the BASECO stock in question) to allow petitioner to borrow from them, if available, the certificates referred to" but that "it
needs a more sufficient time therefor" (sic). BASECO's counsel however eventually had to confess inability to produce the
originals of the stock certificates, putting up the feeble excuse that while he had "requested the stockholders to allow * *
(him) to borrow said certificates, * * some of * * (them) claimed that they had delivered the certificates to third parties by way
of pledge and/or to secure performance of obligations, while others allegedly have entrusted them to third parties in view of
last national emergency." 108 He has conveniently omitted, nor has he offered to give the details of the transactions
adverted to by him, or to explain why he had not impressed on the supposed stockholders the primordial importance of
convincing this Court of their present custody of the originals of the stock, or if he had done so, why the stockholders are
unwilling to agree to some sort of arrangement so that the originals of their certificates might at the very least be exhibited to
the Court. Under the circumstances, the Court can only conclude that he could not get the originals from the stockholders for
the simple reason that, as the Solicitor General maintains, said stockholders in truth no longer have them in their
possession, these having already been assigned in blank to then President Marcos.
21. Facts Justify Issuance of Sequestration and Takeover Orders
In the light of the affirmative showing by the Government that, prima facie at least, the
stockholders and directors of BASECO as of April, 1986 109 were mere "dummies," nominees or alter
egos of President Marcos; at any rate, that they are no longer owners of any shares of stock in the corporation, the
conclusion cannot be avoided that said stockholders and directors have no basis and no standing whatever to cause the
filing and prosecution of the instant proceeding; and to grant relief to BASECO, as prayed for in the petition, would in effect
be to restore the assets, properties and business sequestered and taken over by the PCGG to persons who are "dummies,"
nominees or alter egos of the former president.
From the standpoint of the PCGG, the facts herein stated at some length do indeed show
that the private corporation known as BASECO was "owned or controlled by former
President Ferdinand E. Marcos * * during his administration, * * through nominees, by
taking advantage of * * (his) public office and/or using * * (his) powers, authority,
influence * *," and that NASSCO and other property of the government had been taken
over by BASECO; and the situation justified the sequestration as well as the provisional
takeover of the corporation in the public interest, in accordance with the terms of
Executive Orders No. 1 and 2, pending the filing of the requisite actions with the
Sandiganbayan to cause divestment of title thereto from Marcos, and its adjudication in
favor of the Republic pursuant to Executive Order No. 14.
As already earlier stated, this Court agrees that this assessment of the facts is correct;
accordingly, it sustains the acts of sequestration and takeover by the PCGG as being in
accord with the law, and, in view of what has thus far been set out in this opinion,
pronounces to be without merit the theory that said acts, and the executive orders
pursuant to which they were done, are fatally defective in not according to the parties
CORPORATION LAW CASES SESSION 1
affected prior notice and hearing, or an adequate remedy to impugn, set aside or
otherwise obtain relief therefrom, or that the PCGG had acted as prosecutor and judge at
the same time.
22. Executive Orders Not a Bill of Attainder
Neither will this Court sustain the theory that the executive orders in question are a bill of
attainder. 110 "A bill of attainder is a legislative act which inflicts punishment without judicial trial." 111 "Its essence is the
substitution of a legislative for a judicial determination of guilt." 112
In the first place, nothing in the executive orders can be reasonably construed as a
determination or declaration of guilt. On the contrary, the executive orders, inclusive of
Executive Order No. 14, make it perfectly clear that any judgment of guilt in the amassing
or acquisition of "ill-gotten wealth" is to be handed down by a judicial tribunal, in this
case, the Sandiganbayan, upon complaint filed and prosecuted by the PCGG. In the
second place, no punishment is inflicted by the executive orders, as the merest glance at
their provisions will immediately make apparent. In no sense, therefore, may the
executive orders be regarded as a bill of attainder.
23. No Violation of Right against Self-Incrimination and Unreasonable Searches and
Seizures
BASECO also contends that its right against self incrimination and unreasonable
searches and seizures had been transgressed by the Order of April 18, 1986 which
required it "to produce corporate records from 1973 to 1986 under pain of contempt of
the Commission if it fails to do so." The order was issued upon the authority of Section 3
(e) of Executive Order No. 1, treating of the PCGG's power to "issue subpoenas
requiring * * the production of such books, papers, contracts, records, statements of
accounts and other documents as may be material to the investigation conducted by the
Commission, " and paragraph (3), Executive Order No. 2 dealing with its power to
"require all persons in the Philippines holding * * (alleged "ill-gotten") assets or
properties, whether located in the Philippines or abroad, in their names as nominees,
agents or trustees, to make full disclosure of the same * *." The contention lacks merit.
It is elementary that the right against self-incrimination has no application to juridical
persons.
While an individual may lawfully refuse to answer incriminating questions
unless protected by an immunity statute, it does not follow that a
corporation, vested with special privileges and franchises, may refuse to
show its hand when charged with an abuse ofsuchprivileges * * 113
Relevant jurisprudence is also cited by the Solicitor General. 114
87

* * corporations are not entitled to all of the constitutional protections
which private individuals have. * * They are not at all within the privilege
against self-incrimination, although this court more than once has said
that the privilege runs very closely with the 4th Amendment's Search and
Seizure provisions. It is also settled that an officer of the company cannot
refuse to produce its records in its possession upon the plea that they will
either incriminate him or may incriminate it." (Oklahoma Press Publishing
Co. v. Walling, 327 U.S. 186; emphasis, the Solicitor General's).
* * The corporation is a creature of the state. It is presumed to be
incorporated for the benefit of the public. It received certain special
privileges and franchises, and holds them subject to the laws of the state
and the limitations of its charter. Its powers are limited by law. It can
make no contract not authorized by its charter. Its rights to act as a
corporation are only preserved to it so long as it obeys the laws of its
creation. There is a reserve right in the legislature to investigate its
contracts and find out whether it has exceeded its powers. It would be a
strange anomaly to hold that a state, having chartered a corporation to
make use of certain franchises, could not, in the exercise of sovereignty,
inquire how these franchises had been employed, and whether they had
been abused, and demand the production of the corporate books and
papers for that purpose. The defense amounts to this, that an officer of
the corporation which is charged with a criminal violation of the statute
may plead the criminality of such corporation as a refusal to produce its
books. To state this proposition is to answer it. While an individual may
lawfully refuse to answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation, vested with special
privileges and franchises may refuse to show its hand when charged with
an abuse of such privileges. (Wilson v. United States, 55 Law Ed., 771,
780 [emphasis, the Solicitor General's])
At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No. 14
assures protection to individuals required to produce evidence before the PCGG against
any possible violation of his right against self-incrimination. It gives them immunity from
prosecution on the basis of testimony or information he is compelled to present. As
amended, said Section 4 now provides that
xxx xxx xxx
The witness may not refuse to comply with the order on the basis of his
privilege against self-incrimination; but no testimony or other information
compelled under the order (or any information directly or indirectly
derived from such testimony, or other information) may be used against
CORPORATION LAW CASES SESSION 1
the witness in any criminal case, except a prosecution for perjury, giving a
false statement, or otherwise failing to comply with the order.
The constitutional safeguard against unreasonable searches and seizures finds no
application to the case at bar either. There has been no search undertaken by any agent
or representative of the PCGG, and of course no seizure on the occasion thereof.
24. Scope and Extent of Powers of the PCGG
One other question remains to be disposed of, that respecting the scope and extent of
the powers that may be wielded by the PCGG with regard to the properties or
businesses placed under sequestration or provisionally taken over. Obviously, it is not a
question to which an answer can be easily given, much less one which will suffice for
every conceivable situation.
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG cannot exercise acts
of dominion over property sequestered, frozen or provisionally taken over. AS already
earlier stressed with no little insistence, the act of sequestration; freezing or provisional
takeover of property does not import or bring about a divestment of title over said
property; does not make the PCGG the owner thereof. In relation to the property
sequestered, frozen or provisionally taken over, the PCGG is a conservator, not an
owner. Therefore, it can not perform acts of strict ownership; and this is specially true in
the situations contemplated by the sequestration rules where, unlike cases of
receivership, for example, no court exercises effective supervision or can upon due
application and hearing, grant authority for the performance of acts of dominion.
Equally evident is that the resort to the provisional remedies in question should entail the
least possible interference with business operations or activities so that, in the event that
the accusation of the business enterprise being "ill gotten" be not proven, it may be
returned to its rightful owner as far as possible in the same condition as it was at the time
of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the property or
business sequestered or provisionally taken over, much like a court-appointed
receiver, 115 such as to bring and defend actions in its own name; receive rents; collect debts due; pay outstanding
debts; and generally do such other acts and things as may be necessary to fulfill its mission as conservator and
administrator. In this context, it may in addition enjoin or restrain any actual or threatened commission of acts by any person
or entity that may render moot and academic, or frustrate or otherwise make ineffectual its efforts to carry out its task; punish
for direct or indirect contempt in accordance with the Rules of Court; and seek and secure the assistance of any office,
agency or instrumentality of the government. 116 In the case of sequestered businesses generally (i.e., going concerns,
88

businesses in current operation), as in the case of sequestered objects, its essential role, as already discussed, is that of
conservator, caretaker, "watchdog" or overseer. It is not that of manager, or innovator, much less an owner.
c. Powers over Business Enterprises Taken Over by Marcos or Entities
or Persons Close to him; Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to have been
"taken over by the government of the Marcos Administration or by entities or persons
close to former President Marcos," 117 the PCGG is given power and authority, as already adverted to, to
"provisionally take (it) over in the public interest or to prevent * * (its) disposal or dissipation;" and since the term is obviously
employed in reference to going concerns, or business enterprises in operation, something more than mere physical custody
is connoted; the PCGG may in this case exercise some measure of control in the operation, running, or management of the
business itself. But even in this special situation, the intrusion into management should be restricted to the minimum degree
necessary to accomplish the legislative will, which is "to prevent the disposal or dissipation" of the business enterprise. There
should be no hasty, indiscriminate, unreasoned replacement or substitution of management officials or change of policies,
particularly in respect of viable establishments. In fact, such a replacement or substitution should be avoided if at all
possible, and undertaken only when justified by demonstrably tenable grounds and in line with the stated objectives of the
PCGG. And it goes without saying that where replacement of management officers may be called for, the greatest prudence,
circumspection, care and attention - should accompany that undertaking to the end that truly competent, experienced and
honest managers may be recruited. There should be no role to be played in this area by rank amateurs, no matter how wen
meaning. The road to hell, it has been said, is paved with good intentions. The business is not to be experimented or played
around with, not run into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight should never be lost sight of the
ultimate objective of the whole exercise, which is to turn over the business to the Republic, once judicially established to be
"ill-gotten." Reason dictates that it is only under these conditions and circumstances that the supervision, administration and
control of business enterprises provisionally taken over may legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances that the PCGG
may properly exercise the prerogative to vote sequestered stock of corporations, granted
to it by the President of the Philippines through a Memorandum dated June 26, 1986.
That Memorandum authorizes the PCGG, "pending the outcome of proceedings to
determine the ownership of * * (sequestered) shares of stock," "to vote such shares of
stock as it may have sequestered in corporations at all stockholders' meetings called for
the election of directors, declaration of dividends, amendment of the Articles of
Incorporation, etc." The Memorandum should be construed in such a manner as to be
consistent with, and not contradictory of the Executive Orders earlier promulgated on the
same matter. There should be no exercise of the right to vote simply because the right
exists, or because the stocks sequestered constitute the controlling or a substantial part
of the corporate voting power. The stock is not to be voted to replace directors, or revise
the articles or by-laws, or otherwise bring about substantial changes in policy, program or
practice of the corporation except for demonstrably weighty and defensible grounds, and
always in the context of the stated purposes of sequestration or provisional takeover, i.e.,
to prevent the dispersion or undue disposal of the corporate assets. Directors are not to
be voted out simply because the power to do so exists. Substitution of directors is not to
be done without reason or rhyme, should indeed be shunned if at an possible, and
undertaken only when essential to prevent disappearance or wastage of corporate
CORPORATION LAW CASES SESSION 1
property, and always under such circumstances as assure that the replacements are
truly possessed of competence, experience and probity.
In the case at bar, there was adequate justification to vote the incumbent directors out of
office and elect others in their stead because the evidence showed prima facie that the
former were just tools of President Marcos and were no longer owners of any stock in the
firm, if they ever were at all. This is why, in its Resolution of October 28, 1986; 118 this Court
declared that
Petitioner has failed to make out a case of grave abuse or excess of
jurisdiction in respondents' calling and holding of a stockholders' meeting
for the election of directors as authorized by the Memorandum of the
President * * (to the PCGG) dated June 26, 1986, particularly, where as
in this case, the government can, through its designated directors,
properly exercise control and management over what appear to be
properties and assets owned and belonging to the government itself and
over which the persons who appear in this case on behalf of BASECO
have failed to show any right or even any shareholding in said
corporation.
It must however be emphasized that the conduct of the PCGG nominees in the BASECO
Board in the management of the company's affairs should henceforth be guided and
governed by the norms herein laid down. They should never for a moment allow
themselves to forget that they are conservators, not owners of the business; they are
fiduciaries, trustees, of whom the highest degree of diligence and rectitude is, in the
premises, required.
25. No Sufficient Showing of Other Irregularities
As to the other irregularities complained of by BASECO, i.e., the cancellation or revision,
and the execution of certain contracts, inclusive of the termination of the employment of
some of its executives, 119 this Court cannot, in the present state of the evidence on record, pass upon them. It is
not necessary to do so. The issues arising therefrom may and will be left for initial determination in the appropriate action.
But the Court will state that absent any showing of any important cause therefor, it will not normally substitute its judgment
for that of the PCGG in these individual transactions. It is clear however, that as things now stand, the petitioner cannot be
said to have established the correctness of its submission that the acts of the PCGG in question were done without or in
excess of its powers, or with grave abuse of discretion.
WHEREFORE, the petition is dismissed. The temporary restraining order issued on
October 14, 1986 is lifted.
G.R. No. L-27155 May 18, 1978
PNB vs. CA, RITA GUECO TAPNIO, CECILIO GUECO and THE PHILIPPINE
AMERICAN GENERAL INSURANCE COMPANY, INC
89

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:
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).
CORPORATION LAW CASES SESSION 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 Jacobo-Nazon 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 1956-1957 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 effectively enforce collection against her. Her sugar
90

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. "6-
Gueco", 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
CORPORATION LAW CASES SESSION 1
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 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
91

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.
CORPORATION LAW CASES SESSION 1
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
92

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. 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
CORPORATION LAW CASES SESSION 1
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.
G.R. No. 126297 January 31, 2007
PROFESSIONAL SERVICES, INC vs. NATIVIDAD and ENRIQUE AGANA
Hospitals, having undertaken one of mankinds most important and delicate endeavors,
must assume the grave responsibility of pursuing it with appropriate care. The care and
service dispensed through this high trust, however technical, complex and esoteric its
character may be, must meet standards of responsibility commensurate with the
undertaking to preserve and protect the health, and indeed, the very lives of those placed
in the hospitals keeping.1
Assailed in these three consolidated petitions for review on certiorari is the Court of
Appeals Decision2 dated September 6, 1996 in CA-G.R. CV No. 42062 and CA-G.R. SP
No. 32198 affirming with modification the Decision3dated March 17, 1993 of the Regional
Trial Court (RTC), Branch 96, Quezon City in Civil Case No. Q-43322 and nullifying its
Order dated September 21, 1993.
The facts, as culled from the records, are:
On April 4, 1984, Natividad Agana was rushed to the Medical City General Hospital
(Medical City Hospital) because of difficulty of bowel movement and bloody anal
93

discharge. After a series of medical examinations, Dr. Miguel Ampil, petitioner in G.R. No.
127590, diagnosed her to be suffering from "cancer of the sigmoid."
On April 11, 1984, Dr. Ampil, assisted by the medical staff4 of the Medical City Hospital,
performed an anterior resection surgery on Natividad. He found that the malignancy in
her sigmoid area had spread on her left ovary, necessitating the removal of certain
portions of it. Thus, Dr. Ampil obtained the consent of Natividads husband, Enrique
Agana, to permit Dr. Juan Fuentes, respondent in G.R. No. 126467, to perform
hysterectomy on her.
After Dr. Fuentes had completed the hysterectomy, Dr. Ampil took over, completed the
operation and closed the incision.
However, the operation appeared to be flawed. In the corresponding Record of Operation
dated April 11, 1984, the attending nurses entered these remarks:
"sponge count lacking 2
"announced to surgeon searched (sic) done but to no avail continue for closure."
On April 24, 1984, Natividad was released from the hospital. Her hospital and medical
bills, including the doctors fees, amounted to P60,000.00.
After a couple of days, Natividad complained of excruciating pain in her anal region. She
consulted both Dr. Ampil and Dr. Fuentes about it. They told her that the pain was the
natural consequence of the surgery. Dr. Ampil then recommended that she consult an
oncologist to examine the cancerous nodes which were not removed during the
operation.
On May 9, 1984, Natividad, accompanied by her husband, went to the United States to
seek further treatment. After four months of consultations and laboratory examinations,
Natividad was told she was free of cancer. Hence, she was advised to return to the
Philippines.
On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two
weeks thereafter, her daughter found a piece of gauze protruding from her vagina. Upon
being informed about it, Dr. Ampil proceeded to her house where he managed to extract
by hand a piece of gauze measuring 1.5 inches in width. He then assured her that the
pains would soon vanish.
CORPORATION LAW CASES SESSION 1
Dr. Ampils assurance did not come true. Instead, the pains intensified, prompting
Natividad to seek treatment at the Polymedic General Hospital. While confined there, Dr.
Ramon Gutierrez detected the presence of another foreign object in her vagina -- a foul-
smelling gauze measuring 1.5 inches in width which badly infected her vaginal vault. A
recto-vaginal fistula had formed in her reproductive organs which forced stool to excrete
through the vagina. Another surgical operation was needed to remedy the damage.
Thus, in October 1984, Natividad underwent another surgery.
On November 12, 1984, Natividad and her husband filed with the RTC, Branch 96,
Quezon City a complaint for damages against the Professional Services, Inc. (PSI),
owner of the Medical City Hospital, Dr. Ampil, and Dr. Fuentes, docketed as Civil Case
No. Q-43322. They alleged that the latter are liable for negligence for leaving two pieces
of gauze inside Natividads body and malpractice for concealing their acts of negligence.
Meanwhile, Enrique Agana also filed with the Professional Regulation Commission
(PRC) an administrative complaint for gross negligence and malpractice against Dr.
Ampil and Dr. Fuentes, docketed as Administrative Case No. 1690. The PRC Board of
Medicine heard the case only with respect to Dr. Fuentes because it failed to acquire
jurisdiction over Dr. Ampil who was then in the United States.
On February 16, 1986, pending the outcome of the above cases, Natividad died and was
duly substituted by her above-named children (the Aganas).
On March 17, 1993, the RTC rendered its Decision in favor of the Aganas, finding PSI,
Dr. Ampil and Dr. Fuentes liable for negligence and malpractice, the decretal part of
which reads:
WHEREFORE, judgment is hereby rendered for the plaintiffs ordering the defendants
PROFESSIONAL SERVICES, INC., DR. MIGUEL AMPIL and DR. JUAN FUENTES to
pay to the plaintiffs, jointly and severally, except in respect of the award for exemplary
damages and the interest thereon which are the liabilities of defendants Dr. Ampil and Dr.
Fuentes only, as follows:
1. As actual damages, the following amounts:
a. The equivalent in Philippine Currency of the total of US$19,900.00 at
the rate of P21.60-US$1.00, as reimbursement of actual expenses
incurred in the United States of America;
94

b. The sum of P4,800.00 as travel taxes of plaintiffs and their physician
daughter;
c. The total sum of P45,802.50, representing the cost of hospitalization at
Polymedic Hospital, medical fees, and cost of the saline solution;
2. As moral damages, the sum of P2,000,000.00;
3. As exemplary damages, the sum of P300,000.00;
4. As attorneys fees, the sum of P250,000.00;
5. Legal interest on items 1 (a), (b), and (c); 2; and 3 hereinabove, from date of
filing of the complaint until full payment; and
6. Costs of suit.
SO ORDERED.
Aggrieved, PSI, Dr. Fuentes and Dr. Ampil interposed an appeal to the Court of Appeals,
docketed as CA-G.R. CV No. 42062.
Incidentally, on April 3, 1993, the Aganas filed with the RTC a motion for a partial
execution of its Decision, which was granted in an Order dated May 11, 1993. Thereafter,
the sheriff levied upon certain properties of Dr. Ampil and sold them for P451,275.00 and
delivered the amount to the Aganas.
Following their receipt of the money, the Aganas entered into an agreement with PSI and
Dr. Fuentes to indefinitely suspend any further execution of the RTC Decision. However,
not long thereafter, the Aganas again filed a motion for an alias writ of execution against
the properties of PSI and Dr. Fuentes. On September 21, 1993, the RTC granted the
motion and issued the corresponding writ, prompting Dr. Fuentes to file with the Court of
Appeals a petition for certiorari and prohibition, with prayer for preliminary injunction,
docketed as CA-G.R. SP No. 32198. During its pendency, the Court of Appeals issued a
Resolution5 dated October 29, 1993 granting Dr. Fuentes prayer for injunctive relief.
On January 24, 1994, CA-G.R. SP No. 32198 was consolidated with CA-G.R. CV No.
42062.
CORPORATION LAW CASES SESSION 1
Meanwhile, on January 23, 1995, the PRC Board of Medicine rendered its Decision 6 in
Administrative Case No. 1690 dismissing the case against Dr. Fuentes. The Board held
that the prosecution failed to show that Dr. Fuentes was the one who left the two pieces
of gauze inside Natividads body; and that he concealed such fact from Natividad.
On September 6, 1996, the Court of Appeals rendered its Decision jointly disposing of
CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198, thus:
WHEREFORE, except for the modification that the case against defendant-appellant Dr.
Juan Fuentes is hereby DISMISSED, and with the pronouncement that defendant-
appellant Dr. Miguel Ampil is liable to reimburse defendant-appellant Professional
Services, Inc., whatever amount the latter will pay or had paid to the plaintiffs-appellees,
the decision appealed from is hereby AFFIRMED and the instant appeal DISMISSED.
Concomitant with the above, the petition for certiorari and prohibition filed by herein
defendant-appellant Dr. Juan Fuentes in CA-G.R. SP No. 32198 is hereby GRANTED
and the challenged order of the respondent judge dated September 21, 1993, as well as
the alias writ of execution issued pursuant thereto are hereby NULLIFIED and SET
ASIDE. The bond posted by the petitioner in connection with the writ of preliminary
injunction issued by this Court on November 29, 1993 is hereby cancelled.
Costs against defendants-appellants Dr. Miguel Ampil and Professional Services, Inc.
SO ORDERED.
Only Dr. Ampil filed a motion for reconsideration, but it was denied in a Resolution 7 dated
December 19, 1996.
Hence, the instant consolidated petitions.
In G.R. No. 126297, PSI alleged in its petition that the Court of Appeals erred in holding
that: (1) it is estopped from raising the defense that Dr. Ampil is not its employee; (2) it is
solidarily liable with Dr. Ampil; and (3) it is not entitled to its counterclaim against the
Aganas. PSI contends that Dr. Ampil is not its employee, but a mere consultant or
independent contractor. As such, he alone should answer for his negligence.
In G.R. No. 126467, the Aganas maintain that the Court of Appeals erred in finding that
Dr. Fuentes is not guilty of negligence or medical malpractice, invoking the doctrine of
res ipsa loquitur. They contend that the pieces of gauze are prima facie proofs that the
operating surgeons have been negligent.
95

Finally, in G.R. No. 127590, Dr. Ampil asserts that the Court of Appeals erred in finding
him liable for negligence and malpractice sans evidence that he left the two pieces of
gauze in Natividads vagina. He pointed to other probable causes, such as: (1) it was Dr.
Fuentes who used gauzes in performing the hysterectomy; (2) the attending nurses
failure to properly count the gauzes used during surgery; and (3) the medical intervention
of the American doctors who examined Natividad in the United States of America.
For our resolution are these three vital issues: first, whether the Court of Appeals erred in
holding Dr. Ampil liable for negligence and malpractice; second, whether the Court of
Appeals erred in absolving Dr. Fuentes of any liability; and third, whether PSI may be
held solidarily liable for the negligence of Dr. Ampil.
I - G.R. No. 127590
Whether the Court of Appeals Erred in Holding Dr. Ampil
Liable for Negligence and Malpractice.
Dr. Ampil, in an attempt to absolve himself, gears the Courts attention to other possible
causes of Natividads detriment. He argues that the Court should not discount either of
the following possibilities: first, Dr. Fuentes left the gauzes in Natividads body after
performing hysterectomy; second, the attending nurses erred in counting the gauzes;
and third, the American doctors were the ones who placed the gauzes in Natividads
body.
Dr. Ampils arguments are purely conjectural and without basis. Records show that he did
not present any evidence to prove that the American doctors were the ones who put or
left the gauzes in Natividads body. Neither did he submit evidence to rebut the
correctness of the record of operation, particularly the number of gauzes used. As to the
alleged negligence of Dr. Fuentes, we are mindful that Dr. Ampil examined his (Dr.
Fuentes) work and found it in order.
The glaring truth is that all the major circumstances, taken together, as specified by the
Court of Appeals, directly point to Dr. Ampil as the negligent party, thus:
First, it is not disputed that the surgeons used gauzes as sponges to control the
bleeding of the patient during the surgical operation.
Second, immediately after the operation, the nurses who assisted in the surgery
noted in their report that the sponge count (was) lacking 2; that such anomaly
CORPORATION LAW CASES SESSION 1
was announced to surgeon and that a search was done but to no avail
prompting Dr. Ampil to continue for closure x x x.
Third, after the operation, two (2) gauzes were extracted from the same spot of
the body of Mrs. Agana where the surgery was performed.
An operation requiring the placing of sponges in the incision is not complete until the
sponges are properly removed, and it is settled that the leaving of sponges or other
foreign substances in the wound after the incision has been closed is at least prima facie
negligence by the operating surgeon.8 To put it simply, such act is considered so
inconsistent with due care as to raise an inference of negligence. There are even legions
of authorities to the effect that such act is negligence per se. 9
Of course, the Court is not blind to the reality that there are times when danger to a
patients life precludes a surgeon from further searching missing sponges or foreign
objects left in the body. But this does not leave him free from any obligation. Even if it
has been shown that a surgeon was required by the urgent necessities of the case to
leave a sponge in his patients abdomen, because of the dangers attendant upon delay,
still, it is his legal duty to so inform his patient within a reasonable time thereafter by
advising her of what he had been compelled to do. This is in order that she might seek
relief from the effects of the foreign object left in her body as her condition might permit.
The ruling in Smith v. Zeagler10 is explicit, thus:
The removal of all sponges used is part of a surgical operation, and when a physician or
surgeon fails to remove a sponge he has placed in his patients body that should be
removed as part of the operation, he thereby leaves his operation uncompleted and
creates a new condition which imposes upon him the legal duty of calling the new
condition to his patients attention, and endeavoring with the means he has at hand to
minimize and avoid untoward results likely to ensue therefrom.
Here, Dr. Ampil did not inform Natividad about the missing two pieces of gauze. Worse,
he even misled her that the pain she was experiencing was the ordinary consequence of
her operation. Had he been more candid, Natividad could have taken the immediate and
appropriate medical remedy to remove the gauzes from her body. To our mind, what was
initially an act of negligence by Dr. Ampil has ripened into a deliberate wrongful act of
deceiving his patient.
This is a clear case of medical malpractice or more appropriately, medical negligence. To
successfully pursue this kind of case, a patient must only prove that a health care
provider either failed to do something which a reasonably prudent health care provider
96

would have done, or that he did something that a reasonably prudent provider would not
have done; and that failure or action caused injury to the patient. 11 Simply put, the
elements are duty, breach, injury and proximate causation. Dr, Ampil, as the lead
surgeon, had the duty to remove all foreign objects, such as gauzes, from Natividads
body before closure of the incision. When he failed to do so, it was his duty to inform
Natividad about it. Dr. Ampil breached both duties. Such breach caused injury to
Natividad, necessitating her further examination by American doctors and another
surgery. That Dr. Ampils negligence is the proximate cause12 of Natividads injury could
be traced from his act of closing the incision despite the information given by the
attending nurses that two pieces of gauze were still missing. That they were later on
extracted from Natividads vagina established the causal link between Dr. Ampils
negligence and the injury. And what further aggravated such injury was his deliberate
concealment of the missing gauzes from the knowledge of Natividad and her family.
II - G.R. No. 126467
Whether the Court of Appeals Erred in Absolving
Dr. Fuentes of any Liability
The Aganas assailed the dismissal by the trial court of the case against Dr. Fuentes on
the ground that it is contrary to the doctrine of res ipsa loquitur. According to them, the
fact that the two pieces of gauze were left inside Natividads body is a prima facie
evidence of Dr. Fuentes negligence.
We are not convinced.
Literally, res ipsa loquitur means "the thing speaks for itself." It is the rule that the fact of
the occurrence of an injury, taken with the surrounding circumstances, may permit an
inference or raise a presumption of negligence, or make out a plaintiffs prima facie case,
and present a question of fact for defendant to meet with an explanation. 13 Stated
differently, where the thing which caused the injury, without the fault of the injured, is
under the exclusive control of the defendant and the injury is such that it should not have
occurred if he, having such control used proper care, it affords reasonable evidence, in
the absence of explanation that the injury arose from the defendants want of care, and
the burden of proof is shifted to him to establish that he has observed due care and
diligence.14
From the foregoing statements of the rule, the requisites for the applicability of the
doctrine of res ipsa loquitur are: (1) the occurrence of an injury; (2) the thing which
CORPORATION LAW CASES SESSION 1
caused the injury was under the control and management of the defendant; (3) the
occurrence was such that in the ordinary course of things, would not have happened if
those who had control or management used proper care; and (4) the absence of
explanation by the defendant. Of the foregoing requisites, the most instrumental is the
"control and management of the thing which caused the injury." 15
We find the element of "control and management of the thing which caused the injury" to
be wanting. Hence, the doctrine of res ipsa loquitur will not lie.
It was duly established that Dr. Ampil was the lead surgeon during the operation of
Natividad. He requested the assistance of Dr. Fuentes only to perform hysterectomy
when he (Dr. Ampil) found that the malignancy in her sigmoid area had spread to her left
ovary. Dr. Fuentes performed the surgery and thereafter reported and showed his work
to Dr. Ampil. The latter examined it and finding everything to be in order, allowed Dr.
Fuentes to leave the operating room. Dr. Ampil then resumed operating on Natividad. He
was about to finish the procedure when the attending nurses informed him that two
pieces of gauze were missing. A "diligent search" was conducted, but the misplaced
gauzes were not found. Dr. Ampil then directed that the incision be closed. During this
entire period, Dr. Fuentes was no longer in the operating room and had, in fact, left the
hospital.
Under the "Captain of the Ship" rule, the operating surgeon is the person in complete
charge of the surgery room and all personnel connected with the operation. Their duty is
to obey his orders.16 As stated before, Dr. Ampil was the lead surgeon. In other words, he
was the "Captain of the Ship." That he discharged such role is evident from his following
conduct: (1) calling Dr. Fuentes to perform a hysterectomy; (2) examining the work of Dr.
Fuentes and finding it in order; (3) granting Dr. Fuentes permission to leave; and (4)
ordering the closure of the incision. To our mind, it was this act of ordering the closure of
the incision notwithstanding that two pieces of gauze remained unaccounted for, that
caused injury to Natividads body. Clearly, the control and management of the thing
which caused the injury was in the hands of Dr. Ampil, not Dr. Fuentes.
In this jurisdiction, res ipsa loquitur is not a rule of substantive law, hence, does not per
se create or constitute an independent or separate ground of liability, being a mere
evidentiary rule.17 In other words, mere invocation and application of the doctrine does
not dispense with the requirement of proof of negligence. Here, the negligence was
proven to have been committed by Dr. Ampil and not by Dr. Fuentes.
III - G.R. No. 126297
97

Whether PSI Is Liable for the Negligence of Dr. Ampil
The third issue necessitates a glimpse at the historical development of hospitals and the
resulting theories concerning their liability for the negligence of physicians.
Until the mid-nineteenth century, hospitals were generally charitable institutions,
providing medical services to the lowest classes of society, without regard for a patients
ability to pay.18 Those who could afford medical treatment were usually treated at home
by their doctors.19 However, the days of house calls and philanthropic health care are
over. The modern health care industry continues to distance itself from its charitable past
and has experienced a significant conversion from a not-for-profit health care to for-profit
hospital businesses. Consequently, significant changes in health law have accompanied
the business-related changes in the hospital industry. One important legal change is an
increase in hospital liability for medical malpractice. Many courts now allow claims for
hospital vicarious liability under the theories of respondeat superior, apparent authority,
ostensible authority, or agency by estoppel. 20
In this jurisdiction, the statute governing liability for negligent acts is Article 2176 of the
Civil Code, which reads:
Art. 2176. Whoever by act or omission causes damage to another, there being fault or
negligence, is obliged to pay for the damage done. Such fault or negligence, if there is no
pre-existing contractual relation between the parties, is called a quasi-delict and is
governed by the provisions of this Chapter.
A derivative of this provision is Article 2180, the rule governing vicarious liability under
the doctrine of respondeat superior, thus:
ART. 2180. The obligation imposed by Article 2176 is demandable not only for ones own
acts or omissions, but also for those of persons for whom one is responsible.
x x x x x x
The owners and managers of an establishment or enterprise are likewise responsible for
damages caused by their employees in the service of the branches in which the latter are
employed or on the occasion of their functions.
Employers shall be liable for the damages caused by their employees and household
helpers acting within the scope of their assigned tasks even though the former are not
engaged in any business or industry.
CORPORATION LAW CASES SESSION 1
x x x x x x
The responsibility treated of in this article shall cease when the persons herein
mentioned prove that they observed all the diligence of a good father of a family to
prevent damage.
A prominent civilist commented that professionals engaged by an employer, such as
physicians, dentists, and pharmacists, are not "employees" under this article because the
manner in which they perform their work is not within the control of the latter (employer).
In other words, professionals are considered personally liable for the fault or negligence
they commit in the discharge of their duties, and their employer cannot be held liable for
such fault or negligence. In the context of the present case, "a hospital cannot be held
liable for the fault or negligence of a physician or surgeon in the treatment or operation of
patients."21
The foregoing view is grounded on the traditional notion that the professional status and
the very nature of the physicians calling preclude him from being classed as an agent or
employee of a hospital, whenever he acts in a professional capacity.22 It has been said
that medical practice strictly involves highly developed and specialized knowledge, 23 such
that physicians are generally free to exercise their own skill and judgment in rendering
medical services sans interference.24 Hence, when a doctor practices medicine in a
hospital setting, the hospital and its employees are deemed to subserve him in his
ministrations to the patient and his actions are of his own responsibility.25
The case of Schloendorff v. Society of New York Hospital26 was then considered an
authority for this view. The "Schloendorff doctrine" regards a physician, even if employed
by a hospital, as an independent contractor because of the skill he exercises and the
lack of control exerted over his work. Under this doctrine, hospitals are exempt from the
application of the respondeat superior principle for fault or negligence committed by
physicians in the discharge of their profession.
However, the efficacy of the foregoing doctrine has weakened with the significant
developments in medical care. Courts came to realize that modern hospitals are
increasingly taking active role in supplying and regulating medical care to patients. No
longer were a hospitals functions limited to furnishing room, food, facilities for treatment
and operation, and attendants for its patients. Thus, in Bing v. Thunig, 27 the New York
Court of Appeals deviated from the Schloendorff doctrine, noting that modern hospitals
actually do far more than provide facilities for treatment. Rather, they regularly employ,
on a salaried basis, a large staff of physicians, interns, nurses, administrative and
manual workers. They charge patients for medical care and treatment, even collecting for
98

such services through legal action, if necessary. The court then concluded that there is
no reason to exempt hospitals from the universal rule of respondeat superior.
In our shores, the nature of the relationship between the hospital and the physicians is
rendered inconsequential in view of our categorical pronouncement in Ramos v. Court of
Appeals28 that for purposes of apportioning responsibility in medical negligence cases, an
employer-employee relationship in effect exists between hospitals and their attending
and visiting physicians. This Court held:
"We now discuss the responsibility of the hospital in this particular incident. The unique
practice (among private hospitals) of filling up specialist staff with attending and visiting
"consultants," who are allegedly not hospital employees, presents problems in
apportioning responsibility for negligence in medical malpractice cases. However, the
difficulty is more apparent than real.
In the first place, hospitals exercise significant control in the hiring and firing of
consultants and in the conduct of their work within the hospital premises. Doctors who
apply for consultant slots, visiting or attending, are required to submit proof of
completion of residency, their educational qualifications, generally, evidence of
accreditation by the appropriate board (diplomate), evidence of fellowship in most cases,
and references. These requirements are carefully scrutinized by members of the hospital
administration or by a review committee set up by the hospital who either accept or reject
the application. x x x.
After a physician is accepted, either as a visiting or attending consultant, he is normally
required to attend clinico-pathological conferences, conduct bedside rounds for clerks,
interns and residents, moderate grand rounds and patient audits and perform other tasks
and responsibilities, for the privilege of being able to maintain a clinic in the hospital,
and/or for the privilege of admitting patients into the hospital. In addition to these, the
physicians performance as a specialist is generally evaluated by a peer review
committee on the basis of mortality and morbidity statistics, and feedback from patients,
nurses, interns and residents. A consultant remiss in his duties, or a consultant who
regularly falls short of the minimum standards acceptable to the hospital or its peer
review committee, is normally politely terminated.
In other words, private hospitals, hire, fire and exercise real control over their attending
and visiting consultant staff. While consultants are not, technically employees, x x x,
the control exercised, the hiring, and the right to terminate consultants all fulfill the
important hallmarks of an employer-employee relationship, with the exception of the
payment of wages. In assessing whether such a relationship in fact exists, the control
CORPORATION LAW CASES SESSION 1
test is determining. Accordingly, on the basis of the foregoing, we rule that for the
purpose of allocating responsibility in medical negligence cases, an employer-employee
relationship in effect exists between hospitals and their attending and visiting physicians.
"
But the Ramos pronouncement is not our only basis in sustaining PSIs liability. Its
liability is also anchored upon the agency principle of apparent authority or agency by
estoppel and the doctrine of corporate negligence which have gained acceptance in the
determination of a hospitals liability for negligent acts of health professionals. The
present case serves as a perfect platform to test the applicability of these doctrines, thus,
enriching our jurisprudence.
Apparent authority, or what is sometimes referred to as the "holding
out" theory, or doctrine of ostensible agency or agency by estoppel,29 has its origin from
the law of agency. It imposes liability, not as the result of the reality of a contractual
relationship, but rather because of the actions of a principal or an employer in somehow
misleading the public into believing that the relationship or the authority exists. 30 The
concept is essentially one of estoppel and has been explained in this manner:
"The principal is bound by the acts of his agent with the apparent authority which he
knowingly permits the agent to assume, or which he holds the agent out to the public as
possessing. The question in every case is whether the principal has by his voluntary act
placed the agent in such a situation that a person of ordinary prudence, conversant with
business usages and the nature of the particular business, is justified in presuming that
such agent has authority to perform the particular act in question. 31
The applicability of apparent authority in the field of hospital liability was upheld long time
ago in Irving v. Doctor Hospital of Lake Worth, Inc.32 There, it was explicitly stated that
"there does not appear to be any rational basis for excluding the concept of apparent
authority from the field of hospital liability." Thus, in cases where it can be shown that a
hospital, by its actions, has held out a particular physician as its agent and/or employee
and that a patient has accepted treatment from that physician in the reasonable belief
that it is being rendered in behalf of the hospital, then the hospital will be liable for the
physicians negligence.
Our jurisdiction recognizes the concept of an agency by implication or estoppel. Article
1869 of the Civil Code reads:
99

ART. 1869. Agency may be express, or implied from the acts of the principal, from his
silence or lack of action, or his failure to repudiate the agency, knowing that another
person is acting on his behalf without authority.
In this case, PSI publicly displays in the lobby of the Medical City Hospital the names and
specializations of the physicians associated or accredited by it, including those of Dr.
Ampil and Dr. Fuentes. We concur with the Court of Appeals conclusion that it "is now
estopped from passing all the blame to the physicians whose names it proudly paraded
in the public directory leading the public to believe that it vouched for their skill and
competence." Indeed, PSIs act is tantamount to holding out to the public that Medical
City Hospital, through its accredited physicians, offers quality health care services. By
accrediting Dr. Ampil and Dr. Fuentes and publicly advertising their qualifications, the
hospital created the impression that they were its agents, authorized to perform medical
or surgical services for its patients. As expected, these patients, Natividad being one of
them, accepted the services on the reasonable belief that such were being rendered by
the hospital or its employees, agents, or servants. The trial court correctly pointed out:
x x x regardless of the education and status in life of the patient, he ought not be
burdened with the defense of absence of employer-employee relationship between the
hospital and the independent physician whose name and competence are certainly
certified to the general public by the hospitals act of listing him and his specialty in its
lobby directory, as in the case herein. The high costs of todays medical and health care
should at least exact on the hospital greater, if not broader, legal responsibility for the
conduct of treatment and surgery within its facility by its accredited physician or surgeon,
regardless of whether he is independent or employed."33
The wisdom of the foregoing ratiocination is easy to discern. Corporate entities, like PSI,
are capable of acting only through other individuals, such as physicians. If these
accredited physicians do their job well, the hospital succeeds in its mission of offering
quality medical services and thus profits financially. Logically, where negligence mars the
quality of its services, the hospital should not be allowed to escape liability for the acts of
its ostensible agents.
We now proceed to the doctrine of corporate negligence or corporate responsibility.
One allegation in the complaint in Civil Case No. Q-43332 for negligence and
malpractice is that PSI as owner, operator and manager of Medical City Hospital, "did not
perform the necessary supervision nor exercise diligent efforts in the supervision of Drs.
Ampil and Fuentes and its nursing staff, resident doctors, and medical interns who
assisted Drs. Ampil and Fuentes in the performance of their duties as
CORPORATION LAW CASES SESSION 1
surgeons." Premised on the doctrine of corporate negligence, the trial court held that
34
PSI is directly liable for such breach of duty.
We agree with the trial court.
Recent years have seen the doctrine of corporate negligence as the judicial answer to
the problem of allocating hospitals liability for the negligent acts of health practitioners,
absent facts to support the application of respondeat superior or apparent authority. Its
formulation proceeds from the judiciarys acknowledgment that in these modern times,
the duty of providing quality medical service is no longer the sole prerogative and
responsibility of the physician. The modern hospitals have changed structure. Hospitals
now tend to organize a highly professional medical staff whose competence and
performance need to be monitored by the hospitals commensurate with their inherent
responsibility to provide quality medical care.35
The doctrine has its genesis in Darling v. Charleston Community Hospital.36 There, the
Supreme Court of Illinois held that "the jury could have found a hospital negligent, inter
alia, in failing to have a sufficient number of trained nurses attending the patient; failing to
require a consultation with or examination by members of the hospital staff; and failing to
review the treatment rendered to the patient." On the basis of Darling, other jurisdictions
held that a hospitals corporate negligence extends to permitting a physician known to be
incompetent to practice at the hospital.37 With the passage of time, more duties were
expected from hospitals, among them: (1) the use of reasonable care in the maintenance
of safe and adequate facilities and equipment; (2) the selection and retention of
competent physicians; (3) the overseeing or supervision of all persons who practice
medicine within its walls; and (4) the formulation, adoption and enforcement of adequate
rules and policies that ensure quality care for its patients.38 Thus, in Tucson Medical
Center, Inc. v. Misevich,39 it was held that a hospital, following the doctrine of corporate
responsibility, has the duty to see that it meets the standards of responsibilities for the
care of patients. Such duty includes the proper supervision of the members of its medical
staff. And in Bost v. Riley,40 the court concluded that a patient who enters a hospital does
so with the reasonable expectation that it will attempt to cure him. The hospital
accordingly has the duty to make a reasonable effort to monitor and oversee the
treatment prescribed and administered by the physicians practicing in its premises.
In the present case, it was duly established that PSI operates the Medical City Hospital
for the purpose and under the concept of providing comprehensive medical services to
the public. Accordingly, it has the duty to exercise reasonable care to protect from harm
all patients admitted into its facility for medical treatment. Unfortunately, PSI failed to
perform such duty. The findings of the trial court are convincing, thus:
100

x x x PSIs liability is traceable to its failure to conduct an investigation of the matter
reported in the nota bene of the count nurse. Such failure established PSIs part in the
dark conspiracy of silence and concealment about the gauzes. Ethical considerations, if
not also legal, dictated the holding of an immediate inquiry into the events, if not for the
benefit of the patient to whom the duty is primarily owed, then in the interest of arriving at
the truth. The Court cannot accept that the medical and the healing professions, through
their members like defendant surgeons, and their institutions like PSIs hospital facility,
can callously turn their backs on and disregard even a mere probability of mistake or
negligence by refusing or failing to investigate a report of such seriousness as the one in
Natividads case.
It is worthy to note that Dr. Ampil and Dr. Fuentes operated on Natividad with the
assistance of the Medical City Hospitals staff, composed of resident doctors, nurses,
and interns. As such, it is reasonable to conclude that PSI, as the operator of the
hospital, has actual or constructive knowledge of the procedures carried out, particularly
the report of the attending nurses that the two pieces of gauze were missing. In Fridena
v. Evans,41 it was held that a corporation is bound by the knowledge acquired by or notice
given to its agents or officers within the scope of their authority and in reference to a
matter to which their authority extends. This means that the knowledge of any of the staff
of Medical City Hospital constitutes knowledge of PSI. Now, the failure of PSI, despite
the attending nurses report, to investigate and inform Natividad regarding the missing
gauzes amounts to callous negligence. Not only did PSI breach its duties to oversee or
supervise all persons who practice medicine within its walls, it also failed to take an
active step in fixing the negligence committed. This renders PSI, not only vicariously
liable for the negligence of Dr. Ampil under Article 2180 of the Civil Code, but also directly
liable for its own negligence under Article 2176. In Fridena, the Supreme Court of Arizona
held:
x x x In recent years, however, the duty of care owed to the patient by the hospital has
expanded. The emerging trend is to hold the hospital responsible where the hospital has
failed to monitor and review medical services being provided within its walls. See Kahn
Hospital Malpractice Prevention, 27 De Paul . Rev. 23 (1977).
Among the cases indicative of the emerging trend is Purcell v. Zimbelman, 18 Ariz. App.
75,500 P. 2d 335 (1972). In Purcell, the hospital argued that it could not be held liable for
the malpractice of a medical practitioner because he was an independent contractor
within the hospital. The Court of Appeals pointed out that the hospital had created a
professional staff whose competence and performance was to be monitored and
reviewed by the governing body of the hospital, and the court held that a hospital would
be negligent where it had knowledge or reason to believe that a doctor using the facilities
CORPORATION LAW CASES SESSION 1
was employing a method of treatment or care which fell below the recognized standard
of care.
Subsequent to the Purcell decision, the Arizona Court of Appeals held that a hospital has
certain inherent responsibilities regarding the quality of medical care furnished to patients
within its walls and it must meet the standards of responsibility commensurate with this
undertaking. Beeck v. Tucson General Hospital, 18 Ariz. App. 165, 500 P. 2d 1153
(1972). This court has confirmed the rulings of the Court of Appeals that a hospital has
the duty of supervising the competence of the doctors on its staff. x x x.
x x x x x x
In the amended complaint, the plaintiffs did plead that the operation was performed at
the hospital with its knowledge, aid, and assistance, and that the negligence of the
defendants was the proximate cause of the patients injuries. We find that such general
allegations of negligence, along with the evidence produced at the trial of this case, are
sufficient to support the hospitals liability based on the theory of negligent supervision."
Anent the corollary issue of whether PSI is solidarily liable with Dr. Ampil for damages, let
it be emphasized that PSI, apart from a general denial of its responsibility, failed to
adduce evidence showing that it exercised the diligence of a good father of a family in
the accreditation and supervision of the latter. In neglecting to offer such proof, PSI failed
to discharge its burden under the last paragraph of Article 2180 cited earlier, and,
therefore, must be adjudged solidarily liable with Dr. Ampil. Moreover, as we have
discussed, PSI is also directly liable to the Aganas.
One final word. Once a physician undertakes the treatment and care of a patient, the law
imposes on him certain obligations. In order to escape liability, he must possess that
reasonable degree of learning, skill and experience required by his profession. At the
same time, he must apply reasonable care and diligence in the exercise of his skill and
the application of his knowledge, and exert his best judgment.
WHEREFORE, we DENY all the petitions and AFFIRM the challenged Decision of the
Court of Appeals in CA-G.R. CV No. 42062 and CA-G.R. SP No. 32198.
Costs against petitioners PSI and Dr. Miguel Ampil.
SO ORDERED.
101

G.R. No. 126297 February 11, 2008
PROFESSIONAL SERVICES, INC. vs. THE COURT OF APPEALS and NATIVIDAD
and ENRIQUE AGANA
As the hospital industry changes, so must the laws and jurisprudence governing hospital
liability. The immunity from medical malpractice traditionally accorded to hospitals has to
be eroded if we are to balance the interest of the patients and hospitals under the
present setting.
Before this Court is a motion for reconsideration filed by Professional Services, Inc.
(PSI), petitioner in G.R. No. 126297, assailing the Courts First Division Decision dated
January 31, 2007, finding PSI and Dr. Miguel Ampil, petitioner in G.R. No. 127590, jointly
and severally liable for medical negligence.
A brief revisit of the antecedent facts is imperative.
On April 4, 1984, Natividad Agana was admitted at the Medical City General Hospital
(Medical City) because of difficulty of bowel movement and bloody anal discharge. Dr.
Ampil diagnosed her to be suffering from "cancer of the sigmoid." Thus, on April 11,
1984, Dr. Ampil, assisted by the medical staff1 of Medical City, performed an anterior
resection surgery upon her. During the surgery, he found that the malignancy in her
sigmoid area had spread to her left ovary, necessitating the removal of certain portions of
it. Thus, Dr. Ampil obtained the consent of Atty. Enrique Agana, Natividads husband, to
permit Dr. Juan Fuentes, respondent in G.R. No. 126467, to perform hysterectomy upon
Natividad.
Dr. Fuentes performed and completed the hysterectomy. Afterwards, Dr. Ampil took over,
completed the operation and closed the incision. However, the operation appeared to be
flawed. In the corresponding Record of Operation dated April 11, 1984, the attending
nurses entered these remarks:
sponge count lacking 2
announced to surgeon searched done (sic) but to no avail continue for closure.
After a couple of days, Natividad complained of excruciating pain in her anal region. She
consulted both Dr. Ampil and Dr. Fuentes about it. They told her that the pain was the
natural consequence of the surgical operation performed upon her. Dr. Ampil
recommended that Natividad consult an oncologist to treat the cancerous nodes which
were not removed during the operation.
CORPORATION LAW CASES SESSION 1
On May 9, 1984, Natividad, accompanied by her husband, went to the United States to
seek further treatment. After four (4) months of consultations and laboratory
examinations, Natividad was told that she was free of cancer. Hence, she was advised to
return to the Philippines.
On August 31, 1984, Natividad flew back to the Philippines, still suffering from pains. Two
(2) weeks thereafter, her daughter found a piece of gauze protruding from her vagina. Dr.
Ampil was immediately informed. He proceeded to Natividads house where he managed
to extract by hand a piece of gauze measuring 1.5 inches in width. Dr. Ampil then
assured Natividad that the pains would soon vanish.
Despite Dr. Ampils assurance, the pains intensified, prompting Natividad to seek
treatment at the Polymedic General Hospital. While confined thereat, Dr. Ramon
Gutierrez detected the presence of a foreign object in her vagina -- a foul-smelling gauze
measuring 1.5 inches in width. The gauze had badly infected her vaginal vault. A recto-
vaginal fistula had formed in her reproductive organ which forced stool to excrete through
the vagina. Another surgical operation was needed to remedy the situation. Thus, in
October 1984, Natividad underwent another surgery.
On November 12, 1984, Natividad and her husband filed with the Regional Trial Court,
Branch 96, Quezon City a complaint for damages against PSI (owner of Medical City),
Dr. Ampil and Dr. Fuentes.
On February 16, 1986, pending the outcome of the above case, Natividad died. She was
duly substituted by her above-named children (the Aganas).
On March 17, 1993, the trial court rendered judgment in favor of spouses Agana finding
PSI, Dr. Ampil and Dr. Fuentes jointly and severally liable. On appeal, the Court of
Appeals, in its Decision dated September 6, 1996, affirmed the assailed judgment with
modification in the sense that the complaint against Dr. Fuentes was dismissed.
PSI, Dr. Ampil and the Aganas filed with this Court separate petitions for review
on certiorari. On January 31, 2007, the Court, through its First Division, rendered a
Decision holding that PSI is jointly and severally liable with Dr. Ampil for the following
reasons: first, there is an employer-employee relationship between Medical City and Dr.
Ampil. The Court relied on Ramos v. Court of Appeals,2 holding that for the purpose of
apportioning responsibility in medical negligence cases, an employer-employee
relationship in effect exists between hospitals and their attending and visiting
physicians; second, PSIs act of publicly displaying in the lobby of the Medical City the
names and specializations of its accredited physicians, including Dr. Ampil, estopped it
102

from denying the existence of an employer-employee relationship between them under
the doctrine of ostensible agency or agency by estoppel; and third, PSIs failure to
supervise Dr. Ampil and its resident physicians and nurses and to take an active step in
order to remedy their negligence rendered it directly liable under the doctrine of
corporate negligence.
In its motion for reconsideration, PSI contends that the Court erred in finding it liable
under Article 2180 of the Civil Code, there being no employer-employee relationship
between it and its consultant, Dr. Ampil. PSI stressed that the Courts Decision
in Ramos holding that "an employer-employee relationship in effect exists between
hospitals and their attending and visiting physicians for the purpose of apportioning
responsibility" had been reversed in a subsequent Resolution.3 Further, PSI argues
that the doctrine of ostensible agency or agency by estoppelcannot apply because
spouses Agana failed to establish one requisite of the doctrine, i.e., that Natividad relied
on the representation of the hospital in engaging the services of Dr. Ampil. And lastly, PSI
maintains that the doctrine of corporate negligence is misplaced because the
proximate cause of Natividads injury was Dr. Ampils negligence.
The motion lacks merit.
As earlier mentioned, the First Division, in its assailed Decision, ruled that an employer-
employee relationship "in effect" exists between the Medical City and Dr. Ampil.
Consequently, both are jointly and severally liable to the Aganas. This ruling proceeds
from the following ratiocination in Ramos:
We now discuss the responsibility of the hospital in this particular incident. The
unique practice (among private hospitals) of filling up specialist staff with
attending and visiting "consultants," who are allegedly not hospital employees,
presents problems in apportioning responsibility for negligence in medical
malpractice cases. However, the difficulty is only more apparent than real.
In the first place, hospitals exercise significant control in the hiring and
firing of consultants and in the conduct of their work within the hospital
premises. Doctors who apply for "consultant" slots, visiting or attending, are
required to submit proof of completion of residency, their educational
qualifications; generally, evidence of accreditation by the appropriate board
(diplomate), evidence of fellowship in most cases, and references. These
requirements are carefully scrutinized by members of the hospital administration
or by a review committee set up by the hospital who either accept or reject the
application. This is particularly true with respondent hospital.
CORPORATION LAW CASES SESSION 1
After a physician is accepted, either as a visiting or attending consultant,
he is normally required to attend clinico-pathological conferences, conduct
bedside rounds for clerks, interns and residents, moderate grand rounds
and patient audits and perform other tasks and responsibilities, for the
privilege of being able to maintain a clinic in the hospital, and/or for the
privilege of admitting patients into the hospital. In addition to these, the
physicians performance as a specialist is generally evaluated by a peer
review committee on the basis of mortality and morbidity statistics, and
feedback from patients, nurses, interns and residents. A consultant remiss
in his duties, or a consultant who regularly falls short of the minimum
standards acceptable to the hospital or its peer review committee, is
normally politely terminated.
In other words, private hospitals hire, fire and exercise real control over their
attending and visiting "consultant" staff. While "consultants" are not,
technically employees, a point which respondent hospital asserts in
denying all responsibility for the patients condition, the control exercised,
the hiring, and the right to terminate consultants all fulfill the important
hallmarks of an employer-employee relationship, with the exception of the
payment of wages. In assessing whether such a relationship in fact exists,
the control test is determining. Accordingly, on the basis of the foregoing,
we rule that for the purpose of allocating responsibility in medical
negligence cases, an employer-employee relationship in effect exists
between hospitals and their attending and visiting physicians. This being
the case, the question now arises as to whether or not respondent hospital is
solidarily liable with respondent doctors for petitioners condition.
The basis for holding an employer solidarily responsible for the negligence of its
employee is found in Article 2180 of the Civil Code which considers a person
accountable not only for his own acts but also for those of others based on the
formers responsibility under a relationship of partia ptetas.
Clearly, in Ramos, the Court considered the peculiar relationship between a hospital and
its consultants on the bases of certain factors. One such factor is the "control test"
wherein the hospital exercises control in the hiring and firing of consultants, like Dr.
Ampil, and in the conduct of their work.
Actually, contrary to PSIs contention, the Court did not reverse its ruling in Ramos. What
it clarified was that the De Los Santos Medical Clinic did not exercise control over its
consultant, hence, there is no employer-employee relationship between them. Thus,
103

despite the granting of the said hospitals motion for reconsideration, the doctrine
in Ramos stays, i.e., for the purpose of allocating responsibility in medical negligence
cases, an employer-employee relationship exists between hospitals and their
consultants.
In the instant cases, PSI merely offered a general denial of responsibility, maintaining
that consultants, like Dr. Ampil, are "independent contractors," not employees of the
hospital. Even assuming that Dr. Ampil is not an employee of Medical City, but an
independent contractor, still the said hospital is liable to the Aganas.
In Nograles, et al. v. Capitol Medical Center, et al.,4 through Mr. Justice Antonio T. Carpio,
the Court held:
The question now is whether CMC is automatically exempt from liability
considering that Dr. Estrada is an independent contractor-physician.
In general, a hospital is not liable for the negligence of an independent
contractor-physician. There is, however, an exception to this principle. The
hospital may be liable if the physician is the "ostensible" agent of the hospital.
(Jones v. Philpott, 702 F. Supp. 1210 [1988]) This exception is also known as the
"doctrine of apparent authority." (Sometimes referred to as the apparent or
ostensible agency theory. [King v. Mitchell, 31 A.D.3rd 958, 819 N.Y. S.2d 169
(2006)].
xxx
The doctrine of apparent authority essentially involves two factors to determine
the liability of an independent contractor-physician.
The first factor focuses on the hospitals manifestations and is sometimes
described as an inquiry whether the hospital acted in a manner which would lead
a reasonable person to conclude that the individual who was alleged to be
negligent was an employee or agent of the hospital. (Diggs v. Novant Health,
Inc., 628 S.E.2d 851 (2006) citing Hylton v. Koontz, 138 N.C. App. 629 (2000). In
this regard, the hospital need not make express representations to the
patient that the treating physician is an employee of the hospital; rather a
representation may be general and implied. (Id.)
The doctrine of apparent authority is a specie of the doctrine of estoppel. Article
1431 of the Civil Code provides that "[t]hrough estoppel, an admission or
CORPORATION LAW CASES SESSION 1
representation is rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon." Estoppel rests on this
rule: "Whether a party has, by his own declaration, act, or omission, intentionally
and deliberately led another to believe a particular thing true, and to act upon
such belief, he cannot, in any litigation arising out of such declaration, act or
omission, be permitted to falsify it. (De Castro v. Ginete, 137 Phil. 453 [1969],
citing Sec. 3, par. A, Rule 131 of the Rules of Court. See also King v. Mitchell, 31
A.D.3rd 958, 819 N.Y.S.2d 169 [2006]).
xxx
The second factor focuses on the patients reliance. It is sometimes
characterized as an inquiry on whether the plaintiff acted in reliance upon the
conduct of the hospital or its agent, consistent with ordinary care and prudence.
(Diggs v. Novant Health, Inc.)
PSI argues that the doctrine of apparent authority cannot apply to these cases
because spouses Agana failed to establish proof of their reliance on the representation of
Medical City that Dr. Ampil is its employee.
The argument lacks merit.
Atty. Agana categorically testified that one of the reasons why he chose Dr. Ampil was
that he knew him to be a staff member of Medical City, a prominent and known
hospital.
Q Will you tell us what transpired in your visit to Dr. Ampil?
A Well, I saw Dr. Ampil at the Medical City, I know him to be a staff member
there, and I told him about the case of my wife and he asked me to bring my wife
over so she could be examined. Prior to that, I have known Dr. Ampil, first, he
was staying in front of our house, he was a neighbor, second, my daughter was
his student in the University of the East School of Medicine at Ramon
Magsaysay; and when my daughter opted to establish a hospital or a clinic, Dr.
Ampil was one of our consultants on how to establish that hospital. And from
there, I have known that he was a specialist when it comes to that illness.
Atty. Agcaoili
104
 CORPORATION LAW CASES SESSION 1
On that particular occasion, April 2, 1984, what was your reason for choosing to Q Was the hospital immediately informed about the missing sponges?
contact Dr. Ampil in connection with your wifes illness?
A That is the duty of the surgeon, sir.
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 Q As a witness to an untoward incident in the operating room, was it not
City which is a prominent and known hospital.And third, because he is a your obligation, Dr., to also report to the hospital because you are under
neighbor, I expect more than the usual medical service to be given to us, than his the control and direction of the hospital?
ordinary patients.5
A The hospital already had the record of the two OS missing, sir.
Clearly, PSI is estopped from passing the blame solely to Dr. Ampil. Its act of displaying
his name and those of the other physicians in the public directory at the lobby of the Q If you place yourself in the position of the hospital, how will you
hospital amounts to holding out to the public that it offers quality medical service through recover.
the listed physicians. This justifies Atty. Aganas belief that Dr. Ampil was a member of
the hospitals staff. It must be stressed that under the doctrine of apparent authority, A You do not answer my question with another question.
the question in every case is whether the principal has by his voluntary act placed
the agent in such a situation that a person of ordinary prudence, conversant with Q Did the hospital do anything about the missing gauzes?
business usages and the nature of the particular business, is justified in
presuming that such agent has authority to perform the particular act in A The hospital left it up to the surgeon who was doing the operation, sir.
question.6 In these cases, the circumstances yield a positive answer to the question.
Q Did the hospital investigate the surgeon who did the operation?
The challenged Decision also anchors its ruling on the doctrine of corporate
responsibility.7 The duty of providing quality medical service is no longer the sole
A I am not in the position to answer that, sir.
prerogative and responsibility of the physician. This is because the modern hospital now
tends to organize a highly-professional medical staff whose competence and
Q You never did hear the hospital investigating the doctors involved in
performance need also to be monitored by the hospital commensurate with its inherent
this case of those missing sponges, or did you hear something?
responsibility to provide quality medical care.8 Such responsibility includes the proper
supervision of the members of its medical staff. Accordingly, the hospital has the
xxxxxx
duty to make a reasonable effort to monitor and oversee the treatment prescribed
and administered by the physicians practicing in its premises.
A I think we already made a report by just saying that two sponges were
missing, it is up to the hospital to make the move.
Unfortunately, PSI had been remiss in its duty. It did not conduct an immediate
investigation on the reported missing gauzes to the great prejudice and agony of its
patient. Dr. Jocson, a member of PSIs medical staff, who testified on whether the Atty. Agana
hospital conducted an investigation, was evasive, thus:
Precisely, I am asking you if the hospital did a move, if the hospital did a
Q We go back to the operative technique, this was signed by Dr. move.
Puruganan, was this submitted to the hospital?
A I cannot answer that.
A Yes, sir, this was submitted to the hospital with the record of the
patient. Court

105

By that answer, would you mean to tell the Court that you were aware if
there was such a move done by the hospital?
A I cannot answer that, your honor, because I did not have any more
follow-up of the case that happened until now.9
The above testimony obviously shows Dr. Jocsons lack of concern for the patients.
Such conduct is reflective of the hospitals manner of supervision. Not only did
PSI breach its duty to oversee or supervise all persons who practice medicine
within its walls, it also failed to take an active step in fixing the negligence
committed.This renders PSI, not only vicariously liable for the negligence of Dr. Ampil
under Article 2180 of the Civil Code, but also directly liable for its own negligence under
Article 2176.
Moreover, there is merit in the trial courts finding that the failure of PSI to conduct an
investigation "established PSIs part in the dark conspiracy of silence and
concealment about the gauzes." The following testimony of Atty. Agana supports such
findings, thus:
Q You said you relied on the promise of Dr. Ampil and despite the promise you
were not able to obtain the said record. Did you go back to the record custodian?
A I did not because I was talking to Dr. Ampil. He promised me.
Q After your talk to Dr. Ampil, you went to the record custodian?
A I went to the record custodian to get the clinical record of my wife, and
I was given a portion of the records consisting of the findings, among
them, the entries of the dates, but not the operating procedure and
operative report.10
In sum, we find no merit in the motion for reconsideration.
WHEREFORE, we DENY PSIs motion for reconsideration with finality.
SO ORDERED.
G.R. No. 126297 February 2, 2010
PROFESSIONAL SERVICES, INC vs. THE COURT OF APPEALS and NATIVIDAD
and ENRIQUE AGANA
CORPORATION LAW CASES SESSION 1
With prior leave of court, petitioner Professional Services, Inc. (PSI) filed a second
1
motion for reconsideration2urging referral thereof to the Court en banc and seeking
modification of 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 cases invoking 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 referral8 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 complaint10 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 decision12 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 1avvphi1
On petition for review, this Court, in its January 31, 2007 decision, affirmed the CA
decision.15 PSI filed a motion for reconsideration16 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:
106

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 Appeals18 that "for
purposes of allocating responsibility in medical negligence cases, an employer-employee
relationship exists between hospitals and their consultants." 19Although the Court
in Ramos later issued a Resolution dated April 11, 200220 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
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 currently prevailing relationships among patient, physician and hospital, with
CORPORATION LAW CASES SESSION 1
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
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
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
107

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 217634 in relation to Article 218035 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 143136 and Article 186937 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.
xxx xxx xxx
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.
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
CORPORATION LAW CASES SESSION 1
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 decision41 and April 11, 2002 resolution42 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 that the
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 appealed44 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.
108

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 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 Medical City 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
CORPORATION LAW CASES SESSION 1
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. 1avvphi1
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 City General
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, Enrique
decided 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
109

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.
Second, it is a judicial admission that, by virtue of the nature of its business as well as its
prominence57 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.
CORPORATION LAW CASES SESSION 1
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 non-delegable.
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
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
110
 CORPORATION LAW CASES SESSION 1
inaction, therefore, PSI failed its own standard of hospital care. It committed corporate Therefore, taking all the equities of this case into consideration, this Court believes P15
negligence. 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.
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 WHEREFORE, the second motion for reconsideration is DENIED and the motions for
those of the doctor-consultant practicing within its premises in relation to the patient; intervention are NOTED.
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. 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
All this notwithstanding, we make it clear that PSIs hospital liability based on ostensible and Raymund Agana) and Enrique Agana the total amount of P15 million, subject to 12%
agency and corporate negligence applies only to this case, pro hac vice. It is not p.a. interest from the finality of this resolution to full satisfaction.
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. No further pleadings by any party shall be entertained in this case.
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 Let the long-delayed entry of judgment be made in this case upon receipt by all
concerned parties of this resolution.
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 SO ORDERED.
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

111