Commercial Law Corporation Law Power of the Board Ultra Vires Acts of

Corporate Officers Agency

In 1988, Manuel Cruz, Jr., a board member of Dieselman Freight Services, Co. (DFS)
authorized Cristeta Polintan to sell a 2,094 sq. m. parcel of land owned by DFS.
Polintan in turn authorized Felicisima Noble to sell the same lot. Noble then offered
AF Realty & Development, Co., represented by Zenaida Ranullo, the land at the rate
of P2,500.00 per sq. m. AF Realty accepted the offer and issued a P300,000 check
as downpayment.

However, it appeared that DFS did not authorize Cruz, Jr. to sell the said land.
Nevertheless, Manuel Cruz, Sr. (father) and president of DFS, accepted the check
but modified the offer. He increased the selling price to P4,000.00 per sq. m. AF
Realty, in its response, did not exactly agree nor disagree with the counter-offer but
only said it is willing to pay the balance (but was not clear at what rate). Eventually,
DFS sold the property to someone else.

Now AF Realty is suing DFS for specific performance. It claims that DFS ratified the
contract when it accepted the check and made a counter-offer.

ISSUE: Whether or not the sale made through an agent was ratified.

HELD: No. There was no valid agency created. The Board of Directors of DFS never
authorized Cruz, Jr. to sell the land. Hence, the agreement between Cruz, Jr. and
Polintan, as well as the subsequent agreement between Polintan and Noble, never
bound the corporation. Therefore the sale transacted by Noble purportedly on
behalf of Polintan and ultimately purportedly on behalf of DFS is void.

Being a void sale, it cannot be ratified even if Cruz, Sr. accepted the check and
made a counter-offer. (Cruz, Sr. returned the check anyway). Under Article 1409 of
the Civil Code, void transactions can never be ratified because they were void from
the very beginning.

FACTS: Subject of this case is a lot (Lot No. 88) located in Lahug, Cebu City. Its
original owner was Anastacio Deiparine when the same was subject to expropriation
proceedings, initiated by Republic, represented by the then Civil Aeronautics
Administration (CAA), for the expansion and improvement of the Lahug Airport.
During the pendency of the expropriation proceedings, respondent Bernardo L.
Lozada, Sr. acquired Lot No. 88 from Deiparine. The trial court ruled for the Republic
and ordered the latter to pay Lozada the fair market value of the lot. However, the
projected improvement and expansion plan of the old Lahug Airport, however, was
not pursued. The plaintiff-respondents initiated a complaint for the recovery of
possession and reconveyance of ownership the subject lot. On the other hand, the
petitioners asked for the immediate dismissal of the complaint. They specifically
denied that the Government had made assurances to reconvey Lot No. 88 to
respondents in the event that the property would no longer be needed for airport
operations. Petitioners instead asserted that the judgment of condemnation was
unconditional, and respondents were, therefore, not entitled to recover the
expropriated property notwithstanding non-use or abandonment thereof. The lower
court ruled for herein plaintiff-respondents, which decision was affirmed by the
Court of Appeals. In this petition, the petitioners argued that the judgment in Civil
Case No. R-1881 was absolute and unconditional, giving title in fee simple to the
Republic.

ISSUE: Whether or not a constructive trust was constituted in this case, and as
such, the respondents herein are entitled to the restitution of the expropriated
property which was not used for a public purpose.

HELD: YES. Art. 1454 of the Civil Code provides: If an absolute conveyance of
property is made in order to secure the performance of an obligation of the grantor
toward the grantee, a trust by virtue of law is established. If the fulfillment of the
obligation is offered by the grantor when it becomes due, he may demand the
reconveyance of the property to him.

Constructive trusts are fictions of equity which are bound by no unyielding formula
when they are used by courts as devices to remedy any situation in which the
holder of legal title may not in good conscience retain the beneficial interest.

In constructive trusts, the arrangement is temporary and passive in which the

trustees sole duty is to transfer the title and possession over the property to the
plaintiff-beneficiary. Of course, the wronged party seeking the aid of a court of
equity in establishing a constructive trust must himself do equity. Accordingly, the
court will exercise its discretion in deciding what acts are required of the plaintiff-
beneficiary as conditions precedent to obtaining such decree and has the obligation
to reimburse the trustee the consideration received from the latter just as the
plaintiff-beneficiary would if he proceeded on the theory of rescission. In the good
judgment of the court, the trustee may also be paid the necessary expenses he may
have incurred in sustaining the property, his fixed costs for improvements thereon,
and the monetary value of his services in managing the property to the extent that
plaintiff-beneficiary will secure a benefit from his acts.

The rights and obligations between the constructive trustee and the beneficiary, in
this case, respondent MCIAA and petitioners over Lots Nos. 916 and 920, are
echoed in Art. 1190 of the Civil Code, When the conditions have for their purpose
the extinguishment of an obligation to give, the parties, upon the fulfillment of said
conditions, shall return to each other what they have received x x x In case of the
loss, deterioration or improvement of the thing, the provisions which, with respect
to the debtor, are laid down in the preceding article shall be applied to the party
who is bound to return x x x.

Facts: Hornilla filed a complaint against Atty. Salunat with the IBP Commission on
Bar Discipline for unethical practice regarding conflict of interests. Said counsel is a
member of the ASSA Law Office and acted as the lawyer for the Philippine Public
School Teachers Association.
In a squabble between the PPSTA and some of its board members pending SEC
resolution for unlawful spending and undervalued sale of real properties, Atty.
Salunat appeared as counsel for said board members.

Respondent says he only appeared in behalf of ASSA since he was a partner.

Moreover, he only filed a Manifestation for extreme urgency.

Issue: Whether or not Salunat is guilty of unethical behavior as a member of the

IBP.

Held: Yes. Respondent Atty. Ernesto Salunat is found GUILTY of representing

conflicting interests and is ADMONISHED to observe a higher degree of fidelity in
the practice of his profession. He is further WARNED that a repetition of the same or
similar acts will be dealt with more severely.

RULE 15.03. A lawyer shall not represent conflicting interests except by written
consent of all concerned given after a full disclosure of the facts.

There is conflict of interest when a lawyer represents inconsistent interests of two or

more opposing parties. The test is whether or not in behalf of one client, it is the
lawyers duty to fight for an issue or claim, but it is his duty to oppose it for the other
client. In brief, if he argues for one client, this argument will be opposed by him
when he argues for the other client. This rule covers not only cases in which
confidential communications have been confided, but also those in which no
confidence has been bestowed or will be used. Also, there is conflict of interests if
the acceptance of the new retainer will require the attorney to perform an act which
will injuriously affect his first client in any matter in which he represents him and
also whether he will be called upon in his new relation to use against his first client
any knowledge acquired through their connection.Another test of the inconsistency
of interests is whether the acceptance of a new relation will prevent an attorney
from the full discharge of his duty of undivided fidelity and loyalty to his client or
invite suspicion of unfaithfulness or double dealing in the performance thereof.

Where corporate directors have committed a breach of trust either by their frauds,
ultra vires acts, or negligence, and the corporation is unable or unwilling to institute
suit to remedy the wrong, a stockholder may sue on behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the
wrong done directly to the corporation and indirectly to the stockholders. This is
what is known as a derivative suit, and settled is the doctrine that in a derivative
suit, the corporation is the real party in interest while the stockholder filing suit for
the corporations behalf is only nominal party. The corporation should be included as
a party in the suit.

In the case at bar, the records show that SEC Case No. 05-97-5657, entitled
Philippine Public School Teachers Assn., Inc., et al. v. 1992-1995 Board of Directors
of the Philippine Public School Teachers Assn. (PPSTA), et al., was filed by the PPSTA
against its own Board of Directors. Respondent admits that the ASSA Law Firm, of
which he is the Managing Partner, was the retained counsel of PPSTA. Yet, he
appeared as counsel of record for the respondent Board of Directors in the said
case. Clearly, respondent was guilty of conflict of interest when he represented the
parties against whom his other client, the PPSTA, filed suit.

FLIGHT ATTENDANTS AND STEWARDS ASSOCIATION OF THE PHILIPPINES

(FASAP) v. PHILIPPINE AIRLINES, INC., PATRIA CHIONG and COURT OF
APPEALS

October 2, 2009/ G.R. No. 178083

YNARES-SANTIAGO, J.:

ISSUE: Cabin crew personnel were covered by the retrenchment and demotion
scheme of PAL due to financial distress which is evidenced by proof of its claimed
losses in a petition for suspension of payments, as well as the Order of the
Securities and Exchange Commission (SEC) approving the said petition for
suspension of payments, together with proof of summary of its debts and other
liabilities.

Exercising its management prerogative and sound business judgment, it decided to

cut its fleet of aircraft in order to minimize its operating losses and rescue itself from
total downfall; which meant that a corresponding company-wide reduction in
manpower necessarily had to be made. As a result, 5,000 PAL employees (including
the herein 1,400 cabin attendants) were retrenched.

PAL, however, gave a whole different reason for retrenchment when the pilots went
on strike. Accordingly, what really brought about the really perilous situation of
closure was that on June 5, 1998, the pilots went on strike, ninety (90%) per cent of
the pilots went on strike, approximately six hundred (600). These pilots strike was
so devastating x x x. Without any pilots no plane can fly, your Honor, that is the
stark reality of the situation, and without airplanes flying, there would be no place
for employment of cabin attendants.

ISSUE: Whether or not the strike, which PAL used as basis to undertake the massive
retrenchment under scrutiny, is an authorized cause.

RULING: The strike was a temporary occurrence that did not necessitate the
immediate and sweeping retrenchment of 1,400 cabin or flight attendants.

There was no reason to drastically implement a permanent retrenchment scheme in

response to a temporary strike, which could have ended at any time, or remedied
promptly, if management acted with alacrity. Juxtaposed with its failure to
implement the required cost-cutting measures, the retrenchment scheme was a
knee-jerk solution to a temporary problem that beset PAL at the time.
PAL must still prove that it implemented cost-cutting measures to obviate
retrenchment, which under the law should be the last resort. By PALs own
admission, however, the cabin personnel retrenchment scheme was one of the first
remedies it resorted to, even before it could complete the proposed downsizing of
its aircraft fleet.

The following elements under Article 283 of the Labor Code must concur or be
present, to wit:

(1) That retrenchment is reasonably necessary and likely to prevent business

losses which, if already incurred, are not merely de minimis, but substantial,
serious, actual and real, or if only expected, are reasonably imminent as perceived
objectively and in good faith by the employer;

(2) That the employer served written notice both to the employees and to the
Department of Labor and Employment at least one month prior to the intended date
of retrenchment;

(3) That the employer pays the retrenched employees separation pay
equivalent to one (1) month pay or at least one-half () month pay for every year of
service, whichever is higher;

(4) That the employer exercises its prerogative to retrench employees in good
faith for the advancement of its interest and not to defeat or circumvent the
employees right to security of tenure; and,

(5) That the employer uses fair and reasonable criteria in ascertaining who
would be dismissed and who would be retained among the employees, such as
status, efficiency, seniority, physical fitness, age, and financial hardship for certain
workers.

In the absence of one element, the retrenchment scheme becomes an irregular

exercise of management prerogative.

The retrenchment scheme under scrutiny was not triggered directly by

any financial difficulty PAL was experiencing at the time, nor borne of an
actual implementation of its proposed downsizing of aircraft.

In July 1969, Zosimo Falcon and Justo Trazo entered into an agreement with
Alejandro Te whereby it was agreed that from 1970 to 1976, Te shall be the sole
dealer of 20,000 bags Prime White cement in Mindanao. Falcon was the president of
Prime White Cement Corporation (PWCC) and Trazo was a board member thereof. Te
was likewise a board member of PWCC. It was agreed that the selling price for a bag
of cement shall be P9.70.
Before the bags of cement can be delivered, Te already made known to the public
that he is the sole dealer of cements in Mindanao. Various hardwares then
approached him to be his sub-dealers, hence, Te entered into various contracts with
them.

But then apparently, Falcon and Trazo were not authorized by the Board of PWCC to
enter into such contract. Nevertheless, the Board wished to retain the contract but
they wanted some amendment which includes the increase of the selling price per
bag to P13.30 and the decrease of the total amount of cement bags from 20k to 8k
only plus the contract shall only be effective for a period of three months and not 6
years.

Te refused the counter-offer. PWCC then awarded the contract to someone else.

Te then sued PWCC for damages. PWCC filed a counterclaim and in said
counterclaim, it is claiming for moral damages the basis of which is the claim that
Tes filing of a civil case against PWCC destroyed the companys goodwill. The lower
court ruled in favor Te.

ISSUE: Whether or not the ruling of the lower court is correct.

HELD: No. Te is what can be called as a self-dealing director he deals business

with the same corporation in which he is a director. There is nothing wrong per se
with that. However, Sec. 32 provides that:

SEC. 32. Dealings of directors, trustees or officers with the corporation. - A

contract of the corporation with one or more of its directors or trustees or officers is
voidable, at the option of such corporation, unless all the following conditions are
present:

1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;

2. That the vote of such director or trustee was not necessary for the approval of
the contract;

3. That the contract is fair and reasonable under the circumstances; and

4. That in the case of an officer, the contract with the officer has been previously
authorized by the Board of Directors.

In this particular case, the Supreme Court focused on the fact that the contract
between PWCC and Te through Falcon and Trazo was not reasonable. Hence, PWCC
has all the rights to void the contract and look for someone else, which it did. The
contract is unreasonable because of the very low selling price. The Price at that
time was at least P13.00 per bag and the original contract only stipulates P9.70.
Also, the original contract was for 6 years and theres no clause in the contract
which protects PWCC from inflation. As a director, Te in this transaction should
protect the corporations interest more than his personal interest. His failure to do
so is disloyalty to the corporation.

Anent the issue of moral damages, there is no question that PWCCs goodwill and
reputation had been prejudiced due to the filing of this case. However, there can be
no award for moral damages under Article 2217 of the Civil Code in favor of a
corporation.

NOTE: In a later case, Coastal Pacific Trading, Inc. vs Southern Rolling Mills Co., Inc.
(July 28, 2006), it was ruled that a corporation may be entitled to moral damages
provided that its good reputation was debased resulting in its humiliation in the
business realm.

San Juan Structural and Steel Fabricators, Inc. vs Court of Appeals

296 SCRA 631 [GR No. 129459 September 29, 1998]

Facts: Plaintiff-appellant San Juan structural and steel fabricators Inc.s amended
complaint alleged that on February 14, 1989, plaintiff-appellant entered into an
agreement with defendant-appellee Motorich Sales Corporation for the transfer to it
of a parcel of land identified as lot 30, Block 1 of the Acropolis Greens Subdivision
located in the district of Murphy, Quezon City, Metro Manila containing an area of
414 sqm, covered by TCT no. 362909; that as stipulated in the agreement of
February 14, 1i989, plaintiff-appellant paid the down payment in the sum of
P100,000, the balance to be paid on or before March 2, 19889; that on March 1,
1989,Mr. Andres T. Co, president of Plaintiff-appellant corporation, wrote a letter to
defendant-appellee Motorich Sales Corporation requesting a computation for the
balance to be paid; that said letter was coursed through the defendant-appellees
broker. Linda Aduca who wrote the computation of the balance; that on March 2,
1989, plaintiff-appellant was ready with the amount corresponding to the balance,
covered by Metrobank cashiers check no. 004223 payable to defendant-appellee
Motorich Sales Corporation; that plaintiff-appellant and defendant-appellee were
supposed to meet in the plaintiff-appellants office but defendant-appellees
treasurer, Nenita Lee Gruenbeg did not appear; that defendant-appelle despite
repeated demands and in utter disregard of its commitments had refused to
execute the transfer of rights/deed of assignment which is necessary to transfer the
certificate of title; that defendant ACL development corporation is impleaded as a
necessary party since TCT no. 362909 is still in the name of said defendant; while
defendant VNM Realty and Development Corporation is likewise impleaded as a
necessary party in view of the fact that it is the transferor of the right in favor of
defendant-appellee Motorich Sales Corporation; that on April 6, 1989 defendant ACL
Development Corporation and Motorich Sales Corporation entered into a deed of
absolute sale whereby the former transferred to the latter the subject property; that
by reason of said transfer; the registry of deeds of Quezon City issued a new title in
the name of Motorich Sales Corporation, represented by defendant-appellee Nenita
Lee Gruenbeg and Reynaldo L. Gruenbeg, under TCT no. 3751; that as a result of
defendants-appellees Nenita and Motorichs bad faith in refusing to execute a
formal transfer of rights/deed of assignment, plaintiff-appellant suffered moral and
nominal damages which may be assessed against defendant-appellees in the sum
of P500,000; that as a result of an unjustified and unwarranted failure to execute
the required transfer or formal deed of sale in favor of plaintiff-appellant, defendant-
appellees should be assessed exemplary damages in the sum of P100,000; that by
reason of the said bad faith in refusing to execute a transfer in favor of plaintiff-
appellant the latter lost opportunity to construct a residential building in the sum of
P100,000 and that as a consequence of such bad faith, it has been constrained to
obtain the services of counsel at an agreed fee of P100,000 plus appearance fee of
for every appearance in court hearings.

Issues: Whether or not the corporations treasurer act can bind the corporation.

Whether or not the doctrine of piercing the veil of corporate entity is applicable.

Held: No. Such contract cannot bind Motorich, because it never authorized or
ratified such sale.

A corporation is a juridical person separate and distinct from its stockholders or

members. Accordingly, the property of the corporation is not the property of the
corporation is not the property of its stockholders or members and may not be sold
by the stockholders or members without express authorization from the
corporations board of directors.

Section 23 of BP 68 provides the Board of Directors or Trustees Unless otherwise

provided in this code, the corporate powers of all corporations formed under this
code shall be exercised, all business conducted, and all property of such
corporations controlled and held by the board of directors or trustees to be elected
from among the stockholders of stocks, or where there is no stock, from among the
members of the corporations, who shall hold office for 1 year and until their
successors are elected and qualified.

As a general rule, the acts of corporate officers within the scope of their authority
are binding on the corporation. But when these officers exceed their authority, their
actions, cannot bind the corporation, unless it has ratified such acts as is estopped
from disclaiming them.
Because Motorich had never given a written authorization to respondent Gruenbeg
to sell its parcel of land, we hold that the February 14, 1989 agreement entered into
by the latter with petitioner is void under Article 1874 of the Civil Code. Being
inexistent and void from the beginning, said contract cannot be ratified.

The statutorily granted privilege of a corporate veil may be used only for legitimate
purposes. On equitable consideration,the veil can be disregarded when it is utilized
as a shield to commit fraud, illegality or inequity, defeat public convenience;
confuse legitimate issues; or serve as a mere alter ego or business conduit of a
person or an instrumentality, agency or adjunct of another corporation.

We stress that the corporate fiction should be set aside when it becomes a shield
against liability for fraud, or an illegal act on inequity committed on third person.
The question of piercing the veil of corporate fiction is essentially, then a matter of
proof. In the present case, however, the court finds no reason to pierce the
corporate veil of respondent Motorich. Petitioner utterly failed to establish the said
corporation was formed, or that it is operated for the purpose of shielding any
alleged fraudulent or illegal activities of its officers or stockholders; or that the said
veil was used to conceal fraud, illegality or inequity at the expense of third persons
like petitioner.