Recent Jurisprudence (April 2014 March 2015) Mercantile Law
CORPORATION LAW corporations or associations at least sixty per centum of whose capital is owned
GRANDFATHER RULE
NARRA NICKEL MINING AND DEVELOPMENT CORP.,
TESORO MINING AND DEVELOPMENT, INC., and McARTHUR MINING, INC.,
vs. REDMONT CONCOLIDATED MINES CORP.
G.R. No. 195580, January 28, 2015, J. Velasco, Jr.
A corporation that complies with the 60-40 Filipino to foreign equity
requirement can be considered a Filipino corporation if there is no doubt as to who
has the beneficial ownership and control of the corporation. In this case, a
further investigation as to the nationality of the personalities with the beneficial
ownership and control of the corporate shareholders in both the investing and
investee corporations is necessary. Doubt refers to various indicia that the
beneficial ownership and control of the corporation do not in fact reside in
Filipino shareholders but in foreign stakeholders. Even if at first glance the
petitioners comply with the 60-40 Filipino to foreign equity ratio, doubt exists in
the present case that gives rise to a reasonable suspicion that the Filipino
shareholders do not actually have the requisite number of control and beneficial
ownership in petitioners Narra, Tesoro, and McArthur. Hence, the Court is correct
in using the Grandfather Rule in determining the nationality of the petitioners.
Facts:
Petitioner Narra Nickel and Mining Development Corp. (Narra) filed this
Motion for Reconsideration of the Supreme Court's April 21, 2014 Decision
wherein it affirmed the appellate court's ruling that petitioners, being foreign
corporations, are not entitled to Mineral Production Sharing Agreements (MPSAs
). In reaching the assailed decision, the Court upheld with approval the appellate
court's finding that there was doubt as to petitioners' nationality since a 100%
Canadian-owned firm, MBMI Resources, Inc. (MBMI), effectively owns 60% of the
common stocks of the petitioners by owning equity interest of petitioners' other
majority corporate shareholders.
To petitioners, the Courts application of the Grandfather Rule to
determine their nationality is erroneous and allegedly without basis in the
Constitution, the Foreign Investments Act of 1991 (FIA), the Philippine Mining
Act of 1995, and the Rules issued by the Securities and Exchange Commission
(SEC). These laws and rules supposedly espouse the application of the Control
Test in verifying the Philippine nationality of corporate entities for purposes of
determining compliance with Sec. 2, Art. XII of the Constitution that only
NATIONALITY OF CORPORATIONS
by such [Filipino] citizens may enjoy certain rights and privileges, like the
exploration and development of natural resources
Issue:
Whether the Court erred in using the Grandfather rule and not the
control test in determining the nationality of the petitioners.
Ruling:
No. As defined by Dean Cesar Villanueva, the Grandfather Rule is the
method by which the percentage of Filipino equity in a corporation engaged in
nationalized and/or partly nationalized areas of activities, provided for under
the Constitution and other nationalization laws, is computed, in cases where
corporate shareholders are present, by attributing the nationality of the second
or even subsequent tier of ownership to determine the nationality of the
corporate shareholder. Thus, to arrive at the actual Filipino ownership and
control in a corporation, both the direct and indirect shareholdings in the
corporation are determined. In other words, if there are layers of intervening
corporations investing in a mining joint venture, we must delve into the
citizenship of the individual stockholders of each corporation.
Admittedly, an ongoing quandary obtains as to the role of the
Grandfather Rule in determining compliance with the minimum Filipino equity
requirement vis--vis the Control Test. This confusion springs from the
erroneous assumption that the use of one method forecloses the use of the other.
The Control Test and the Grandfather Rule are not, as it were, incompatible
ownership-determinant methods that can only be applied alternative to each
other. Rather, these methods can, if appropriate, be used cumulatively in the
determination of the ownership and control of corporations engaged in fully or
partly nationalized activities, as the mining operation.
The Grandfather Rule, standing alone, should not be used to determine
the Filipino ownership and control in a corporation, as it could result in an
otherwise foreign corporation rendered qualified to perform nationalized or
partly nationalized activities. Hence, it is only when the Control Test is first
complied with that the Grandfather Rule may be applied. Put in another manner,
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if the subject corporations Filipino equity falls below the threshold 60%, the
corporation is immediately considered foreign-owned, in which case, the need to
resort to the Grandfather Rule disappears.
On the other hand, a corporation that complies with the 60-40 Filipino
to foreign equity requirement can be considered a Filipino corporation if there is
no doubt as to who has the beneficial ownership and control of the
corporation. In that instance, there is no need for a dissection or further inquiry
on the ownership of the corporate shareholders in both the investing and
investee corporation or the application of the Grandfather Rule. As a corollary
rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by the
subject or investee corporation, a resort to the Grandfather Rule is necessary if
doubt exists as to the locus of the beneficial ownership and control.
In this case, a further investigation as to the nationality of the
personalities with the beneficial ownership and control of the corporate
shareholders in both the investing and investee corporations is necessary.
As explained in the April 21, 2012 Decision, the doubt that demands
the application of the Grandfather Rule in addition to or in tandem with the
Control Test is not confined to, or more bluntly, does not refer to the fact that the
apparent Filipino ownership of the corporations equity falls below the 60%
threshold. Rather, doubt refers to various indicia that the beneficial
ownership and control of the corporation do not in fact reside in Filipino
shareholders but in foreign stakeholders. Even if at first glance the petitioners
comply with the 60-40 Filipino to foreign equity ratio, doubt exists in the present
case that gives rise to a reasonable suspicion that the Filipino shareholders do
not actually have the requisite number of control and beneficial ownership in
petitioners Narra, Tesoro, and McArthur. Hence, a further investigation and
dissection of the extent of the ownership of the corporate shareholders through
the Grandfather Rule is justified.
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING AND
DEVELOPMENT, INC., and MCARTHUR MINING, INC. vs. REDMONT
CONSOLIDATED MINES CORP.
G.R. No. 195580, April 21, 2014, J. Velasco Jr.
The Grandfather Rule is a method to determine the nationality of the
corporation by making reference to the nationality of the stockholders of the
investor corporation. Based on a SEC Rule and DOJ Opinion, the Grandfather Rule
or the second part of the SEC Rule applies only when the 60-40 Filipino-foreign
equity ownership is in doubt (i.e., in cases where the joint venture corporation with
Filipino and foreign stockholders with less than 60% Filipino stockholdings [or
59%] invests in other joint venture corporation which is either 60-40% Filipino-
alien or the 59% less Filipino). Stated differently, where the 60-40 Filipino- foreign
equity ownership is not in doubt, the Grandfather Rule will not apply.
Facts:
Redmont Consolidated Mines Corp. (Redmont), a domestic corporation
organized and existing under Philippine laws, took interest in mining and
exploring certain areas of the province of Palawan. After inquiring with the
Department of Environment and Natural Resources (DENR), it learned that the
areas where it wanted to undertake exploration and mining activities where
already covered by Mineral Production Sharing Agreement (MPSA) applications
of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur, through its predecessor-in-interest Sara Marie
Mining, Inc. (SMMI), filed an application for an MPSA. Subsequently, SMMI was
issued MPSA-AMA-IVB-153 covering an area of over 1,782 hectares and EPA-
IVB-44 which includes an area of 3,720 hectares. The MPSA and EP were then
transferred to Madridejos Mining Corporation (MMC) and, on November 6, 2006,
assigned to petitioner McArthur. Petitioner Narra acquired its MPSA from Alpha
Resources and Development Corporation and Patricia Louise Mining &
Development Corporation (PLMDC) which previously filed an application for an
MPSA. Through the said application, the DENR issued MPSA-IV-1-12 covering an
area of 3.277 hectares in barangays Calategas and San Isidro, Municipality of
Narra, Palawan. Subsequently, another MPSA application of SMMI was filed with
the DENR Region IV-B, labeled as MPSA-AMA-IVB-154 (formerly EPA-IVB-47)
over 3,402 hectares in Barangays Malinao and Princesa Urduja, Municipality of
Narra, Province of Palawan. SMMI subsequently conveyed, transferred and
assigned its rights and interest over the said MPSA application to Tesoro.
On 2007, Redmont filed before the Panel of Arbitrators (POA) of the
DENR three (3) separate petitions for the denial of petitioners applications for
MPSA. In the petitions, Redmont alleged that at least 60% of the capital stock of
McArthur, Tesoro and Narra are owned and controlled by MBMI Resources, Inc.
(MBMI), a 100% Canadian corporation. Redmont reasoned that since MBMI is a
considerable stockholder of petitioners, it was the driving force behind
petitioners filing of the MPSAs over the areas covered by applications since it
knows that it can only participate in mining activities through corporations
which are deemed Filipino citizens. Redmont argued that given that petitioners
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capital stocks were mostly owned by MBMI, they were likewise disqualified from pesos (PhP 10,000,000) divided into 10,000 common shares at one thousand
engaging in mining activities through MPSAs, which are reserved only for pesos (PhP 1,000) per share, subscribed to by the following:
Filipino citizens.
Name Nationality Number of Amount Amount Paid
Issue: Shares Subscribed
Whether or not petitioner corporations Narra, Tesoro and McArthur areMadridejos Mining Filipino 5,997 PhP 5,997,000.00 PhP 825,000.00
foreign corporations based on the "Grandfather Rule". Corporation

Ruling: MBMI Resources, Canadian 3,998 PhP 3,998,000.0 PhP 1,878,174.60

Inc.
Yes. Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00

Grandfather Rule is a method to determine the nationality of theFernando B. Filipino 1 PhP 1,000.00 PhP 1,000.00
corporation by making reference to the nationality of the stockholders of theEsguerra
investor corporation. Based on a SEC Rule and DOJ Opinion, the Grandfather
Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
Rule or the second part of the SEC Rule applies only when the 60-40 Filipino-
foreign equity ownership is in doubt (i.e., in cases where the joint ventureMichael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
corporation with Filipino and foreign stockholders with less than 60% Filipino
stockholdings [or 59%] invests in other joint venture corporation which is eitherKenneth Cawkell Canadian 1 PhP 1,000.00 PhP 1,000.00
60-40% Filipino-alien or the 59% less Filipino). Stated differently, where the 60-
Total 10,000 PhP 10,000,000.00 PhP 2,708,174.60
40 Filipino- foreign equity ownership is not in doubt, the Grandfather Rule will
not apply.

After a scrutiny of the evidence extant on record, the Court finds that
this case calls for the application of the grandfather rule since doubt prevails and
persists in the corporate ownership of petitioners. Also doubt is present in the
60-40 Filipino equity ownership of petitioners Narra, McArthur and Tesoro,
since their common investor, the 100% Canadian corporationMBMI, funded
them. Obviously, the instant case presents a situation which exhibits a scheme
employed by stockholders to circumvent the law, creating a cloud of doubt in the
Courts mind. To determine, therefore, the actual participation, direct or indirect,
of MBMI, the grandfather rule must be used.
McArthur Mining, Inc.
To establish the actual ownership, interest or participation of MBMI in
each of petitioners corporate structure, they have to be "grandfathered." As
previously discussed, McArthur acquired its MPSA application from MMC, which
acquired its application from SMMI. McArthur has a capital stock of ten million
Interestingly, looking at the corporate structure of MMC, we take note
that it has a similar structure and composition as McArthur. In fact, it would
seem that MBMI is also a major investor and "controls" MBMI and also, similar
nominal shareholders were present, i.e. Fernando B. Esguerra (Esguerra), Lauro
L. Salazar (Salazar), Michael T. Mason (Mason) and Kenneth Cawkell (Cawkell):
Madridejos Mining Corporation
In the case of Madridejos Mining Corporation, noticeably, Olympic Mines
& Development Corporation (Olympic) as one of its stockholders did not pay any
amount with respect to the number of shares they subscribed to in the
corporation, which is quite absurd since Olympic is the major stockholder in
MMC. MBMIs 2006 Annual Report sheds light on why Olympic failed to pay any
amount with respect to the number of shares it subscribed to. MBMI states that
Olympic entered into joint venture agreements with several Philippine
companies, wherein MBMI holds directly and indirectly a 60% effective equity
interest in the Olympic Properties. Thus, as demonstrated in this first

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corporation, McArthur, when it is "grandfathered," company layering was Again, MBMI, along with other nominal stockholders, i.e., Mason, Agcaoili and
utilized by MBMI to gain control over McArthur. It is apparent that MBMI has Esguerra, is present in this corporate structure.
more than 60% or more equity interest in McArthur, making the latter a foreign
corporation. Patricia Louise Mining & Development Corporation

Tesoro Mining and Development, Inc. Using the grandfather method, we further look and examine PLMDCs
corporate structure:
Tesoro, which acquired its MPSA application from SMMI, has a capital
stock of ten million pesos (PhP 10,000,000) divided into ten thousand (10,000)
Name Nationality Number of Amount Amount Paid
common shares at PhP 1,000 per share. Except for the name "Sara Marie Mining, Shares Subscribed
Inc.," Tesoros corporate structure shows exactly the same figures as the
Palawan Alpha South Resources Filipino
corporate structure of petitioner McArthur, down to the last centavo. All the 6,596 PhP 6,596,000.00 PhP 0
Development Corporation
other shareholders are the same: MBMI, Salazar, Esguerra, Agcaoili, Mason and
Cawkell. The figures under "Nationality," "Number of Shares," "Amount
Subscribed," and "Amount Paid" are exactly the same. MBMI Resources, Canadian 3,396 PhP 3,396,000.00 PhP
Inc. 2,796,000.00
Sara Marie Mining, Inc. Higinio C. Mendoza, Jr. Filipino 1 PhP 1,000.00 PhP 1,000.00

After subsequently studying SMMIs corporate structure, it is not Fernando B. Esguerra Filipino 1 PhP 1,000.00 PhP 1,000.00
farfetched for us to spot the glaring similarity between SMMI and MMCs
Henry E. Fernandez Filipino 1 PhP 1,000.00 PhP 1,000.00
corporate structure. Again, the presence of identical stockholders, namely:
Olympic, MBMI, Amanti Limson (Limson), Esguerra, Salazar, Hernando, Mason Lauro L. Salazar Filipino 1 PhP 1,000.00 PhP 1,000.00
and Cawkell. The figures under the headings "Nationality," "Number of Shares,"
"Amount Subscribed," and "Amount Paid" are exactly the same except for the Manuel A. Agcaoili Filipino 1 PhP 1,000.00 PhP 1,000.00
amount paid by MBMI which now reflects the amount of two million seven
Bayani H. Agabin Filipino 1 PhP 1,000.00 PhP 1,000.00
hundred ninety four thousand pesos (PhP 2,794,000). Oddly, the total value of
the amount paid is two million eight hundred nine thousand nine hundred pesos Michael T. Mason American 1 PhP 1,000.00 PhP 1,000.00
(PhP 2,809,900). Accordingly, after "grandfathering" petitioner Tesoro and
Kenneth Cawkell
factoring in Olympics participation in SMMIs corporate structure, it is clear that Canadian 1 PhP 1,000.00 PhP 1,000.00
MBMI is in control of Tesoro and owns 60% or more equity interest in Tesoro. Total 10,000 PhP PhP
This makes petitioner Tesoro a non-Filipino corporation and, thus, disqualifies it 10,000,000.00 2,708,174.60
to participate in the exploitation, utilization and development of our natural
resources.

Narra Nickel Mining and Development Corporation
Moving on to the last petitioner, Narra, which is the transferee and
assignee of PLMDCs MPSA application, whose corporate structures
arrangement is similar to that of the first two petitioners discussed. The capital
stock of Narra is ten million pesos (PhP 10,000,000), which is divided into ten
thousand common shares (10,000) at one thousand pesos (PhP 1,000) per share.
Yet again, the same stockholders in petitioners corporate structures are
present. Similarly, the amount of money paid by the 2nd tier majority stock
holder, in this case, Palawan Alpha South Resources and Development Corp.
(PASRDC), is zero.
Concluding from the above-stated facts, it is quite safe to say that
petitioners McArthur, Tesoro and Narra are not Filipino since MBMI, a 100%

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Canadian corporation, owns 60% or more of their equity interests. Such
conclusion is derived from grandfathering petitioners corporate owners,
namely: MMI, SMMI and PLMDC. Going further and adding to the picture, MBMIs
Summary of Significant Accounting Policies statement regarding the "joint
venture" agreements that it entered into with the "Olympic" and "Alpha" groups
involves SMMI, Tesoro, PLMDC and Narra. Noticeably, the ownership of the
"layered" corporations boils down to MBMI, Olympic or corporations under the
"Alpha" group wherein MBMI has joint venture agreements with, practically
exercising majority control over the corporations mentioned. In effect, whether
looking at the capital structure or the underlying relationships between and
among the corporations, petitioners are NOT Filipino nationals and must be
considered foreign since 60% or more of their capital stocks or equity interests
are owned by MBMI.
DOCTRINE OF CORPORATE JURIDICAL PERSONALITY
PHILIPPINE NATIONAL BANK vs. MERELO B. AZNAR et
al.
G.R. No. 171805, May 30, 2014, J. Leonardo-De Castro
Stockholders cannot claim ownership over corporate properties by virtue
of the Minutes of a Stockholders meeting which merely evidence a loan agreement
between the stockholders and the corporation. As such, there interest over the
properties are merely inchoate.
Facts:
In 1958, RISCO ceased operation due to business reverses. Due to
Merelo B. Aznar, Matias B. Aznar III, Jose L. Aznar, Rosario T. Barcenilla, Jose B.
Enad and Ricardo Gabuyas (Aznar et al)desire to rehabilitate RISCO, they
contributed a total amount of P212,720.00 which was used in the purchase of the
three (3) parcels of land located in various areas in the Cebu Province.
After the purchase of the above lots, titles were issued in the name of
RISCO. The amount contributed by plaintiffs constituted as liens and
encumbrances on the aforementioned properties as annotated in the titles of
said lots. Such annotation was made pursuant to the Minutes of the Special
Meeting of the Board of Directors of RISCO stating that;
And that the respective contributions above-mentioned shall
constitute as their lien or interest on the property described
above, if and when said property are titled in the name of RURAL
INSURANCE & SURETY CO., INC., subject to registration as their
adverse claim in pursuance of the Provisions of Land Registration
Act, (Act No. 496, as amended) until such time their respective
contributions are refunded to them completely.
Thereafter, various subsequent annotations were made on the same
titles in favor of PNB. As a result, a Certificate of Sale was issued in favor of PNB,
being the lone and highest bidder of the three (3) parcels of land and was also
issued Transfer Certificate of Title over the said parcels of land.
This prompted Aznar et. al to file a complaint seeking the quieting of
their supposed title to the subject properties. They alleged that the subsequent
CORPORATE JURIDICAL PERSONALITY
annotations on the titles are subject to the prior annotation of their liens and
encumbrances. On the other hand, asserts that plaintiffs, as mere stockholders of
RISCO do not have any legal or equitable right over the properties of the
corporation. PNB posited that even if plaintiffs monetary lien had not expired,
their only recourse was to require the reimbursement or refund of their
contribution.
Aznar, et al., filed a Manifestation and Motion for Judgment on the
Pleadings. Thus, the trial court rendered the November 18, 1998 Decision, which
ruled against PNB. It further declared that the Minutes of the Special Meeting of
the Board of Directors of RISCO annotated on the titles to subject properties as
an express trust whereby RISCO was a mere trustee and the above-mentioned
stockholders as beneficiaries being the true and lawful owners of Lots 3597,
7380 and 1323.
On appeal, the CA set aside the ruling of the trial court and ruled that
there was no trust created. The lien is merely an evidence of the loan. Thus, it
directed PNB to pay Aznar, et al., the amount of their contributions plus legal
interest from the time of acquisition of the property until finality of judgment.
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Issue:
Whether or not Aznar et al as stockholders has the legal or equitable
rights over the subject properties
Ruling:
No. Aznar et al do not have any legal or equitable rights over the
properties.
Indeed, we find that Aznar, et al., have no right to ask for the quieting of
title of the properties at issue because they have no legal and/or equitable rights
over the properties that are derived from the previous registered owner which is
RISCO.
As a consequence thereof, a corporation has a personality separate and
distinct from those of its stockholders and other corporations to which it may be
connected. Thus, we had previously ruled in Magsaysay-Labrador v. Court of
Appeals that the interest of the stockholders over the properties of the
corporation is merely inchoate and therefore does not entitle them to intervene
in litigation involving corporate property.
Here, the interest, if it exists at all, of petitioners-movants is indirect,
contingent, remote, conjectural, consequential and collateral. At the very least,
their interest is purely inchoate, or in sheer expectancy of a right in the
management of the corporation and to share in the profits thereof and in the
properties and assets thereof on dissolution, after payment of the corporate
debts and obligations.
In the case at bar, there is no allegation, much less any proof, that the
corporate existence of RISCO has ceased and the corporate property has been
liquidated and distributed to the stockholders. The records only indicate that, as
per Securities and Exchange Commission (SEC) Certification dated June 18, 1997,
the SEC merely suspended RISCOs Certificate of Registration beginning on
September 5, 1988 due to its non-submission of SEC required reports and its
failure to operate for a continuous period of at least five years.
Verily, Aznar, et al., who are stockholders of RISCO, cannot claim
ownership over the properties at issue in this case on the strength of the Minutes
which, at most, is merely evidence of a loan agreement between them and the
company. There is no indication or even a suggestion that the ownership of said
properties were transferred to them which would require no less that the said
properties be registered under their names. For this reason, the complaint
should be dismissed since Aznar, et al., have no cause to seek a quieting of title
over the subject properties.
At most, what Aznar, et al., had was merely a right to be repaid the
amount loaned to RISCO. Unfortunately, the right to seek repayment or
reimbursement of their contributions used to purchase the subject properties is
already barred by prescription.
COMMISSIONER OF CUSTOMS vs. OILINK INTERNATIONAL CORPORATION
G.R. No. 161759, July 2, 2014, J. Bersamin
URC and Oilink had the same Board of Directors and Oilink was 100%
owned by URC. The Court held that the doctrine of piercing the corporate veil has
no application here because the Commissioner of Customs did not establish that
Oilink had been set up to avoid the payment of taxes or duties, or for purposes that
would defeat public convenience, justify wrong, protect fraud, defend crime,
confuse legitimate legal or judicial issues, perpetrate deception or otherwise
circumvent the law.
Facts:
In the course of its business undertakings, particularly in the period
from 1991 to 1994, Union Refinery Corporation (URC) imported oil products into
the country. URC and Oilink had interlocking directors when Oilink started its
business. They had the same Board of Directors and Oilink was 100% owned by
URC.
The District Collector of the Port of Manila, formally demanded that URC
pay the taxes and duties on its oil imports that had arrived between January 6,
1991 and November 7, 1995 at the Port of Lucanin in Mariveles, Bataan.
On July 2, 1999, Commissioner Tan made a final demand for the total
liability of P138,060,200.49 upon URC and Oilink. Co requested from
Commissioner Tan a complete finding of the facts and law in support ofthe
assessment made in the latters July 2, 1999 final demand. Oilink formally
protested the assessment on the ground that it was not the party liable for the
assessed deficiency taxes.
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On July 12, 1999, after receiving the letter from Co, Commissioner Tan
communicated in writing the detailed computation of the tax liability, stressing
that the Bureau of Customs (BoC) would not issue any clearance to Oilink unless
the amount of P138,060,200.49 demanded as Oilinks tax liability be first paid,
and a performance bond be posted by URC/Oilink to secure the payment of any
adjustments that would result from the BIRs review of the liabilities for VAT,
excise tax, special duties, penalties, etc.
Thus, on July 30, 1999, Oilink appealed to the CTA, seeking the
nullification of the assessment for having been issued without authority and with
grave abuse of discretion tantamount to lack of jurisdiction because the
Government was thereby shifting the imposition from URC to Oilink.
The CTA rendered its decision declaring as null and void the assessment of the
Commissioner of Customs. The CA ruled in favor of Oilink.
Issue:
Whether or not the Commissioner of Customs could pierce the veil of
corporate fiction
Ruling:
No. A corporation, upon coming into existence, is invested by law with a
personality separate and distinct from those of the persons composing it as well
as from any other legal entity to which it may be related. For this reason, a
stockholder is generally not made to answer for the acts or liabilities of the
corporation, and viceversa. The separate and distinct personality of the
corporation is, however, a mere fiction established by law for convenience and to
promote the ends of justice. It may not be used or invoked for ends that subvert
the policy and purpose behind its establishment, or intended by law to which the
corporation owes its being. This is true particularly when the fiction is used to
defeat public convenience, to justify wrong, to protect fraud, to defend crime, to
confuse legitimate legal or judicial issues, to perpetrate deception or otherwise
to circumvent the law. This is likewise true where the corporate entity is being
used as an alter ego, adjunct, or business conduit for the sole benefit of the
stockholders or of another corporate entity. In such instances, the veil of
corporate entity will be pierced or disregarded with reference to the particular
transaction involved.
In Philippine National Bank v. Ritratto Group, Inc., the Court has outlined
the following circumstances thatare useful in the determination of whether a
subsidiary is a mere instrumentality of the parent-corporation, viz:
1. Control, not mere majority or complete control, but complete
domination, not only of finances butof policy and business practice in respect to
the transaction attacked so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud
or wrong, to perpetrate the violation of a statutory or other positive legal duty,
or dishonest and, unjust act incontravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.
In applying the "instrumentality" or "alter ego" doctrine, the courts are
concerned with reality, not form, and with how the corporation operated and the
individual defendant's relationship to the operation. Consequently, the absence
of any one of the foregoing elements disauthorizes the piercing of the corporate
veil.
Indeed, the doctrine of piercing the corporate veil has no application
here because the Commissioner of Customs did not establish that Oilink had
been set up to avoid the payment of taxes or duties, or for purposes that would
defeat public convenience, justify wrong, protect fraud, defend crime, confuse
legitimate legal or judicial issues, perpetrate deception or otherwise circumvent
the law. It is also noteworthy that from the outset the Commissioner of Customs
sought to collect the deficiency taxes and duties from URC, and that it was only
on July 2, 1999 when the Commissioner of Customs sent the demand letter to
both URC and Oilink. That was revealing, because the failure of the
Commissioner of Customs to pursue the remedies against Oilink from the outset
manifested that its belated pursuit of Oilink was only an afterthought.
GIRLY G. ICO vs. SYSTEMS TECHNOLOGY INSTITUTE, INC., MONICO V.
JACOB and PETER K. FERNANDEZ
G.R. No. 185100, July 9, 2014, J. Del Castillo
A corporation, as a juridical entity, may act only through its directors,
officers and employees. Obligations incurred as a result of the directors and
officers acts as corporate agents, are not their personal liability but the direct
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responsibility of the corporation they represent. As a rule, they are only solidarily
liable with the corporation for the illegal termination of services of employees if
they acted with malice or bad faith.
To hold a director or officer personally liable for corporate obligations,
two requisites must concur: (1) it must be alleged in the complaint that the director
or officer assented to patently unlawful acts of the corporation or that the officer
was guilty of gross negligence or bad faith; and (2) there must be proof that the
officer acted in bad faith.
Facts:
Systems Technology Institute, Inc. (STI) is an educational institution
duly incorporated, organized, and existing under Philippine laws. Monico V.
Jacob (Jacob) and Peter K. Fernandez (Fernandez) are STI officers, the former
being the President and Chief Executive Officer (CEO) and the latter Senior Vice-
President. STI offers pre-school, elementary, secondary and tertiary education, as
well as post-graduate courses either through franchisees or STI wholly-owned
schools.
Girly G. Ico (Ico), a masteral degree holder with doctorate units
earned, was hired as Faculty Member by STI College Makati (Inc.), which
operates STI College-Makati (STI-Makati). STI College Makati (Inc.) is a wholly-
owned subsidiary of STI. Ico was subsequent promoted as Dean of STI College-
Paraaque and, thereafter, as Chief Operating Officer (COO) of STI-Makati.
However, after the merger between STI and STI College Makati (Inc.), Ico
received a memorandum cancelling her COO assignment at STI-Makati, citing
managements decision to undertake an "organizational restructuring" in line
with the merger of STI and STI-Makati. Further ordering Ico to report to turn
over her work to one Victoria Luz (Luz), who shall function as STI-Makatis
School Administrator. According to STI, the "organizational re-structuring" was
undertaken "in order to streamline operations. In the process, the positions of
Chief Executive Officer and Chief Operating Officer of STI Makati were
abolished."
Furthermore, the STIs Corporate Auditor/Audit Advisory Group
conducted an audit of STI-Makati covering the whole period of Icos stint as
COO/School Administrator therein. In a report (Audit Report) later submitted to
Fernandez, the auditors claim to have discovered several irregularities. In
another memorandum, it was recommended that an investigation committee be
formed to investigate Ico for grave abuse of authority, falsification, gross
dishonesty, maligning and causing intrigues, and other charges. Fernandez
recommended that Ico be placed under preventive suspension pending
investigation. Hence, pursuant to said recommendation, Ico was placed under
preventive suspension and banning her entry to any of STIs premises.
Labor Arbiter (LA) found Ico to have been illegally constructively and in
bad faith dismissed by respondents in her legally acquired status as regular
employee thus, ordering respondents SYSTEMS TECHNOLOGY INSTITUTE, INC.
and/or MONICO V. JACOB, PETER K. FERNANDEZ in solido to reinstate her to her
former position and pay Icos full back wages plus damages. On appeal, NLRC
reversed the ruling of the LA. On petition for certiorari by Ico before the CA, CA
affirmed the ruling of the NLRC, hence, this petition.
Issue:
Whether Jacob, as officer of STI, may be held solidarily liable with STI.
Ruling:
Nonetheless, the Court fails to discern any bad faith or negligence on the
part of respondent Jacob. The principal character that figures prominently in this
case is Fernandez; he alone relentlessly caused petitioners hardships and
suffering. He alone is guilty of persecuting petitioner. Indeed, some of his actions
were without sanction of STI itself, and were committed outside of the authority
given to him by the school; they bordered on the personal, rather than official.
His superior, Jacob, may have been, for the most part, clueless of what Fernandez
was doing to petitioner. After all, Fernandez was the Head of the Academic
Services Group of the EMD, and petitioner directly reported to him at the time;
his position enabled him to pursue a course of action with petitioner that Jacob
was largely unaware of.
A corporation, as a juridical entity, may act only through its directors,
officers and employees. Obligations incurred as a result of the directors and
officers acts as corporate agents, are not their personal liability but the direct
responsibility of the corporation they represent. As a rule, they are only
solidarily liable with the corporation for the illegal termination of services of
employees if they acted with malice or bad faith.
To hold a director or officer personally liable for corporate obligations,
two requisites must concur: (1) it must be alleged in the complaint that the
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director or officer assented to patently unlawful acts of the corporation or that
the officer was guilty of gross negligence or bad faith; and (2) there must be
proof that the officer acted in bad faith.
Hence, Jacob is absolved from any liability.
PALM AVENUE HOLDING CO.,INC., and PALM AVENUE REALTY AND
DEVELOPMENT CORPORATION vs. SANDIGANBAYAN 5TH Division,
REPUBLIC OF THE PHILIPPINES, represented by the PRESIDENTIAL
COMMISSION ON GOOD GOVERNMENT (PCGG)
G.R. No. 173082, August 6, 2014, J. Peralta
The writ of sequestration issued against the assets of the corporation is not
valid because the suit in the civil case was against the shareholder in the
corporation and is not a suit against the latter. Thus, the failure to implead these
corporations as defendants and merely annexing a list of such corporations to the
complaints is a violation of their right to due process for it would be, in effect,
disregarding their distinct and separate personality without a hearing.
Furthermore, the sequestration order issued against the corporation is
deemed automatically lifted due to the failure of the Republic to commence the
proper judicial action or to implead them therein within the period under the
Constitution.
Facts:
Through a writ of sequestration dated October 27, 1986, the Presidential
Commission on Good Government (PCGG) sequestered all the assets, properties,
records, and documents of the Palm Companies.The PCGG had relied on a letter
from the Palm Companies Attorney-in-Fact, Jose S. Sandejas, specifically
identifying Benjamin Kokoy Romualdez, a known crony of former President
Ferdinand E. Marcos, as the beneficial owner of the Benguet Corporation shares
in the Palm Companies name.
The Republic, represented by the PCGG, filed a complaint with the
Sandiganbayan docketed as Civil Case No. 0035 but did not initially implead the
Palm Companies as defendants. However, the Sandiganbayan issued a Resolution
dated June 16, 1989 where it ordered said companies to be impleaded. Pursuant
to said order, the Republic filed an amended complaint dated January 17, 1997
and named therein the Palm Companies as defendants. The graft court admitted
the amended complaint on October 15, 2001.
Thereafter, the companies filed a Motion for Bill of Particulars to direct
the Republic to submit a bill of particulars regarding matters in the amended
complaint which were not alleged with certainty or particularity.
Hence, the Republic submitted its bill of particulars. Subsequently, the
Palm Companies filed a motion to dismiss the Republics complaint. They argued
that the bill of particulars did not satisfactorily comply with the requested
details.
Furthermore, the Palm Companies filed another motion to order the
PCGG to release all the companies shares of stock and funds in its custody on the
ground that since they were not impleaded as parties-defendants in Civil Case
No. 0035 within the period prescribed by the Constitution.
The Sandiganbayan then issued its October 21, 2010 Resolution,
granting the companies foregoing motion.
Issue:
Whether the Sandiganbayan committed grave abuse of discretion
amounting to excess off jurisdiction in granting the Palm Companies motion to
release all shares of stock and funds in the custody of the PCGG
Ruling:
No.
Under Sec. 26, Article XVIII of the 1987 Constitution, it mandates the
Republic to file the corresponding judicial action or proceedings within a six-
month period (from its ratification on February 2, 1987) in order to maintain
sequestration, non-compliance with which would result in the automatic lifting
of the sequestration order. Hence, there is a necessity on the part of the Republic
to actually implead corporations as defendants in the complaint, out of
recognition for their distinct and separate personalities, failure to do so would
necessarily be denying such entities their right to due process.
Here, the writ of sequestration issued against the assets of the Palm
Companies is not valid because the suit in Civil Case No. 0035 against Benjamin
Romualdez as shareholder in the Palm Companies is not a suit against the latter.
Thus, the failure to implead these corporations as defendants and merely
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annexing a list of such corporations to the complaints is a violation of their right
to due process for it would be, in effect, disregarding their distinct and separate
personality without a hearing.
In the case at bar, the Palm Companies were merely mentioned as Item
Nos. 47 and 48, Annex A of the Complaint, as among the corporations where
defendant Romualdez owns shares of stocks. Furthermore, while the writ of
sequestration was issued on October 27, 1986, the Palm Companies were
impleaded in the case only in 1997, or already a decade from the ratification of
the Constitution in 1987, way beyond the prescribed period.
The sequestration order issued against the Palm Companies is therefore
deemed automatically lifted due to the failure of the Republic to commence the
proper judicial action or to implead them therein within the period under the
Constitution. However, the lifting of the writ of sequestration will not necessarily
be fatal to the main case since the same does not ipso facto mean that the
sequestered properties are, in fact, not illgotten. The effect of the lifting of the
sequestration will merely be the termination of the governments role as
conservator.
OLONGAPO CITY vs. SUBIC WATER AND SEWERAGE CO., INC.
G.R. No. 171626, August 6, 2014, J. Brion
OCWD and Subic Water are two separate and different entities. Subic
Water clearly demonstrated that it was a separate corporate entity from OCWD.
OCWD is just a ten percent (10%) shareholder of Subic Water. As a mere
shareholder, OCWDs juridical personality cannot be equated nor confused with
that of Subic Water. It is basic in corporation law that a corporation is a juridical
entity vested with a legal personality separate and distinct from those acting for
and in its behalf and, in general, from the people comprising it. Under this
corporate reality, Subic Water cannot be held liable for OCWDs corporate
obligations in the same manner that OCWD cannot be held liable for the
obligations incurred by Subic Water as a separate entity. The corporate veil should
not and cannot be pierced unless it is clearly established that the separate and
distinct personality of the corporation was used to justify a wrong, protect fraud, or
perpetrate a deception.
Facts:
The Olongapo City filed a complaint for sum of money and damages
against Olongapo City Water District (OCWD). It alleged that OCWD failed to pay
its electricity bills to Olongapo City and remit its payment under the contract to
pay, pursuant to OCWDs acquisition of Olongapo Citys water system.
In the interim, OCWD entered into a Joint Venture Agreement (JVA) with
Subic Bay Metropolitan Authority (SBMA), Biwater International Limited
(Biwater), and D.M. Consunji, Inc. (DMCI). Pursuant to this agreement, Subic
Water a new corporate entity was incorporated, with the following equity
participation from its shareholders: SBMA 19.99% or 20%; OCWD 9.99% or
10%; Biwater 29.99% or 30%; and DMCI 39.99% or 40%.
Subic Water was granted the franchise to operate and to carry on the
business of providing water and sewerage services in the Subic Bay Free Port
Zone, as well as in Olongapo City. Hence, Subic Water took over OCWDs water
operations in Olongapo City. To finally settle their money claims against each
other, Olongapo City and OCWD entered into a compromise agreement.
The compromise agreement also contained a provision regarding the
parties request that Subic Water, Philippines, which took over the operations of
the defendant Olongapo City Water District be made the co-maker for OCWDs
obligations. Mr. Noli Aldip, then chairman of Subic Water, acted as its
representative and signed the agreement on behalf of Subic Water.
To enforce the compromise agreement, Olongapo City filed a motion for
the issuance of a writ of execution with the RTC. It granted the motion, but did
not issue the corresponding writ of execution. Almost four years later, the
Olongapo City, prayed again for the issuance of a writ of execution against OCWD.
OCWDs former counsel, filed a manifestation alleging that OCWD had
already been dissolved and that Subic Water is now the former OCWD. Because
of this assertion, Subic Water also filed a manifestation informing the RTC that as
borne out by the articles of incorporation and general information sheet of Subic
Water defendant OCWD is not Subic Water. The manifestation also indicated
that OCWD was only a ten percent (10%) shareholder of Subic Water; and that
its 10% share was already in the process of being transferred to Olongapo City
pursuant to a Deed of Assignment .
The RTC granted the motion for execution and directed its issuance
against OCWD and/or Subic Water. The CA granted Subic Waters petition for
certiorari and reversed the trial courts rulings.
Issue:
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Whether or not Subic Water can be made liable under the writ of
execution issued by RTC in favor of Olongapo City
Ruling:
No, the writ of execution issued by the RTC, in favor of Olongapo City, is
null and void. OCWD and Subic Water are two separate and different entities.
Olongapo City practically suggests that since Subic Water took over
OCWDs water operations in Olongapo City, it also acquired OCWDs juridical
personality, making the two entities one and the same.
This is an interpretation that we cannot make or adopt under the facts
and the evidence of this case. Subic Water clearly demonstrated that it was a
separate corporate entity from OCWD. OCWD is just a ten percent (10%)
shareholder of Subic Water. As a mere shareholder, OCWDs juridical personality
cannot be equated nor confused with that of Subic Water. It is basic in
corporation law that a corporation is a juridical entity vested with a legal
personality separate and distinct from those acting for and in its behalf and, in
general, from the people comprising it.
Under this corporate reality, Subic Water cannot be held liable for
OCWDs corporate obligations in the same manner that OCWD cannot be held
liable for the obligations incurred by Subic Water as a separate entity. The
corporate veil should not and cannot be pierced unless it is clearly established
that the separate and distinct personality of the corporation was used to justify a
wrong, protect fraud, or perpetrate a deception.
In Concept Builders, Inc. v. NLRC, the Court enumerated the possible
probative factors of identity which could justify the application of the doctrine of
piercing the corporate veil. These are:
(1) Stock ownership by one or common ownership of both corporations;
(2) Identity of directors and officers;
(3) The manner of keeping corporate books and records; and
(4) Methods of conducting the business.
The burden of proving the presence of any of these probative factors lies
with the one alleging it. Unfortunately, Olongapo City simply claimed that Subic
Water took over OCWD's water operations in Olongapo City. Apart from this
allegation, Olongapo City failed to demonstrate any link to justify the
construction that Subic Water and OCWD are one and the same. Under this
evidentiary situation, our duty is to respect the separate and distinct
personalities of these two juridical entities.
Furthermore, an officers actions can only bind the corporation if he had
been authorized to do so. An examination of the compromise agreement reveals
that it was not accompanied by any document showing a grant of authority to Mr.
Noli Aldip to sign on behalf of Subic Water.
Subic Water is a corporation. A corporation, as a juridical entity,
primarily acts through its board of directors, which exercises its corporate
powers. In this capacity, the general rule is that, in the absence of authority from
the board of directors, no person, not even its officers, can validly bind a
corporation.
A corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that the authority to do so has been
conferred upon him, and this includes powers which have been intentionally
conferred, and also such powers as, in the usual course of the particular business,
are incidental to, or may be implied from, the powers intentionally conferred,
powers added by custom and usage, as usually pertaining to the particular officer
or agent, and such apparent powers as the corporation has caused persons
dealing with the officer or agent to believe that it has conferred.
Mr. Noli Aldip signed the compromise agreement purely in his own
capacity. Moreover, the compromise agreement did not expressly provide that
Subic Water consented to become OCWDs co-maker. As worded, the
compromise agreement merely provided that both parties also request Subic
Water, Philippines, which took over the operations of Olongapo City Water
District be made as co-maker for the obligations above-cited. This request was
never forwarded to Subic Waters board of directors. Even if due notification had
been made (which does not appear in the records), Subic Waters board does not
appear to have given any approval to such request. No document such as the
minutes of Subic Waters board of directors meeting or a secretarys certificate,
purporting to be an authorization to Mr. Aldip to conform to the compromise
agreement, was ever presented. In effect, Mr. Aldips act of signing the
compromise agreement was outside of his authority to undertake.
Since Mr. Aldip was never authorized and there was no showing that
Subic Waters articles of incorporation or by-laws granted him such authority,
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then the compromise agreement he signed cannot bind Subic Water. Subic Water
cannot likewise be made a surety or even a guarantor for OCWDs obligations.
OCWDs debts under the compromise agreement are its own corporate
obligations to Olongapo City.

The SC confirmed that the writ of execution issued by RTC Olongapo, in

favor of Olongapo City, is null and void. Accordingly, Subic Water cannot be
made liable under the writ.

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GERARDO LANUZA, JR. AND ANTONIO 0. OLBES vs. BF CORPORATION,
SHANGRI- LA PROPERTIES, INC., ALFREDO C. RAMOS, RUFO B. COLAYCO,
MAXIMO G. LICAUCO III, AND BENJAMIN C. RAMOS
G.R. No. 174938, October 01, 2014, J. Leonen
BF Corporation filed a collection complaint with the Regional Trial Court
against Shangri-La and the members of its board of directors. A corporations
representatives are generally not bound by the terms of the contract executed by
the corporation. They are not personally liable for obligations and liabilities
incurred on or in behalf of the corporation.
Facts:
In 1993, BF Corporation filed a collection complaint with the Regional
Trial Court against Shangri-La and the members of its board of directors.
BF Corporation alleged that Shangri-La induced BF Corporation to
continue with the construction of the buildings using its own funds and credit
despite Shangri-Las default. According to BF Corporation, Shangri- La
misrepresented that it had funds to pay for its obligations with BF Corporation,
and the delay in payment was simply a matter of delayed processing of BF
Corporations progress billing statements. BF Corporation eventually completed
the construction of the buildings. Shangri-La allegedly took possession of the
buildings while still owing BF Corporation an outstanding balance.
On August 3, 1993, Shangri-La, and its BOD filed a motion to suspend the
proceedings in view of BF Corporations failure to submit its dispute to
arbitration, in accordance with the arbitration clause provided in its contract.
Petitioners main argument arises from the separate personality given to
juridical persons vis-a -vis their directors, officers, stockholders, and agents.
Since they did not sign the arbitration agreement in any capacity, they cannot be
forced to submit to the jurisdiction of the Arbitration Tribunal in accordance
with the arbitration agreement. Moreover, they had already resigned as directors
of Shangri-La at the time of the alleged default.
The Arbitral Tribunal rendered a decision, finding that BF Corporation
failed to prove the existence of circumstances that render petitioners and the
other directors solidarily liable. It ruled that petitioners and Shangri-Las other
directors were not liable for the contractual obligations of Shangri-La to BF
Corporation.
Issue:
Whether or not Shangri-Las directors were liable for the contractual
obligations of Shangri-La to BF Corporation
Ruling:
No.
Indeed, as petitioners point out, their personalities as directors of
Shangri-La are separate and distinct from Shangri-La.
A corporation is an artificial entity created by fiction of law. This means
that while it is not a person, naturally, the law gives it a distinct personality and
treats it as such. A corporation, in the legal sense, is an individual with a
personality that is distinct and separate from other persons including its
stockholders, officers, directors, representatives, and other juridical entities.
The law vests in corporations rights, powers, and attributes as if they were
natural persons with physical existence and capabilities to act on their own. For
instance, they have the power to sue and enter into transactions or contracts. A
consequence of a corporations separate personality is that consent by a
corporation through its representatives is not consent of the representative,
personally. Its obligations, incurred through official acts of its representatives,
are its own. A stockholder, director, or representative does not become a party to
a contract just because a corporation executed a contract through that
stockholder, director or representative. Hence, a corporations representatives
are generally not bound by the terms of the contract executed by the
corporation. They are not personally liable for obligations and liabilities incurred
on or in behalf of the corporation.
This court recognized in Heirs of Augusto Salas, Jr. v. Laperal Realty
Corporation that an arbitration clause shall not apply to persons who were
neither parties to the contract nor assignees of previous parties, thus: A
submission to arbitration is a contract. As such, the Agreement, containing the
stipulation on arbitration, binds the parties thereto, as well as their assigns and
heirs. But only they.
As a general rule, therefore, a corporations representative who did not
personally bind himself or herself to an arbitration agreement cannot be forced
to participate in arbitration proceedings made pursuant to an agreement entered
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into by the corporation. He or she is generally not considered a party to that
agreement.
However, there are instances when the distinction between
personalities of directors, officers, and representatives, and of the corporation,
are disregarded. The Court calls this piercing the veil of corporate fiction. When
there are allegations of bad faith or malice against corporate directors or
representatives, it becomes the duty of courts or tribunals to determine if these
persons and the corporation should be treated as one. Without a trial, courts and
tribunals have no basis for determining whether the veil of corporate fiction
should be pierced. Courts or tribunals do not have such prior knowledge. Thus,
the courts or tribunals must first determine whether circumstances exist to
warrant the courts or tribunals to disregard the distinction between the
corporation and the persons representing it.
Hence, when the directors, as in this case, are impleaded in a case
against a corporation, alleging malice or bad faith on their part in directing the
affairs of the corporation, complainants are effectively alleging that the directors
and the corporation are not acting as separate entities.
In that case, complainants have no choice but to institute only one
proceeding against the parties. Under the Rules of Court, filing of multiple suits
for a single cause of action is prohibited. Institution of more than one suit for the
same cause of action constitutes splitting the cause of action, which is a ground
for the dismissal of the others. Thus, in Rule 2:
Section 3. One suit for a single cause of action. A party may not
institute more than one suit for a single cause of action. (3a)
Section 4. Splitting a single cause of action; effect of. If two or more
suits are instituted on the basis of the same cause of action, the filing of one or a
judgment upon the merits in any one is available as a ground for the dismissal of
the others. (4a)
It is because the personalities of petitioners and the corporation may
later be found to be indistinct that we rule that petitioners may be compelled to
submit to arbitration.
FVR SKILLS AND SERVICES EXPONENTS, INC. (SKILLEX), FULGENCIO V.
RANA and MONINA R. BURGOS vs. JOVERT SEV A, JOSUEL V. V ALENCERINA,
JANET ALCAZAR, ANGELITO AMPARO, BENJAMIN ANAEN, JR., JOHN
HILBERT BARBA, BONIFACIO BATANG, JR., VALERIANO BINGCO,JR.,
RONALD CASTRO, MARLON CONSORTE, ROLANDO CORNELIO, EDITO
CULDORA, RUEL DUNCIL, MERVIN FLORES, LORD GALISIM, SOTERO GARCIA,
JR., REY GONZALES, DANTE ISIP, RYAN ISMEN, JOEL JUNIO, CARLITO
LATOJA, ZALDY MARRA, MICHAEL PANTANO, GLENN PILOTON, NORELDO
QUIRANTE, ROEL RANCE, RENANTE ROSARIO and LEONARDA TANAEL
G.R. No. 200857, October 22, 2014, J. Arturo D. Brion
A corporation is a juridical entity with legal personality separate and
distinct from those acting for and in its behalf and, in general, from the people
comprising it. The general rule is that, obligations incurred by the corporation,
acting through its directors, officers and employees, are its sole liabilities.
A director or officer shall only be personally liable for the obligations of
the corporation, if the following conditions concur: (1) the complainant alleged in
the complaint that the director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad faith; and (2)
the complainant clearly and convincingly proved such unlawful acts, negligence or
bad faith.
In the present case, the respondents failed to show the existence of the first
requisite. They did not specifically allege in their complaint that Rana and Burgos
willfully and knowingly assented to the petitioner's patently unlawful act of forcing
the respondents to sign the dubious employment contracts in exchange for their
salaries. The respondents also failed to prove that Rana and Burgos had been guilty
of gross negligence or bad faith in directing the affairs of the corporation.
Facts:
The twenty-eight (28) respondents in this case were employees of
petitioner FVR Skills and Services Exponents, Inc. (petitioner), an independent
contractor engaged in the business of providing janitorial and other manpower
services to its clients.
Skillex entered into a Contract of Janitorial Service (service contract)
with Robinsons Land Corporation (Robinsons). Both agreed that the petitioner
shall supply janitorial, manpower and sanitation services to Robinsons Place
Ermita Mall for a period of one year. Halfway through the service contract, the
Skillex asked the respondents to execute individual contracts which stipulated
that their respective employments shall end at the last day of the year.
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The Skillex and Robinsons no longer extended their contract of janitorial
services. Consequently, the Skillex dismissed the respondents as they were
project employees whose duration of employment was dependent on the
petitioner's service contract with Robinsons.
Respondents filed a complaint for illegal dismissal with the NLRC. They
argued that they were not project employees; they were regular employees who
may only be dismissed for just or authorized causes. The LA ruled in the Skillex's
favor but was reversed by NLRC considering that the respondents had been
under the petitioner's employ for more than a year already and was affirmed by
CA.
Issue:
Whether or not Rana and Burgos should be held solidarily liable with
the corporation for respondents' monetary claims having personalities separate
and distinct from the corporation.
Ruling:
No, Rana and Burgos, as the petitioner's president and general manager,
should not be held solidarily liable with the corporation for its monetary
liabilities with the respondents.
A corporation is a juridical entity with legal personality separate and
distinct from those acting for and in its behalf and, in general, from the people
comprising it. The general rule is that, obligations incurred by the corporation,
acting through its directors, officers and employees, are its sole liabilities.
A director or officer shall only be personally liable for the obligations of
the corporation, if the following conditions concur: (1) the complainant alleged
in the complaint that the director or officer assented to patently unlawful acts of
the corporation, or that the officer was guilty of gross negligence or bad faith;
and (2) the complainant clearly and convincingly proved such unlawful acts,
negligence or bad faith.
In the present case, the respondents failed to show the existence of the
first requisite. They did not specifically allege in their complaint that Rana and
Burgos willfully and knowingly assented to the petitioner's patently unlawful act
of forcing the respondents to sign the dubious employment contracts in
exchange for their salaries. The respondents also failed to prove that Rana and
Burgos had been guilty of gross negligence or bad faith in directing the affairs of
the corporation.
To hold an officer personally liable for the debts of the corporation, and
thus pierce the veil of corporate fiction, it is necessary to clearly and convincingly
establish the bad faith or wrongdoing of such officer, since bad faith is never
presumed. Because the respondents were not able to clearly show the definite
participation of Burgos and Rana in their illegal dismissal, the Court upholds the
general rule that corporate officers are not personally liable for the money claims
of the discharged employees, unless they acted with evident malice and bad faith
in terminating their employment.
DOCTRINE OF PIERCING THE CORPORATE VEIL
ARCO PULP AND PAPER CO., INC. and CANDIDA A. SANTOS vs. DAN T. LIM,
doing business under the name and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES
G.R. No. 206806, June 25, 2014, J. Leonen
The corporate existence may be disregarded where the entity is formed or
used for non-legitimate purposes, such as to evade a just and due obligation, or to
justify a wrong, to shield or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions, in which case, the fiction will
be disregarded and the individuals composing it and the two corporations will be
treated as identical. In the case at bar, when petitioner Arco Pulp and Papers
obligation to Lim became due and demandable, she not only issued an unfunded
check but also contracted with a third party in an effort to shift petitioner Arco
Pulp and Papers liability. She unjustifiably refused to honor petitioner
corporations obligations to respondent. These acts clearly amount to bad faith. In
this instance, the corporate veil may be pierced, and petitioner Santos may be held
solidarily liable with petitioner Arco Pulp and Paper.
Facts:
Dan T. Lim works in the business of supplying scrap papers, cartons, and
other raw materials, under the name Quality Paper and Plastic Products,
Enterprises, to factories engaged in the paper mill business. Lim delivered scrap
papers worth 7,220,968.31 to Arco Pulp and Paper Company, Inc. through its
Chief Executive Officer and President, Candida A. Santos. The parties allegedly
agreed that Arco Pulp and Paper would either pay Dan T. Lim the value of the
raw materials or deliver to him their finished products of equivalent value.
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Dan T. Lim alleged that when he delivered the raw materials, Arco Pulp
and Paper issued a post-dated check as partial payment, with the assurance that
the check would not bounce. When he deposited the check, it was dishonored for
being drawn against a closed account. On the same day, Arco Pulp and Paper and
a certain Eric Sy executed a memorandum of agreement where Arco Pulp and
Paper bound themselves to deliver their finished products to Megapack
Container Corporation, owned by Eric Sy, for his account. According to the
memorandum, the raw materials would be supplied by Dan T. Lim, through his
company, Quality Paper and Plastic Products.
Despite repeated demands by Lim, Arco Pulp and Paper did not pay. Lim
filed a complaint for collection of sum of money with prayer for attachment with
the RTC. The trial court rendered a judgment in favor of Arco Pulp and Paper and
dismissed the complaint, holding that when Arco Pulp and Paper and Eric Sy
entered into the memorandum of agreement, novation took place, which
extinguished Arco Pulp and Papers obligation to. Lim. The CA reversed said
decision.
Issue:
Whether or not Candida A. Santos was solidarily liable with Arco Pulp
and Paper Co., Inc.
Ruling:
Yes.
In Heirs of Fe Tan Uy v. International Exchange Bank, the Court has ruled:
Basic is the rule in corporation law that a corporation is a juridical entity
which is vested with a legal personality separate and distinct from those acting
for and in its behalf and, in general, from the people comprising it. Following this
principle, obligations incurred by the corporation, acting through its directors,
officers and employees, are its sole liabilities. A director, officer or employee of a
corporation is generally not held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded if it is used as a
means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, or to confuse legitimate issues.
Before a director or officer of a corporation can be held personally liable
for corporate obligations, however, the following requisites must concur: (1) the
complainant must allege in the complaint that the director or officer assented to
patently unlawful acts of the corporation, or that the officer was guilty of gross
negligence or bad faith; and (2) the complainant must clearly and convincingly
prove such unlawful acts, negligence or bad faith.
As a general rule, directors, officers, or employees of a corporation
cannot be held personally liable for obligations incurred by the corporation.
However, this veil of corporate fiction may be pierced if complainant is able to
prove, as in this case, that (1) the officer is guilty of negligence or bad faith, and
(2) such negligence or bad faith was clearly and convincingly proven.
Here, Santos entered into a contract with respondent in her capacity as
the President and Chief Executive Officer of Arco Pulp and Paper. She also issued
the check in partial payment of petitioner corporations obligations to
respondent on behalf of petitioner Arco Pulp and Paper. This is clear on the face
of the check bearing the account name, "Arco Pulp & Paper, Co., Inc." Any
obligation arising from these acts would not, ordinarily, be Santos personal
undertaking for which she would be solidarily liable with petitioner Arco Pulp
and Paper.
The Court found, however, that the corporate veil must be pierced. In
Livesey v. Binswanger Philippines:
Piercing the veil of corporate fiction is an equitable doctrine
developed to address situations where the separate corporate
personality of a corporation is abused or used for wrongful
purposes. Under the doctrine, the corporate existence may be
disregarded where the entity is formed or used for non-
legitimate purposes, such as to evade a just and due obligation,
or to justify a wrong, to shield or perpetrate fraud or to carry
out similar or inequitable considerations, other unjustifiable
aims or intentions, in which case, the fiction will be disregarded
and the individuals composing it and the two corporations will
be treated as identical.
We agree with the Court of Appeals. Petitioner Santos cannot be
allowed to hide behind the corporate veil. When petitioner Arco
Pulp and Papers obligation to respondent became due and
demandable, she not only issued an unfunded check but also
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contracted with a third party in an effort to shift petitioner Arco
Pulp and Papers liability. She unjustifiably refused to honor
petitioner corporations obligations to respondent. These acts
clearly amount to bad faith. In this instance, the corporate veil
may be pierced, and petitioner Santos may be held solidarily
liable with petitioner Arco Pulp and Paper.
WPM INTERNATIONAL TRADING , INC. and WARLITO P. MANLAPAZ vs. FE
CORAZON LABAYEN
G.R. No. 182770, September 17, 2014, J. Brion
When an officer owns almost all of the stocks of a corporation, it does not
ipso facto warrant the application of the principle of piercing the corporate veil
unless it is proven that the officer has complete dominion over the corporation.
Facts:
WPM International Trading, Inc. (WPM) is engaged in the restaurant
business, with Warlito P. Manlapaz as its president. WPM entered into a
management agreement with the Labayen, by virtue of which the Labayen was
authorized to operate, manage and rehabilitate Quickbite, a restaurant owned
and operated by WPM. As part of her tasks, the respondent looked for a
contractor who would renovate the two existing Quickbite outlets. She engaged
the services of CLN Engineering Services to renovate one of the outlets at the cost
of P432,876.02. However, out of the P432,876.02 renovation cost, only the
amount of P320,000.00 was paid to CLN, leaving a balance of P112,876.02.
CLN filed a complaint for sum of money and damages before the RTC
against the respondent and Manlapaz. CLN later amended the complaint to
exclude Manlapaz as defendant. Labayen was declared in default for her failure
to file a responsive pleading. The RTC found the respondent liable to pay CLN
actual damages in the amount of P112,876.02 with 12% interest per annum and
20% of the amount recoverable as attorneys fees.
As a result, Labayen instituted a complaint for damages against WPM
and Manlapaz. She alleged that she should be entitled to reimbursement.
Labayen also contended that her participation in the management agreement
was limited only to introducing Manlapaz to CLNs general manager and that it
was actually Manlapaz and the general manager who agreed on the terms and
conditions of the agreement. Manlapaz, on the other hand, claimed Labayen had
entered into the renovation agreement with CLN in her own personal capacity
and that since she had exceeded her authority as agent of WPM, the renovation
agreement should only bind her. Further, WPM has a separate and distinct
personality, Manlapaz cannot be made liable for the Labayens claim.
RTC held that Labayen was entitled to indemnity from Manlapaz. The
RTC found that based on the records, there is a clear indication that WPM is a
mere instrumentality or business conduit of Manlapaz and as such, WPM and
Manlapaz are considered one and the same. The RTC also found that Manlapaz
had complete control over WPM considering that he is its chairman, president
and treasurer at the same time. The RTC thus concluded that Manlapaz is liable
in his personal capacity to reimburse the respondent the amount she paid to CLN
in connection with the renovation agreement. CA affirmed the decision of the
RTC applying the principle of piercing the veil of corporate fiction.
Issue:
Whether or not CA correctly applied the principle of piercing the veil of
corporate fiction
Ruling:
No, the CA erred in applying the doctrine.
The doctrine of piercing the corporate veil applies only in three (3) basic
instances, namely: a) when the separate and distinct corporate personality
defeats public convenience, as when the corporate fiction is used as a vehicle for
the evasion of an existing obligation; b) in fraud cases, or when the corporate
entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used
in alter ego cases, i.e., where a corporation is essentially a farce, since it is a mere
alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
Piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements, namely:
(1) Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
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(2) Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of. The
absence of any of these elements prevents piercing the
corporate veil.
In the present case, the attendant circumstances do not establish that
WPM is a mere alter ego of Manlapaz. Aside from the fact that Manlapaz was the
principal stockholder of WPM, records do not show that WPM was organized and
controlled, and its affairs conducted in a manner that made it merely an
instrumentality, agency, conduit or adjunct of Manlapaz. As held in Martinez v.
Court of Appeals, the mere ownership by a single stockholder of even all or
nearly all of the capital stocks of a corporation is not by itself a sufficient ground
to disregard the separate corporate personality. To disregard the separate
juridical personality of a corporation, the wrongdoing must be clearly and
convincingly established.
In this connection, the Court stresses that the control necessary to
invoke the instrumentality or alter ego rule is not majority or even complete
stock control but such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of its
own, and is but a conduit for its principal. The control must be shown to have
been exercised at the time the acts complained of took place. Moreover, the
control and breach of duty must proximately cause the injury or unjust loss for
which the complaint is made.
Here, Labayen failed to prove that Manlapaz, acting as president, had
absolute control over WPM. Even granting that he exercised a certain degree of
control over the finances, policies and practices of WPM, in view of his position
as president, chairman and treasurer of the corporation, such control does not
necessarily warrant piercing the veil of corporate fiction since there was not a
single proof that WPM was formed to defraud CLN or the respondent, or that
Manlapaz was guilty of bad faith or fraud.
On the contrary, the evidence establishes that CLN and Labayen knew
and acted on the knowledge that they were dealing with WPM for the renovation
of the latters restaurant, and not with Manlapaz. That WPM later reneged on its
monetary obligation to CLN, resulting to the filing of a civil case for sum of money
against the respondent, does not automatically indicate fraud, in the absence of
any proof to support it.
HACIENDA CATAYWA/MANUEL VILLANUEVA, et al. vs. ROSARIO LOREZO
G.R. No. 179640, March 18, 2015, J. Peralta
This Court agrees with the petitioners that there is no need to pierce the
corporate veil. Respondent failed to substantiate her claim that Mancy and Sons
Enterprises, Inc. and Manuel and Jose Marie Villanueva are one and the same. She
based her claim on the SSS form wherein Manuel Villanueva appeared as employer.
However, this does not prove, in any way, that the corporation is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, or when it is
made as a shield to confuse the legitimate issues, warranting that its separate and
distinct personality be set aside.
Facts:
Rosario Lorezo received, upon inquiry, a letter from the Social Security
System, informing her that she cannot avail of their retirement benefits since per
their record she has only paid 16 months. Such is 104 months short of the
minimum requirement of 120 months payment to be entitled to the benefit.
Aggrieved, Lorezo then filed her Amended Petition before the SSC,
alleging that she was employed as laborer in Hda. Cataywa managed by Jose
Marie Villanueva in 1970 but was reported to the SSS only in 1978. She alleged
that SSS contributions were deducted from her wages from 1970 to 1995, but
not all were remitted to the SSS which, subsequently, caused the rejection of her
claim. She also impleaded Talisay Farms, Inc. by virtue of its Investment
Agreement with Mancy and Sons Enterprises. She also prayed that the veil of
corporate fiction be pierced since she alleged that Mancy and Sons Enterprises
and Manuel and Jose Marie Villanueva are one and the same.
Petitioners Manuel and Jose Villanueva refuted in their answer, the
allegation that not all contributions of respondent were remitted. Petitioners
alleged that all farm workers of Hda. Cataywa were reported and their
contributions were duly paid and remitted to SSS. It was the late Domingo
Lizares, Jr. who managed and administered the hacienda. While, Talisay Farms,
Inc. filed a motion to dismiss on the ground of lack of cause of action in the
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absence of an allegation that there was an employer-employee relationship
between Talisay Farms and respondent.
The SSC found that Lorezo was a regular employee subject to compulsory
coverage of Hda. Cataywa/Manuel Villanueva/ Mancy and Sons Enterprises, Inc.
within the period of 1970 to February 25, 1990. The SSC denied petitioners'
Motion for Reconsideration. The petitioners, then, elevated the case before the
CA where the case was dismissed outright because the signatory to the
Verification failed to attach his authority to sign for and in behalf of the other
Petitioners and the certified true copies of pleadings and documents relevant
and pertinent to the petition are incomplete.
Issues:
Whether or not the corporate veil should be
pierced
Ruling:
No. It was held in Rivera v. United Laboratories, Inc. that
While a corporation may exist for any lawful purpose, the law will
regard it as an association of persons or, in case of two corporations, merge them
into one, when its corporate legal entity is used as a cloak for fraud or illegality.
This is the doctrine of piercing the veil of corporate fiction. The doctrine applies
only when such corporate fiction is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, or when it is made as a shield to confuse
the legitimate issues, or where a corporation is the mere alter ego or business
conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation. To disregard the separate juridical
personality of a corporation, the wrongdoing must be established clearly and
convincingly. It cannot be presumed.
This Court has cautioned against the inordinate application of this
doctrine, reiterating the basic rule that "the corporate veil may be pierced only if
it becomes a shield for fraud, illegality or inequity committed against a third
person.
The Court has expressed the language of piercing doctrine when applied
to alter ego cases, as follows: Where the stock of a corporation is owned by one
person whereby the corporation functions only for the benefit of such individual
owner, the corporation and the individual should be deemed the same.
This Court agrees with the petitioners that there is no need to pierce the
corporate veil. Respondent failed to substantiate her claim that Mancy and Sons
Enterprises, Inc. and Manuel and Jose Marie Villanueva are one and the same. She
based her claim on the SSS form wherein Manuel Villanueva appeared as
employer. However, this does not prove, in any way, that the corporation is used
to defeat public convenience, justify wrong, protect fraud, or defend crime, or
when it is made as a shield to confuse the legitimate issues, warranting that its
separate and distinct personality be set aside. Also, it was not alleged nor proven
that Mancy and Sons Enterprises, Inc. functions only for the benefit of Manuel
Villanueva, thus, one cannot be an alter ego of the other.
INCORPORATION AND ORGANZATION
BY-LAWS
FOREST HILLS GOLF AND COUNTRY CLUB, INC. vs. GARDPRO, INC.
G.R. No. 164686, October 22, 2014, J. Bersamin
The relevant provisions of the articles of incorporation and the by-laws of
Forest Hills governed the relations of the parties as far as the issues between them
were concerned. Indeed, the articles of incorporation of Forest Hills defined its
charter as a corporation and the contractual relationships between Forest Hills
and the State, between its stockholders and the State, and between Forest Hills and
its stockholder; hence, there could be no gainsaying that the contents of the articles
of incorporation were binding not only on Forest Hills but also on its shareholders.
On the other hand, the by-laws were the self-imposed rules resulting from the
agreement between Forest Hills and its members to conduct the corporate business
in a particular way. In that sense, the by-laws were the private statutes by which
Forest Hills was regulated, and would function. The charter and the by-laws were
thus the fundamental documents governing the conduct of Forest Hills corporate
affairs; they established norms of procedure for exercising rights, and reflected the
purposes and intentions of the incorporators. Until repealed, the by-laws were a
continuing rule for the government of Forest Hills and its officers, the proper
function being to regulate the transaction of the incidental business of Forest Hills.
The by-laws constituted a binding contract as between Forest Hills and its
members, and as between the members themselves. Every stockholder governed by
the by-laws was entitled to access them. The by-laws were self-imposed private
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laws binding on all members, directors and officers of Forest Hills. The prevailing
rule is that the provisions of the articles of incorporation and the by-laws must be
strictly complied with and applied to the letter.
Facts:
Petitioner Forest Hills Golf and Country Club, Inc. (interchangeably
Forest Hills or Club), a non-profit stock corporation, was established to promote
social, recreational and athletic activities among its members. It was an exclusive
and private club organized for the sole benefit of its members. Fil-Estate
Properties, Inc., a party to a Project Agreement to develop the Forest Hills
Residential Estates and the Forest Hills Golf and Country Club, undertook to
market the golf club shares of Forest Hills for a fee. In July 1995, Fil-Estate
Properties, Inc. (FEPI) assigned its rights and obligations under the Project
Agreement to Fil- Estate Golf and Development, Inc. (FEGDI).
In 1995, FEPI and FEGDI engaged Fil-Estate Marketing Associates Inc.,
(FEMAI) to market and offer for sale the shares of stocks of Forest Hills. Leandro
de Mesa, the President of FEMAI, oriented the sales staff on the information that
would usually be inquired about by prospective buyers. He made it clear that
membership in the Club was a privilege, such that purchasers of shares of stock
would not automatically become members of the Club, but must apply for and
comply with all the requirements in order to qualify them for membership,
subject to the approval of the Board of Directors.
Gardpro, Inc. (Gardpro) bought class C common shares of stock, which
were special corporate shares that entitled the registered owner to designate
two nominees or representatives for membership in the Club. Subsequently,
Ramon Albert, the General Manager of the Club, notified the shareholders that it
was already accepting applications for membership. In that regard, Gardpro
designated Fernando R. Martin and Rolando N. Reyes to be its corporate
nominees; hence, the two applied for membership in the Club. Forest Hills
charged them membership fees of P50, 000.00 each, prompting Martin to
immediately call up Albert and complain about being thus charged despite
having been assured that no such fees would be collected from them. With Albert
assuring that the fees were temporary, both nominees of Gardpro paid the fees.
At that time, the P45, 000.00 membership fees of corporate members were
increased to P75,000.00 per nominee by virtue of the resolution of the Board of
Directors. Any nominee who paid the fees within a specified period was entitled
to a discount of P25, 000.00. Both nominees of Gardpro were then admitted as
members upon approval of their applications by the Board of Directors. Later,
Gardpro decided to change its designated nominees, and Forest Hills charged
Gardpro new membership fees of P75, 000.00 per nominee. When Gardpro
refused to pay, the replacement did not take place.
Later, Gardpro filed a complaint in the SEC. SEC Hearing Officer
rendered decision in favor of Gardpro which were later affirmed by both the SEC
En Bank and the CA.
Issue:
Whether or not the replacement nominees of Gardpro are required to
pay membership fees.
Ruling:
No. Forest Hills was not authorized under its articles of incorporation
and by-laws to collect new membership fees for the replacement nominees of
Gardpro.
There is no question that Gardpro held class C common stocks that
entitled it to two memberships in the Club. Its nominees could be admitted as
regular members upon approval of the Board of Directors but only one nominee
for each class C share as designated in the resolution could vote as such. A
regular member was then entitled to use all the facilities and privileges of the
Club. In that regard, Gardpro could only designate as its
nominees/representatives its officers whose functions and office were defined
by its own by-laws.
The membership in the Club was a privilege, it being clear that the mere
purchase of a share in the Club did not immediately qualify a juridical entity for
membership. Admission for membership was still upon the favorable action of
the Board of Directors of the Club. Under Section 2.2.7 of its by-laws, the
application form was accomplished by the chairman of the board, president or
chief executive officer of the applicant juridical entity. The designated nominees
also accomplished their respective application forms, duly proposed and
seconded, and the nominees were evaluated as to their qualifications. The
nominees automatically became ineligible for membership once they ceased to
be officers of the corporate member under its by-laws upon certification of such
loss of tenure by a responsible officer of the corporate member.
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Corporations buy shares in clubs in order to invest for earnings. Their
purchases may also be to reward their corporate executives by having them
enjoy the facilities and perks concomitant to the club memberships. When
Gardpro purchased and registered its ownership of the class C common shares,
it did not only invest for earnings because it also became entitled to nominate
two of its officers in the Club as set forth in its seventh purpose of the articles of
incorporation and Section 2.2.2 of the by-laws.
Golf clubs usually sell shares to individuals and juridical entities in order
to raise capital for the construction of their recreational facilities. In that regard,
golf clubs accept juridical entities to become regular members, and allow such
entities to designate corporate nominees because only natural persons can enjoy
the sports facilities. In the context of this arrangement, Gardpros two nominees
held playing rights. But the articles of incorporation of Forest Hills and Section
2.2.2 of its by-laws recognized the right of the corporate member to replace the
nominees, subject to the payment of the transfer fee in such amount as the Board
of Directors determined for every change. The replacement could take place for
any of the following reasons, namely: (a) if the nominee should cease to be an
officer of the corporate member; or (b) if the corporate member should request
the replacement. In case of a replacement, the playing rights would also be
transferred to the new nominees.
The relevant provisions of the articles of
incorporation and the by-laws of Forest Hills governed the
relations of the parties as far as the issues between them were concerned.
Indeed, the articles of incorporation of Forest Hills defined its charter as a
corporation and the contractual relationships between Forest Hills and the State,
between its stockholders and the State, and between Forest Hills and its
stockholder; hence, there could be no gainsaying that the contents of the articles
of incorporation were binding not only on Forest Hills but also on its
shareholders. On the other hand, the by-laws were the self-imposed rules
resulting from the agreement between Forest Hills and its members to conduct
the corporate business in a particular way. In that sense, the by-laws were the
private statutes by which Forest Hills was regulated, and would function. The
charter and the by-laws were thus the fundamental documents governing the
conduct of Forest Hills corporate affairs; they established norms of procedure
for exercising rights, and reflected the purposes and intentions of the
incorporators. Until repealed, the by-laws were a continuing rule for the
government of Forest Hills and its officers, the proper function being to regulate
the transaction of the incidental business of Forest Hills. The by-laws constituted
a binding contract as between Forest Hills and its members, and as between the
members themselves. Every stockholder governed by the by-laws was entitled to
access them. The by-laws were self-imposed private laws binding on all
members, directors and officers of Forest Hills. The prevailing rule is that the
provisions of the articles of incorporation and the by-laws must be strictly
complied with and applied to the letter.
Anent the second issue, the Court disagrees with the contention of
Forest Hills that the CA encroached upon its prerogative to determine its own
rules and procedures and to decide all issues on the construction of its articles of
incorporation and by-laws. On the contrary, the CA acted entirely within its legal
competence to decide the issues between the parties. The complaint of Gardpro
stated a cause of action, and thus contained the operative acts that gave rise to its
remedial right against Forest Hills. The cause of action required not only the
interpretation of contracts and the application of corporate laws but also the
application of the civil law itself, particularly its tenets on unjust enrichment and
those regulating property rights arising from ownership. If Forest Hills were
allowed to charge nominees membership fees, and then to still charge their
replacement nominees every time a corporate member changed its nominees,
Gardpro would be unduly deprived of its full enjoyment and control of its
property even as the former would be unjustly enriched.
BOARD OF DIRECTORS AND TRUSTEES
MEETINGS
LOPEZ REALTY, INC. AND ASUNCION LOPEZ-GONZALES vs. SPOUSES
REYNALDO TANJANGCO AND MARIA LUISA ARGUELLES-TANJANGCO
G.R. No. 154291, November 12, 2014, J. Reyes
The petitioner assails the validity of sale of shares of stocks to the
respondents claiming that there was no compliance with the requirement of prior
notice to the Board of Directors when the Board Resolution authorizing the sale to
the respondent spouses were promulgated. The Supreme Court ruled that the
general rule is that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the
general law. However, the actions taken in such a meeting by the directors or
trustees may be ratified expressly or impliedly.
Facts:
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The petitioner Lopez Realty, Inc. issued a Board Resolution authorizing
Arturo, a member of the Board of Directors of the corporation, to negotiate with
the Tanjanco spouses for the sale of the shares of LRI (Lopez Realty
Corporation). Because of this, Arturo and the spouses executed a Deed of Sale for
the shares for a consideration of Php3.6M. However, Asuncion, another Board of
Director of the said corporation, submitted a letter requesting the Board to defer
any transaction with Tanjanco as she was not apprised and given notice of the
said transaction. Despite this, the execution of the Deed of Absolute Sale between
Arturo and spouses Tanjanco proceeded. Asuncion then filed a complaint for the
Annulment of the Deed of Sale with a prayer for a writ of preliminary injuction in
the Regional Trial Court. Asuncion alleges that she was neither notified nor
apprised of the on-going sale of the shares of LRI.
The Regional Trial Court granted the prayer of Asuncion and declared
the subject deed null and void for failure to comply with the strict procedural
requirements. The RTC ruled that for a Board Resolution authorizing the sale of
share to be valid, it is necessary that notice must be sent to the Board of
Directors at least one day prior to the said board meeting. However, on appeal,
the Court of Appeals reversed and set aside the decision of the RTC. Hence, the
current petition.
Issue:
Whether or not the sale of the shares of stock of LRI to respondent
spouses Tanjanco are valid pursuant to the Board Resolution promulgated by
LRI despite lack of notice to Asuncion, one of its Board of Directors.
Ruling:
The sale of the shares of stock of LRI to the respondent spouses
Tanjanco is deemed valid because the Board Resolution from which it is derived
is also valid despite the lack of the required prior notice to its Board of Directors.
The Supreme Court reinstated the decision of the RTC and affirmed the decision
of the Court of Appeals.
Section 53 of the Corporation Code provides for
the following:
SEC. 53. Regular and special meetings of directors or trustees. Regular
meetings of the board of directors or trustees of every corporation shall
be held monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees may be held at any
time upon call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere
in or outside of the Philippines, unless the by-laws provide otherwise.
Notice of regular or special meetings stating the date, time and place of
the meeting must be sent to every director or trustee at least one (1) day
prior to the scheduled meeting, unless otherwise provided by the by-
laws. A director or trustee may waive this requirement, either expressly
or impliedly.
The general rule is that a corporation, through its board of directors,
should act in the manner and within the formalities, if any, prescribed by its
charter or by the general law. Thus, directors must act as a body in a meeting
called pursuant to the law or the corporation's by-laws, otherwise, any action
taken therein may be questioned by any objecting director or shareholder.
However, the actions taken in such a meeting by the directors or
trustees may be ratified expressly or impliedly. "Ratification means that the
principal voluntarily adopts, confirms and gives sanction to some unauthorized
act of its agent on its behalf. It is this voluntary choice, knowingly made, which
amounts to a ratification of what was theretofore unauthorized and becomes the
authorized act of the party so making the ratification. The substance of the
doctrine is confirmation after conduct, amounting to a substitute for a prior
authority. Ratification can be made either expressly or impliedly. Implied
ratification may take various forms like silence or acquiescence, acts showing
approval or adoption of the act, or acceptance and retention of benefits flowing
therefrom."
In the present case, the ratification was expressed through the July 30,
1982 Board Resolution. Asuncion claims that the July 30, 1982 Board Resolution
did not ratify the Board Resolution dated August 17, 1981 for lack of the
required number of votes because Juanito is not entitled to vote while Leo voted
"no" to the ratification of the sale even if the minutes stated otherwise.
STOCKHOLDERS AND MEMBERS
RIGHT TO INSPECT
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ADERITO Z. YUJUICO AND BONIFACIO C. SUMBILLA vs. CEZAR T. QUIAMBAO
AND ERIC C. PILAPIL
G.R. No. 180416, June 02, 2014, J. Perez
A criminal action based on the violation of a stockholder's right to
examine or inspect the corporate records and the stock and transfer hook of a
corporation under the second and fourth paragraphs of Section 74 of the
Corporation Code can only he maintained against corporate officers or any other
persons acting on behalf of such corporation. The complaint and the evidence
Quiambao and Sumbilla submitted during preliminary investigation do not
establish that Quiambao and Pilapil were acting on behalf of STRADEC. Violations
of Section 74 contemplates a situation wherein a corporation, acting thru one of its
officers or agents, denies the right of any of its stockholders to inspect the records,
minutes and the stock and transfer book of such corporation. Thus, the dismissal is
valid.
Facts:
Strategic Alliance Development Corporation is a domestic corporation
operating as a business development and investment company. On 1 March
2004, during the annual stockholder's meeting of STRADEC, Aderito Z. Yujuico
was elected as president and chairman of the company. Yujuico replaced Cezar
T. Quiambao, who had been the president and chairman of STRADEC since 1994.
STRADEC appointed petitioner Bonifacio C. Sumbilla as treasurer and one
Joselito John G. Blando as corporate secretary. Blando replaced respondent Eric
C. Pilapil, the previous corporate secretary of STRADEC. On 12 August 2005,
Yujuico and Sumbilla filed a criminal complaint against Quiambao and Pilapil and
one Giovanni T. Casanova before the Office of the City Prosecutor of Pasig City.
The complaint accuses Quiambao, Pilapil and Casanova of violating Section 74 in
relation to Section 144 of the Corporation Code.
That during the stockholders' meeting, Yujuico--as newly elected
president and chairman of STRADEC--demanded Quiambao for the turnover of
the corporate records of the company, particularly the accounting files, ledgers,
journals and other records of the corporation's business. Quiambao refused.
After the stockholders' meeting, Quiambao and Casanova caused the removal of
the corporate records of STRADEC from the company's offices in Pasig City. Upon
his appointment as corporate secretary, Blando likewise demanded Pilapil for
the turnover of the stock and transfer book of STRADEC. Pilapil refused. On 25
June 2004, Pilapil proposed to Blando to have the stock and transfer book
deposited in a safety deposit box with Equitable Pel Bank. Blando acceded to the
proposal and the stock and transfer book was deposited in a safety deposit box
with the bank identified. It was agreed that the safety deposit box may only be
opened in the presence of both Quiambao and Blando. Quiambao and Pilapil
withdrew the stock and transfer book from the safety deposit box and brought it
to the offices of the Stradcom Corporation in Quezon City. Quiambao thereafter
asked Blando to proceed to the STRADCOM offices. Upon arriving thereat,
Quiambao pressured Blando to make certain entries in the stock and transfer
books. After making such entries, Blando again demanded that he be given
possession of the stock and transfer book. Quiambao refused.
Blando received an order issued by the RTC of Pasig City, which directed
him to cancel the entries he made in the stock and transfer book. Blando wrote
letters to Quiambao and Pilapil once again demanding for the turnover of the
stock and transfer book. Pilapil replied where he appeared to agree to Blando's
demand. However, Quiambao still refused to turnover the stock and transfer
book to Blando. Blando was once again constrained to agree to a proposal by
Pilapil to have the stock and transfer book deposited with the RTC of Pasig City.
The said court, however, refused to accept such deposit on the ground that it had
no place for safekeeping.
Since Quiambao and Pilapil still refused to turnover the stock and
transfer book, Blando again acceded to have the book deposited in a safety
deposit box, this time, with the Export and Industry Bank. Yujuico and Sumbilla
theorize that the refusal by the Quiambao, Pilapil and Casanova to turnover
STRADEC's corporate records and stock and transfer book violates their right, as
stockholders, directors and officers of the corporation, to inspect such records
and book under Section 74 of the Corporation Code and may be held criminally
liable pursuant to Section 144 of the Corporation Code.
The MeTC partially granted the Urgent Omnibus Motion. The MeTC
ordered the issuance of a warrant of arrest against Quiambao and Pilapil. The
RTC issued a TRO enjoining the MeTC from conducting further proceedings in
Criminal Case No. 89724.
The RTC granted Quiambao and Pilapils certiorari petition and directing
the dismissal of Criminal Case No. 89724. According to the RTC, the MeTC
committed grave abuse of discretion in issuing a warrant of arrest against
Quiambao and Pilapil. The RTC opined that refusing to allow inspection of the
stock and transfer book, as opposed to refusing examination of other corporate
records, is not punishable as an offense under the Corporation Code. The
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petitioners moved for reconsideration, but the RTC remained steadfast. Hence,
this petition by Yujuico and Sumbilla.
Issue:
Whether or not the RTCs refusal to allow inspection of the stock and
transfer book of a corporation is not a punishable offense under the Corporation
Code, such a refusal still amounts to a violation of Section 74 of the Corporation
Code, for which Section 144 of the same code prescribes a penalty.cra1aw
Ruling:
No, there is no violation of the Corporation, thus, dismissal of the
complaint is warranted.
The act of refusing to allow inspection of the stock and transfer book of a
corporation, when done in violation of Section 74(4) of the Corporation Code, is
punishable as an offense under Section 144 of the same code. In justifying this
conclusion, the RTC seemingly relied on the fact that, under Section 74 of the
Corporation Code, the application of Section 144 is expressly mentioned only in
relation to the act of "refusing to allow any director, trustees, stockholder or
member of the corporation to examine and copy excerpts from the
corporation's records or minutes" that excludes its stock and transfer book, the
same does not mean that the latter section no longer applies to any other
possible violations of the former section. It must be emphasized that Section 144
already purports to penalize "violations" of "any provision" of the Corporation
Code "not otherwise specifically penalized therein." Hence, we find
inconsequential the fact that that Section 74 expressly mentions the application
of Section 144 only to a specific act, but not with respect to the other possible
violations of the former section.
A criminal action based on the violation of a stockholder's right to
examine or inspect the corporate records and the stock and transfer hook of a
corporation under the second and fourth paragraphs of Section 74 of the
Corporation Code can only he maintained against corporate officers or any other
persons acting on behalf of such corporation. The submissions of the Yujuico and
Sumbilla during the preliminary investigation clearly suggest that Quiambao and
Pilapil are neither in relation to STRADEC. Thus, we sustain the dismissal of
Criminal Case No. 89724.
Criminal Case No. 89724 accuses Quiambao and Pilapil of denying
Yujuico and Sumbilla's right to examine or inspect the corporate records and
the stock and transfer book of STRADEC. It is thus a criminal action that is based
on the violation of the second and fourth paragraphs of Section 74 of the
Corporation Code. A perusal of the second and fourth paragraphs of Section 74,
as well as the first paragraph of the same section, reveal that they are provisions
that obligates a corporation: they prescribe what books or records
a corporation is required to keep; where the corporation shall keep them; and
what are the other obligations of the corporation to its stockholders or members
in relation to such books and records. Hence, by parity of reasoning, the second
and fourth paragraphs of Section 74, including the first paragraph of the same
section, can only be violated by a corporation.
It is clear then that a criminal action based on the violation of the second
or fourth paragraphs of Section 74 can only be maintained against corporate
officers or such other persons that are acting on behalf of the corporation.
Violations of Section 74 contemplates a situation wherein a corporation, acting
thru one of its officers or agents, denies the right of any of its stockholders to
inspect the records, minutes and the stock and transfer book of such corporation.
The problem with the Yujuico and Sumbilla's complaint and the
evidence that they submitted during preliminary investigation is that they do not
establish that Quiambao and Pilapil were acting on behalf of STRADEC.
Quiambao and Sumbilla are not actually invoking their right to inspect the
records and the stock and transfer book of STRADEC under the second and
fourth paragraphs of Section 74. What they seek to enforce is the proprietary
right of STRADEC to be in possession of such records and book. Such right,
though certainly legally enforceable by other means, cannot be enforced by a
criminal prosecution based on a violation of the second and fourth paragraphs of
Section 74.
DERIVATIVE SUIT
NESTOR CHING and ANDREW WELLINGTON vs. SUBIC BAY GOLF AND
COUNTRY CLUB, INC., HU HO HSIU LIEN alias SUSAN HU, HU TSUNG CHIEH
alias JACK HU, HU TSUNG HUI, HU TSUNG TZU and REYNALD R. SUAREZ
G.R. No. 174353, September 10, 2014, J. LEONARDO-DE CASTRO
A derivative suit cannot prosper without first complying with the legal
requisites for its institution. Thus, a complaint which contained no allegation
whatsoever of any effort to avail of intra-corporate remedies allows the court to
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dismiss it, even motu proprio. Indeed, even if petitioners thought it was futile to
exhaust intra-corporate remedies, they should have stated the same in the
Complaint and specified the reasons for such opinion. The requirement of this
allegation in the Complaint is not a useless formality which may be disregarded at
will.
Facts:
On February 26, 2003, petitioners Nestor Ching and Andrew Wellington
filed a Complaint with the RTC of Olongapo City on behalf of the members of
Subic Bay Golf and Country Club, Inc. (SBGCCI) against the said country club and
its Board of Directors and officers under the provisions of Presidential Decree
No. 902-A in relation to Section 5.2 of the Securities Regulation Code. The
complaint alleged that the defendant corporation sold shares to plaintiffs at
US$22,000.00 per share, presenting to them the Articles of Incorporation.
However, on June 27, 1996, an amendment to the Articles of Incorporation was
approved by the Securities and Exchange Commission (SEC).
Petitioners claimed in the Complaint that SBGCCI did not disclose to
them the above amendment which allegedly makes the shares non-proprietary,
as it takes away the right of the shareholders to participate in the pro-rata
distribution of the assets of the corporation after its dissolution. According to
petitioners, this is in fraud of the stockholders who only discovered the
amendment when they filed a case for injunction to restrain the corporation
from suspending their rights to use all the facilities of the club. Furthermore,
petitioners alleged that the Board of Directors and officers of the corporation did
not call any stockholders meeting from the time of the incorporation, in
violation of Section 50 of the Corporation Code and the By-Laws of the
corporation. Neither did the defendant directors and officers furnish the
stockholders with the financial statements of the corporation nor the financial
report of the operation of the corporation in violation of Section 75 of the
Corporation Code. Petitioners also claim SBGCCI presented to the SEC an
amendment to the By-Laws of the corporation suspending the voting rights of
the shareholders except for the five founders shares. Said amendment was
allegedly passed without any stockholders meeting or notices to the
stockholders in violation of Section 48 of the Corporation Code.
The Complaint furthermore enumerated several instances of fraud in the
management of the SBGCCI allegedly committed by the Board of Directors and
officers of the corporation.
The RTC issued an Order dismissing the Complaint. The RTC held that
the action is a derivative suit. Petitioners Ching and Wellington elevated the case
to the Court of Appeals which rendered the assailed Decision affirming that of
the RTC.
Hence, petitioners resort to the present Petition for Review, wherein
they argue that the Complaint they filed with the RTC was not a derivative suit.
Issue:
Whether or not the Complaint is indeed a derivative suit.
Ruling:
The nature of an action, as well as which court or body has jurisdiction
over it, is determined based on the allegations contained in the complaint of the
plaintiff, irrespective of whether or not the plaintiff is entitled to recover upon all
or some of the claims asserted therein.
While there were allegations in the Complaint of fraud in their
subscription agreements, such as the misrepresentation of the Articles of
Incorporation, petitioners do not pray for the rescission of their subscription or
seek to avail of their appraisal rights. Instead, they ask that defendants be
enjoined from managing the corporation and to pay damages for their
mismanagement. Petitioners only possible cause of action as minority
stockholders against the actions of the Board of Directors is the common law
right to file a derivative suit. The legal standing of minority stockholders to bring
derivative suits is not a statutory right, there being no provision in the
Corporation Code or related statutes authorizing the same, but is instead a
product of jurisprudence based on equity. However, a derivative suit cannot
prosper without first complying with the legal requisites for its institution.
Section 1, Rule 8 of the Interim Rules of Procedure Governing Intra
Corporate Controversies imposes the following requirements for derivative
suits:
(1) He was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under
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the articles of incorporation, by-laws, laws or rules governing the
corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of;
and
(4) The suit is not a nuisance or harassment suit.
The RTC dismissed the Complaint for failure to comply with the second
and fourth requisites above.
Upon a careful examination of the Complaint, this Court finds that the
same should not have been dismissed on the ground that it is a nuisance or
harassment suit. Although the shareholdings of petitioners are indeed only two
out of the 409 alleged outstanding shares or 0.24%, the Court has held that it is
enough that a member or a minority of stockholders file a derivative suit for and
in behalf of a corporation.
With regard, however, to the second requisite, we find that petitioners
failed to state with particularity in the Complaint that they had exerted all
reasonable efforts to exhaust all remedies available under the articles of
incorporation, by-laws, and laws or rules governing the corporation to obtain the
relief they desire. The Complaint contained no allegation whatsoever of any
effort to avail of intra-corporate remedies. Indeed, even if petitioners thought it
was futile to exhaust intra-corporate remedies, they should have stated the same
in the Complaint and specified the reasons for such opinion. Failure to do so
allows the RTC to dismiss the Complaint, even motu proprio, in accordance with
the Interim Rules. The requirement of this allegation in the Complaint is not a
useless formality which may be disregarded at will.
ALFREDO L. VILLAMOR, JR. vs. JOHN S. UMALE, IN SUBSTITUTION OF
HERNANDO F. BALMORES
G.R. No. 172843, September 24, 2014, J. Leonen
Derivative Suit: The Court has recognized that a stockholder's right to
institute a derivative suit is not based on any express provision of the Corporation
Code, or even the Securities Regulation Code, but is impliedly recognized when the
said laws make corporate directors or officers liable for damages suffered by the
corporation and its stockholders for violation of their fiduciary duties. In effect, the
suit is an action for specific performance of an obligation, owed by the corporation
to the stockholders, to assist its rights of action when the corporation has been put
in default by the wrongful refusal of the directors or management to adopt suitable
measures for its protection.
Management committees: Management committees and receivers are
appointed when the corporation is in imminent danger of (1) dissipation, loss,
wastage or destruction of assets or other properties; and (2) paralysation of its
business operations that may be prejudicial to' the interest of the minority
stockholders, parties-litigants, or the general public." Applicants for the
appointment of a receiver or management committee need to establish the
confluence of these two requisites. This is because appointed receivers and
management committees will immediately take over the management of the
corporation and will have the management powers specified in law.
Jurisdiction to appoint receiver: The Court of Appeals has no power to
appoint a receiver or management committee. The Regional Trial Court has
original and exclusive jurisdiction to hear and decide intra-corporate controversies,
including incidents of such controversies. These incidents include applications for
the appointment of receivers or management committees.
Facts:
MC Home Depot occupied a prime property (Rockland area) in Pasig.
The property was part of the area owned by Mid-Pasig Development
Corporation. Pasig Printing Corporation (PPC) obtained an option to lease
portions of Mid-Pasig's property, including the Rockland area. PPC's board of
directors issued a resolution waiving all its rights, interests, and participation in
the option to lease contract in favor of the law firm of Atty. Villamor. PPC,
represented by Villamor, entered into a memorandum of agreement with MC
Home Depot. Under the MOA, MC Home Depot would continue to occupy the area
as PPC's sub-lessee for 4 years, renewable for another 4 years, at a monthly
rental of P4,500,000.00 plus goodwill of P18,000,000.00.
In compliance with the terms of the MOA, MC Home Depot issued 20
post-dated checks representing rental payments for one year and the goodwill
money. The checks were given to Villamor who did not turn these or the
equivalent amount over to PPC, upon encashment. Hernando Balmores,
stockholder and director of PPC, wrote a letter addressed to PPJC's directors
informing them that Villamor should be made to deliver to PPC and account for
MC Home Depot's checks or their equivalent value. Due to the alleged inaction of
the directors, respondent Balmores filed with the RTC an intra-corporate
controversy complaint against petitioners for their alleged devices or schemes
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amounting to fraud or misrepresentation. Respondent Balmores alleged that
because of petitioners' actions, PPC's assets were ". . . not only in imminent
danger, but have actually been dissipated, lost, wasted and destroyed."
Respondent Balmores prayed that a receiver be appointed from his list of
nominees. He also prayed for petitioners' prohibition from "selling, encumbering,
transferring or disposing in any manner any of PPC's properties, including the
MC Home Depot checks and/or their proceeds." He prayed for the accounting
and remittance to PPC of the MC Home Depot checks or their proceeds and for
the annulment of the board's resolution "waiving PPC's rights in favor of
Villamor's law firm.
The RTC denied respondent Balmores' prayer for the appointment of a
receiver or the creation of a management committee. According to it, PPC's
entitlement to the checks was doubtful. The resolution issued by PPC's board of
directors; waiving its rights to the option to lease contract in favor of Villamor's
law firm, must be accorded prima facie validity. Balmores filed with CA a petition
for certiorari which was given due course. It reversed the trial court's decision,
and issued a new order placing PPC under receivership and creating an interim
management committee. The CA considered the danger of dissipation, wastage,
and loss of PPC's assets if the review of the trial court's judgment would be
delayed. It stated that the board's waiver of PPC's rights in favor of Villamor's
law firm without any consideration and its inaction on Villamor's failure to turn
over the proceeds of rental payments to PPC warrant the creation of a
management committee. Also, the CA ruled that the case filed by respondent
Balmores with the trial court "was a derivative suit because there were
allegations of fraud or ultra vires acts ... by PPC's directors.
Issues:
1. Whether the Court of Appeals correctly characterized respondent
Balmores' action as a derivative suit
2. Whether the Court of Appeals properly placed PPC under receivership
and created a receiver or management committee
Ruling:
1. No.
The requisites of a derivative suit are as follows:
a. He was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time
the action was filed;
b. He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies
available under the articles of incorporation, by-laws, laws
or rules governing the corporation or partnership to obtain
the relief he desires;
c. No appraisal rights are available for the act or acts
complained of; and
d. The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith
dismiss the case.
Balmores' action in the trial court failed to satisfy all the requisites of a
derivative suit. Balmores failed to exhaust all available remedies to obtain the
reliefs he prayed for. Though he tried to communicate with PPC's directors about
the checks in Villamor's possession before he filed an action with the trial court,
Balmores was not able to show that this comprised -all the remedies available
under the articles of incorporation, bylaws, laws, or rules governing PPC. Neither
did respondent Balmores implead PPC as party in the case nor did he allege that
he was filing on behalf of the corporation. The non-derivative character of
Balmores' action may also be gleaned from his allegations in the trial court
complaint. In the complaint, he described the nature of his action as an action
under Rule 1, Section l(a)(l) of the Interim Rules, and not an action under Rule 1,
Section l(a)(4) of the Interim Rules, which refers to derivative suits. Respondent
Balmores filed an individual suit. His intent was very clear from his manner of
describing the nature of his action as being based on Rule 1, Sec. 1(a)(1) of the
Interim Rules, involving devices or schemes employed by, or acts of, the
petitioners as board of directors, business associates and officers of PPC,
amounting to fraud or misrepresentation, which are detrimental to the interest
of the plaintiff as stockholder of PPC.
Balmores did not bring the action for the benefit of the corporation.
Instead, he was alleging that the acts of PPCs directors, specifically the waiver of
rights in favor of Villamors law firm and their failure to take back the MC Home
Depot checks from Villamor, were detrimental to his individual interest as a
stockholder. In filing an action, therefore, his intention was to vindicate his
individual interest and not PPCs or a group of stockholders.
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2. No.
The CA still erred in placing PPC under receivership and in creating and
appointing a management committee. A corporation may be placed under
receivership, or management committees may be created to preserve
properties involved in a suit and to protect the rights of the parties under the
control and supervision of the court. Management committees and receivers
are appointed when the corporation is in imminent danger of (1) dissipation,
loss, wastage or destruction of assets or other properties; and (2)
paralysation of its business operations that may be prejudicial to' the
interest of the minority stockholders, parties-litigants, or the general public."
PPC waived its rights, without any consideration in favor of Villamor. The
checks were already in Villamor's possession. Some of the checks may have
already been encashed. It is, therefore, enough to constitute loss or
dissipation of assets under the Interim Rules. Balmores, however, failed to
show that there was an imminent danger of paralysis of PPC's business
operations. Apparently, PPC was- earning substantial amounts from its other
sub-lessees. Balmores did not prove otherwise. He, therefore, failed to show
at least one of the requisites for appointment of a receiver or management
committee.
INTRA-CORPORATE DISPUTE
ROBERTO L. ABAD, MANUEL D. ANDAL, BENITO V. ARANETA, PHILIP G.
BRODETT, ENRIQUE L. LOCSIN and ROBERTO V. SAN JOSE vs. PHILIPPINE
COMMUNICATIONS
SATELLITE CORPORATION
G.R. No. 200620, March 18, 2015, J. Villarama, Jr.
. Upon the enactment of Republic Act No. 8799, the jurisdiction of the SEC
over intra-corporate controversies and the other cases enumerated in Section 5 of
P.D. No. 902-A was transferred to the Regional Trial Court. The jurisdiction of the
Sandiganbayan has been held not to extend even to a case involving a sequestered
company notwithstanding that the majority of the members of the board of
directors were PCGG nominees.
Facts:
Respondent PHILCOMSA, along with Philippine Overseas
Telecommunications Corporation (POTC) were among those private companies
sequestered by the PCGG after the EDSA People Power Revolution in 1986.
PHILCOMSAT owns 81% of the outstanding capital stock of Philcomsat Holdings
Corporation (PHC). The majority shareholders of PHILCOMSAT are also the
seven families who have owned and controlled POTC.
During the administration of President Gloria Macapagal-Arroyo,
Enrique L. Locsin and Manuel D. Andal, along with Julio Jalandoni, were
appointed nominee-directors representing the Republic of the Philippines. These
PCGG nominees have aligned with the Nieto family (Nieto-PCGG) against the
group of Africa and Ilusorio (Africa-Bildner), in the ensuing battle for control
over the respective boards of POTC, PHILCOMSAT and PHC.
On August 31, 2004, the following were elected during the annual
stockholders meeting of PHC conducted by the Nieto-PCGG group wherein
Locsin was elected Chairman. Said election at PHC was the offshoot of separate
elections conducted by the two factions in POTC and PHILCOMSAT, the Africa-
Bildner group and the Nieto-PCGG group. In the July 28, 2004 stockholders
meetings of POTC and PHILCOMSAT, Victor Africa was among those in the Africa-
Bildner group who were elected as Directors. He was designated as the POTC
proxy to the PHILCOMSAT stockholders meeting. While Locsin, Andal and Nieto,
Jr. were also elected as Directors, they did not accept their election as POTC and
PHILCOMSAT Directors. Instead, the Nieto-PCGG group held the stockholders
meeting for PHILCOMSAT on August 9, 2004 at the Manila Golf Club.
Immediately after the stockholders meeting, an organizational meeting was
held, and Nieto, Jr. and Locsin were respectively elected as Chairman and
President of PHILCOMSAT. At the same meeting, they issued a proxy in favor of
Nieto, Jr. and/or Locsin authorizing them to represent PHILCOMSAT and vote the
PHILCOMSAT shares in the stockholders meeting of PHC scheduled on August
31, 2004.
Thereafter, the two factions took various legal steps including the filing
of suits and countersuits to gain legitimacy for their respective election as
directors and officers of POTC and PHILCOMSAT. The Africa group had sought
the invalidation of the proxy issued in favor of Nieto, Jr. and/or Locsin and
consequent nullification of the elections held during the annual stockholders
meeting of PHC on August 31, 2004. Africa in his capacity as President and CEO
of PHILCOMSAT, and as stockholder in his own right, wrote the board and
management of PHC that PHILCOMSAT will exercise its right of inspection over
the books, records, papers, etc. pertinent to the business transactions of PHC. In
his letter, Nieto, Jr. said that Africas request will be referred to the PHC Board of
Directors or Executive Committee in view of the several pending cases involving
the Africa and Nieto-PCGG groups on one hand, and the PHC and its board of
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directors on the other. He further advised Africa to inform them in writing of his
reasons and purposes for such inspection. In reply, Africa reiterated his request
for inspection asserting that the PHILCOMSAT board of directors was elected on
September 22, 2005. On the day of the scheduled inspection, PHILCOMSAT sent
its representatives. However, Brodett disallowed the conduct of the inspection
which prompted PHILCOMSAT through its counsel to make a written query
whether the refusal of Brodett to permit the conduct of PHCs inspection of
corporate books and financial documents was with the knowledge and authority
of PHCs board of directors. But no reply or communication was received by
Africa from the PHC.
PHILCOMSAT filed in the RTC a Complaint for Inspection of Books
against the incumbent PHC directors and/or officers, to enforce its right under
Sections 74 and 75 of the Corporation Code of the Philippines. The RTC
dismissed the complaint for lack of jurisdiction. PHILCOMSAT appealed to the CA
thru a petition for review arguing that it is the RTC and not Sandiganbayan which
has jurisdiction over the case involving a stockholders right to inspect corporate
books and records. The CA granted the petition.
Issue:
Whether it is the Sandiganbayan or RTC which has jurisdiction over a
stockholders suit to enforce its right of inspection under Section 74 of the
Corporation Code
Ruling:
It is the RTC and not the Sandiganbayan which has jurisdiction over
cases which do not involve a sequestration-related incident but an intra-
corporate controversy.
Originally, Section 5 of P.D. No. 902-A vested the original and exclusive
jurisdiction over cases involving the following in the SEC: Controversies arising
out of intra-corporate or partnership relations, between and among stockholders,
members or associates; between any or all of them and the corporation. Upon the
enactment of Republic Act No. 8799, effective on August 8, 2000, the jurisdiction
of the SEC over intra-corporate controversies and the other cases enumerated in
Section 5 of P.D. No. 902-A was transferred to the Regional Trial Court.
The jurisdiction of the Sandiganbayan has been held not to extend even
to a case involving a sequestered company notwithstanding that the majority of
the members of the board of directors were PCGG nominees. The Court marked
this distinction clearly in Holiday Inn (Phils.), Inc. v. Sandiganbayan:
The original and exclusive jurisdiction given to the
Sandiganbayan over PCGG cases pertains to (a) cases filed by
the PCGG, pursuant to the exercise of its powers under
Executive Order Nos. 1, 2 and 14, as amended by the Office of
the President, and Article XVIII, Section 26 of the Constitution,
i.e., where the principal cause of action is the recovery of ill-
gotten wealth, as well as all incidents arising from, incidental to,
or related to such cases and (b) cases filed by those who wish to
question or challenge the commissions acts or orders in such
cases.
The complaint concerns PHILCOMSATs demand to exercise its right of
inspection as stockholder of PHC but which petitioners refused on the ground of
the ongoing power struggle within POTC and PHILCOMSAT that supposedly
prevents PHC from recognizing PHILCOMSATs representative (Africa) as
possessing such right or authority from the legitimate directors and officers.
Clearly, the controversy is intra-corporate in nature as they arose out of intra-
corporate relations between and among stockholders, and between stockholders
and the corporation.
DISSOLUTION AND LIQUIDATION
LIQUIDATION
ALABANG DEVELOPMENT CORPORATION vs. ALABANG HILLS VILLAGE
ASSOCIATION AND RAFAEL TINIO
G.R. No. 187456, June 02, 2014, J. Peralta
ADC filed its complaint not only after its corporate existence was
terminated but also beyond the three-year period allowed by Section 122 of the
Corporation Code. To allow ADC to initiate the subject complaint and pursue it
until final judgment, on the ground that such complaint was filed for the sole
purpose of liquidating its assets, would be to circumvent the provisions of Section
122 of the Corporation Code. Thus, it is clear that at the time of the filing of the
subject complaint petitioner lacks the capacity to sue as a corporation.
Facts:
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The case traces its roots to the Complaint for Injunction and Damages
filed with the RTC of Muntinlupa City on Alabang Development Corporation
against Alabang Hills Village Association, Inc. and Rafael Tinio Tinio, President of
AHVAI. The Complaint alleged that Alabang is the developer of Alabang Hills
Village and still owns certain parcels of land therein that are yet to be sold, as
well as those considered open spaces that have not yet been donated to the local
government of Muntinlupa City or the Homeowner's Association. In September
2006, ADC learned that AHVAI started the construction of a multi-purpose hall
and a swimming pool on one of the parcels of land still owned by ADC without
the latter's consent and approval, and that despite demand, AHVAI failed to
desist from constructing the said improvements. ADC thus prayed that an
injunction be issued enjoining defendants from constructing the multi-purpose
hall and the swimming pool at the Alabang Hills Village.
In its Answer With Compulsory Counterclaim, AHVAI denied ADC's
asseverations and claimed that the latter has no legal capacity to sue since its
existence as a registered corporate entity was revoked by the SEC on May 26,
2003; that ADC has no cause of action because by law it is no longer the absolute
owner but is merely holding the property in question in trust for the benefit of
AHVAI as beneficial owner thereof; and that the subject lot is part of the open
space required by law to be provided in the subdivision. As counterclaim, it
prayed that an order be issued divesting ADC of the title of the property and
declaring AHVAI as owner thereof; and that ADC be made liable for moral and
exemplary damages as well as attorney's fees. On January 4, 2007, the RTC of
Muntinlupa City, rendered judgment dismissing ADCs complaint. ADC filed a
Notice of Appeal of the RTC decision. The RTC approved ADC's notice of appeal
but dismissed respondent AHVAIs counterclaim on the ground that it is
dependent on ADC's complaint. Respondent AHVAI then filed an appeal with the
CA. The CA dismissed both appeals of ADC and AHVAI, and affirmed the decision
of the RTC. Thus, the instant petition.
Issue:
1. Whether or not the Court of Appeals erred in relying on the case of
Columbia Pictures, Inc. V. Court of appeals in resolving ADC's lack of
capacity
2. Whether or not the Court of Appeals erred in finding lack of capacity
of the ADC in filing the case contrary to the earlier rulings of this
honorable court
Ruling:
1. No, the CA did not err.
The Court does not agree that the CA erred in relying on the case of
Columbia Pictures, Inc. v. Court of Appeals. The CA cited the case for the purpose
of restating and distinguishing the jurisprudential definition of the terms lack of
capacity to sue and lack of personality to sue; and of applying these definitions
to the present case. Unlike in the instant case, the corporations involved in the
Columbia case were foreign corporations is of no moment. The definition of the
term lack of capacity to sue enunciated in the said case still applies to the case
at bar. Indeed, as held by this Court and as correctly cited by the CA in the case of
Columbia: lack of legal capacity to sue means that the plaintiff is not in the
exercise of his civil rights, or does not have the necessary qualification to appear
in the case, or does not have the character or representation he claims; lack of
capacity to sue' refers to a plaintiff's general disability to sue, such as on account
of minority, insanity, incompetence, lack of juridical personality or any other
general disqualifications of a party. In the instant case, petitioner lacks capacity
to sue because it no longer possesses juridical personality by reason of its
dissolution and lapse of the three-year grace period provided under Section 122
of the Corporation Code.
2. As provided by Section 122 of the Corporation Code.
It is to be noted that the time during which the corporation, through its
own officers, may conduct the liquidation of its assets and sue and be sued as a
corporation is limited to three years from the time the period of dissolution
commences; but there is no time limit within which the trustees must complete a
liquidation placed in their hands. It is provided only that the conveyance to the
trustees must be made within the three-year period. It may be found impossible
to complete the work of liquidation within the three-year period or to reduce
disputed claims to judgment. The authorities are to the effect that suits by or
against a corporation abate when it ceased to be an entity capable of suing or
being sued but trustees to whom the corporate assets have been conveyed
pursuant to the authority of Sec. 78 may sue and be sued as such in all matters
connected with the liquidation.
Still in the absence of a board of directors or trustees, those having any
pecuniary interest in the assets, including not only the shareholders but likewise
the creditors of the corporation, acting for and in its behalf, might make proper
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representations with the SEC which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out a final settlement of the
corporate concerns. In the instant case, there is no dispute that petitioner's
corporate registration was revoked on May 26, 2003. Based on law, it had three
years, or until May 26, 2006, to prosecute or defend any suit by or against it. The
subject complaint, however, was filed only on October 19, 2006, more than three
years after such revocation. It is not disputed that the subject complaint was filed
by ADC and not by its directors or trustees.
In the present case, petitioner filed its complaint not only after its
corporate existence was terminated but also beyond the three-year period
allowed by Section 122 of the Corporation Code. Thus, it is clear that at the time
of the filing of the subject complaint petitioner lacks the capacity to sue as a
corporation. To allow petitioner to initiate the subject complaint and pursue it
until final judgment, on the ground that such complaint was filed for the sole
purpose of liquidating its assets, would be to circumvent the provisions of
Section 122 of the Corporation Code.
CORPORATE REHABILITATION
PUERTO AZUL LAND, INC. vs. PACIFIC WIDE REALTY DEVELOPMENT
CORPORATION
G.R. No. 184000, September 17, 2014, J. Perlas- Bernabe
PALI filed petition for rehabilitation due to impossibility of meeting its
debts and obligations. The issue is whether or not such dismissal of petition by the
CA is valid. The court ruled that The validity of PALIs rehabilitation was already
raised as an issue by PWRDC and resolved with finality by the Court in its
November 25, 2009 Decision in G.R. No. 180893 (consolidated with G.R. No.
178768). The Court sustained therein the CAs affirmation of PALIs Revised
Rehabilitation Plan, including those terms which its creditors had found
objectionable, namely, the 50% "haircut" reduction of the principal obligations and
the condonation of accrued interests and penalty charges
Facts:
PALI is a domestic corporation engaged in the business of developing
the Puerto Azul Complex located in Ternate, Cavite into a "satellite city,"
described as a "self-sufficient and integrated tourist destination community with
residential areas, resort/tourism, and retail commercial centers with recreation
areas like golf courses, jungle trails, and white sand lagoons." To finance the full
operation of its business, PALI obtained loans in the total principal amount of
640,225,324.00 from several creditors, among which were East Asia Capital,
Export and Industry Bank (EIB), Philippine National Bank, and Equitable PCI
Bank (EPCIB), secured by real estate owned by PALI and by accommodation
mortgagors under a Mortgage Trust Indenture.
Foreseeing the impossibility of meeting its debts and obligations to its
creditors as they fall due, PALI, on September 14, 2004, filed a Petition for
Suspension of Payments and Rehabilitation before the RTC. On September 17,
2004, the RTC, finding PALIs petition to be sufficient in form and substance,
issued a Stay Order pursuant to Section 6, Rule 4 of the Interim Rules on
Corporate Rehabilitation (Interim Rules). RTC approved PALIs Revised
Rehabilitation Plan. CA granted PWRDCs petition for review and reversed the
December 13, 2005 RTC Decision, thereby dismissing PALIs petition for
rehabilitation. It held that the causes of PALIs inability to pay its debts were not
alleged in the petition with sufficient particularity as to have allowed the RTC to
properly evaluate whether or not to issue a Stay Order and eventually approve
its rehabilitation.
Issue:
Whether or not the CA erred in reversing the RTC Decision, thereby
dismissing PALIs Revised Rehabilitation Plan
Ruling:
Yes. CA erred in dismissing PALIS Rehabilitation Plan
The validity of PALIs rehabilitation was already raised as an issue by
PWRDC and resolved with finality by the Court in its November 25, 2009
Decision in G.R. No. 180893 (consolidated with G.R. No. 178768). The Court
sustained therein the CAs affirmation of PALIs Revised Rehabilitation Plan,
including those terms which its creditors had found objectionable, namely, the
50% "haircut" reduction of the principal obligations and the condonation of
accrued interests and penalty charges.
The rehabilitation plan is contested on the ground that the same is
unreasonable and results in the impairment of the obligations of contract.
PWRDC contests the following stipulations in PALIs rehabilitation plan: fifty
percent (50%) reduction of the principal obligation; condonation of the accrued
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and substantial interests and penalty charges; repayment over a period of ten
years, with minimal interest of two percent (2%) for the first five years and five
percent (5%) for the next five years until fully paid, and only upon availability of
cash flow for debt service.
The Court found nothing onerous in the terms of PALIs rehabilitation
plan. The Interim Rules on Corporate Rehabilitation provides for means of
execution of the rehabilitation plan, which may include, among others, the
conversion of the debts or any portion thereof to equity, restructuring of the
debts, dacion en pago, or sale of assets or of the controlling interest.
The restructuring of the debts of PALI is part and parcel of its
rehabilitation. Moreover, per findings of fact of the RTC and as affirmed by the
CA, the restructuring of the debts of PALI would not be prejudicial to the interest
of PWRDC as a secured creditor.
There is nothing unreasonable or onerous about the 50% reduction of
the principal amount when, as found by the courta quo, a Special Purpose Vehicle
(SPV) acquired the credits of PALI from its creditors at deep discounts of as
much as 85%. Meaning, PALIs creditors accepted only 15% of their credits
value. Stated otherwise, if PALIs creditors are in a position to accept 15% of
their credits value, with more reason that they should be able to accept 50%
thereof as full settlement by their debtor. Since the issue on the validity, as well
as regularity of the December 13, 2005 RTC Decision approving PALIs Revised
Rehabilitation Plan had already been resolved, the Court, in line with the res
judicata principle, is constrained to grant the present petition and, consequently,
reverse the assailed CA decision.
ROBINSON'S BANK CORPORATION vs. HON. SAMUEL H. GAERLAN, et al.
G.R. No. 195289, September 24, 2014, J. Del Castillo
Under Rule 3, Section 5 of the Rules of Procedure on Corporate
Rehabilitation, the review of any order or decision of the rehabilitation court or on
appeal therefrom shall be in accordance with the Rules of Court, unless otherwise
provided. In the case at bar, TIDCORPs Petition for Review sought to nullify the
pari passu sharing scheme directed by the trial court and to grant preferential and
special treatment to TIDCORP over other WGC creditors, such as RBC. This being
the case, there is no visible objection to RBCs participation in said case, as it stands
to be injured or benefited by the outcome of TIDCORPs Petition for Review being
both a secured and unsecured creditor of WGC.
Facts:
Nation Granary, Inc. (now World Granary Corporation, or WGC) filed a
Petition for Rehabilitation with Prayer for Suspension of Payments, Actions and
Proceedings before the RTC.
WGC is engaged in the business of mechanized bulk handling, transport
and storage, warehousing, drying, and milling of grains. It incurred loans
amounting to P2.66 billion from RBC and other banks and entities such as Trade
and Investment Development Corporation of the Philippines (TIDCORP). It
appears that RBC is both a secured and unsecured creditor, while TIDCORP is a
secured creditor.
The RTC issued a Stay Order staying the enforcement of creditors claims
and prohibiting WGC from disposing its properties and paying its outstanding
liabilities. The RTC gave due course to the Petition for Rehabilitation.
Accordingly, the receiver submitted his Report with a proposal of a pari passu
or equal sharing between the secured and unsecured creditors of the proceeds
from WGCs cash flow made available for debt servicing.
In its Comment, TIDCORP among others took exception to the proposed
pari passu sharing, insisting that as a secured creditor, it should enjoy preference
over unsecured creditors, citing law and jurisprudence to the effect that the law
on preference of credits shall be observed in resolving claims against
corporations under rehabilitation. It likewise claimed that WGC violated its
Indemnity Agreement with TIDCORP which required that while the agreement
subsisted, WGC shall not incur new debts without TIDCORPs approval by
obtaining additional loans without the knowledge and consent of the latter.
RBC filed an Opposition to TIDCORPs Comment, arguing that giving
preference to TIDCORP would violate the Stay Order and impair the powers of
the receiver; and that any change in the contractual relations between TIDCORP
and WGC relative to their Indemnity Agreement comes as a necessary
consequence of rehabilitation, which TIDCORP may not be heard to complain.
The RTC approved WGCs rehabilitation plan. TIDCORP filed a Petition
for review before the CA praying that the order directing that all WGC obligations
be settled on a pari passu basis be reversed and set aside. RBC filed an Urgent
Motion for Intervention with attached Comment in Intervention, which is
anchored on its original claim and objection to TIDCORPs position.
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In its Opposition, TIDCORP maintained that intervention is not allowed
in rehabilitation proceedings, citing Rule 3, Section 1 of the Interim Rules of
Procedure on Corporate Rehabilitation. It argued that a final determination of
the appeal does not depend on RBCs participation since rehabilitation
proceedings are in remand binding on all interested and affected parties even if
they did not participate in the proceedings.
Issues:
1. Whether or not RBC should be allowed to participate in the petition
for review;
2. Whether or not a petition for review is the proper remedy for RBC
Ruling:
1. Yes. Under Rule 3, Section 5 of the Rules of Procedure on Corporate
Rehabilitation, the review of any order or decision of the rehabilitation court or
on appeal therefrom shall be in accordance with the Rules of Court, unless
otherwise provided. This being the case, there is no visible objection to RBCs
participation in CA-G.R. SP No. 104141 as it stands to be injured or benefited by
the outcome of TIDCORPs Petition for Review being both a secured and
unsecured creditor of WGC.
To recall, TIDCORPs Petition for Review in CA-G.R. SP No. 104141
sought to 1) nullify the pari passu sharing scheme directed by the trial court; 2)
declare RBC and the other creditor banks which granted additional loans to
WGC after the latter executed its Indemnity Agreement with TIDCORP guilty of
violating TIDCORPs rights; and 3) grant preferential and special treatment to
TIDCORP over other WGC creditors. These remedies would undoubtedly affect
not merely the rights of RBC, but of all the other WGC creditors as well, as their
standing or status as creditors would be somewhat downgraded, and the manner
of recovery of their respective credits will be altered if TIDCORPs prayer is
granted. Thus, the nature of TIDCORPs Petition in CA-G.R. SP No. 104141 is such
that the other creditors like RBC must be allowed to participate in the
proceedings. They have an interest in the controversy where a final decree
would necessarily affect their rights.
To disallow the participation of RBC constitutes an evasion of the
appellate courts positive duty to observe due process, a gross and patent error
that can be considered as grave abuse of discretion. Likewise, when an adverse
effect on the substantial rights of a litigant results from the exercise of the courts
discretion, certiorari may issue. If not, this Court possesses the prerogative and
initiative to take corrective action when necessary to prevent a substantial
wrong or to do substantial justice.
2. No. While TIDCORP is correct in arguing that intervention is not the
proper mode for RBC coming to the CA since it is already a party to the
rehabilitation proceedings, this merely highlights the formers error in not
allowing the latter to participate in the proceedings in CA-G.R. SP No. 104141 just
as it underscores the appellate courts blunder in not ordering that RBC be
allowed to comment or participate in the case so that they may be given the
opportunity to be heard on TIDCORPs allegations and accusations. And while
RBC chose the wrong mode for interposing its comments and objections in CA-
G.R. SP No. 104141, this does not necessarily warrant the outright denial of its
chosen remedy; the Court is not so rigid as to be precluded from adopting
measures to insure that justice would be administered fairly to all parties
concerned. If TIDCORP must pursue its Petition for Review, then RBC should be
allowed to comment and participate in the proceedings. There is no other
solution to the impasse.
Finally, the CA committed another patent error in declaring that RBCs
proper remedy was not to move for intervention, but to file a Petition for Review
of the trial courts June 6, 2008 Order. It failed to perceive the obvious fact that
there is nothing about the trial courts order that RBC questioned; quite the
contrary, it sought to affirm the said order in toto and simply prayed for the
dismissal of TIDCORPs Petition for Review. There is thus no legal and logical
basis for its conclusion that RBC should have resorted to a Petition for Review
just the same.
PHILIPPINE BANK OF COMMUNICATIONS vs. BASIC POLYPRINTERS AND
PACKAGING CORPORATION
G.R. No. 187581, October 20, 2014, J. Bersamin
A material financial commitment becomes significant in gauging the
resolve, determination, earnestness and good faith of the distressed corporation in
financing the proposed rehabilitation plan. This commitment may include the
voluntary undertakings of the stockholders or the would-be investors of the debtor-
corporation indicating their readiness, willingness and ability to contribute funds
or property to guarantee the continued successful operation of the debtor
corporation during the period of rehabilitation. In this case, the financial
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commitments presented by Basic Polyprinters were insufficient for the purpose of
rehabilitation. Thus, its petition for corporate rehabilitation must necessarily fail.
Facts:
Basic Polyprinters and Packaging Corporation (Basic Polyprinters) was
a domestic corporation engaged in the business of printing greeting cards, gift
wrappers, gift bags, calendars, posters, labels and other novelty items.
On February 27, 2004, Basic Polyprinters, along with the eight other
corporations belonging to the Limtong Group of Companies (namely: Cuisine
Connection, Inc., Fine Arts International, Gibson HP Corporation, Gibson Mega
Corporation, Harry U. Limtong Corporation, Main Pacific Features, Inc., T.O.L.
Realty & Development Corp., and Wonder Book Corporation), filed a joint
petition for suspension of payments with approval of the proposed rehabilitation
in the RTC.
Included in its overall Rehabilitation Program was the full payment of its
outstanding loans in favor of Philippine Bank of Communications (PBCOM),
RCBC, Land Bank, EPCIBank and AUB via repayment over 15 years with
moratorium of two-years for the interest and five years for the principal at 5%
interest per annum and a dacion en pago of its affiliate property in favor of
EPCIBank.
Finding the petition sufficient in form and substance, the RTC issued the
stay order dated August 31, 2006. It appointed Manuel N. Cacho III as the
rehabilitation receiver, and required all creditors and interested parties,
including the Securities and Exchange Commission (SEC), to file their comments.
After the initial hearing and evaluation of the comments and opposition
of the creditors, including PBCOM, the RTC gave due course to the petition and
referred it to the rehabilitation receiver for evaluation and recommendation.
On October 18, 2007, the rehabilitation receiver submitted his report
recommending the approval of the rehabilitation plan. On December 19, 2007,
the rehabilitation receiver submitted his clarifications and corrections to his
report and recommendations.
On January 11, 2008, the RTC issued an order approving the
rehabilitation plan.
In the assailed decision promulgated on December 16, 2008, the CA
affirmed the questioned order of the RTC, agreeing with the finding of the
rehabilitation receiver that there were sufficient evidence, factors and actual
opportunities in the rehabilitation plan indicating that Basic Polyprinters could
be successfully rehabilitated in due time.
The PBCOM claims that the CA did not pass upon the issues presented in
its petition, that the rehabilitation plan did not contain the material financial
commitments required by Section 5, Rule 4 of the Interim Rules of Procedure for
Corporate Rehabilitation (Interim Rules); that, accordingly, the proposed
repayment scheme did not constitute a material financial commitment, and the
proposed dacion en pago was not proper because the property subject thereof
had been mortgaged in its favor;
Issue:
Whether or not Basic Polyprinters can be rehabilitated.
Ruling:
No. Basic Polyprinters cannot be rehabilitated.
A material financial commitment becomes significant in gauging the
resolve, determination, earnestness and good faith of the distressed corporation
in financing the proposed rehabilitation plan. This commitment may include the
voluntary undertakings of the stockholders or the would-be investors of the
debtor-corporation indicating their readiness, willingness and ability to
contribute funds or property to guarantee the continued successful operation of
the debtor corporation during the period of rehabilitation.
Basic Polyprinters presented financial commitments, as follows:
1. Additional P10 million working capital to be sourced from the
insurance claim;
2. Conversion of the directors and shareholders deposit for future
subscription to common stock;
3. Conversion of substituted liabilities, if any, to additional paid-in
capital to increase the companys equity; and
4. All liabilities (cash advances made by the stockholders) of the
company from the officers and stockholders shall be treated as trade
payables.
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However, these financial commitments were insufficient for the
purpose.
The commitment to add P10,000,000.00 working capital appeared to be
doubtful considering that the insurance claim from which said working capital
would be sourced had already been written-off by Basic Polyprinterss affiliate,
Wonder Book Corporation. A claim that has been written-off is considered a bad
debt or a worthless asset, and cannot be deemed a material financial
commitment for purposes of rehabilitation. At any rate, the proposed additional
P10,000,000.00 working capital was insufficient to cover at least half of the
shareholders deficit that amounted to P23,316,044.00 as of June 30, 2006.
The Supreme Court also declared in Wonder Book Corporation v.
Philippine Bank of Communications (Wonder Book) that the conversion of all
deposits for future subscriptions to common stock and the treatment of all
payables to officers and stockholders as trade payables was hardly constituting
material financial commitments. Such conversion of cash advances to trade
payables was, in fact, a mere re-classification of the liability entry and had no
effect on the shareholders deficit. On the other hand, the Supreme Court cannot
determine the effect of the conversion of the directors and shareholders
deposits for future subscription to common stock and substituted liabilities on
the shareholders deficit because their amounts were not reflected in the
financial statements contained in the rollo.
Basic Polyprinterss rehabilitation plan likewise failed to offer any
proposal on how it intended to address the low demands for their products and
the effect of direct competition from stores like SM, Gaisano, Robinsons, and
other malls. Even the P245 million insurance claim that was supposed to cover
the destroyed inventories worth P264 million appears to have been written-off
with no probability of being realized later on.
The Supreme Court observes, too, that Basic Polyprinterss proposal to
enter into the dacion en pago to create a source of fresh capital was not feasible
because the object thereof would not be its own property but one belonging to its
affiliate, TOL Realty and Development Corporation, a corporation also
undergoing rehabilitation. Moreover, the negotiations (for the return of books
and magazines from Basic Polyprinterss trade creditors) did not partake of a
voluntary undertaking because no actual financial commitments had been made
thereon.
Worthy of note here is that Wonder Book Corporation was a sister
company of Basic Polyprinters, being one of the corporations that had filed the
joint petition for suspension of payments and rehabilitation in SEC. Both of them
submitted identical commitments in their respective rehabilitation plans. As a
result, as the Court observed in Wonder Book, the commitments by Basic
Polyprinters could not be considered as firm assurances that could convince
creditors, future investors and the general public of its financial and operational
viability.
Due to the rehabilitation plan being an indispensable requirement in
corporate rehabilitation proceedings, Basic Polyprinters was expected to exert a
conscious effort in formulating the same, for such plan would spell the future not
only for itself but also for its creditors and the public in general. The contents
and execution of the rehabilitation plan could not be taken lightly.
The Supreme Court is not oblivious to the plight of corporate debtors
like Basic Polyprinters that have inevitably fallen prey to economic recession and
unfortunate incidents in the course of their operations. However, the Supreme
Court must endeavor to balance the interests of all the parties that had a stake in
the success of rehabilitating the debtors. In doing so here, the Supreme Court
cannot now find the rehabilitation plan for Basic Polyprinters to be genuine and
in good faith, for it was, in fact, unilateral and detrimental to its creditors and the
public.
MARILYN VICTORIO-AQUINO vs. PACIFIC PLANS INC. and
MAMARETO A. MARCELO, JR.
G.R. No. 193108, December 10, 2014, J. Peralta
While the voice and participation of the creditors is crucial in the
determination of the viability of the rehabilitation plan, as they stand to benefit or
suffer in the implementation thereof, the interests of all stakeholders is the ultimate
and prime consideration.
Facts:
Respondent Pacific Plans, Inc. (now Abundance Providers and
Entrepreneurs Corporation or APEC) is engaged in the business of selling pre-
need plans and educational plans, including traditional open-ended educational
plans. PEPTrads are educational plans where respondent guarantees to pay the
planholder, without regard to the actual cost at the time of enrolment, the full
amount of tuition and other school fees of a designated beneficiary. Petitioner
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Marilyn is a holder of two units of respondents PEPTrads.
On April 7, 2005, foreseeing the impossibility of meeting its obligations
to the availing plan holders as they fall due, respondent filed a Petition for
Corporate Rehabilitation with the Regional Trial Court (Rehabilitation Court),
praying that it be placed under rehabilitation and suspension of payments. The
Rehabilitation Court issued a Stay Order, directing the suspension of payments of
the obligations of respondent and ordering all creditors and interested parties to
file their comments/oppositions, respectively, to the Petition for Corporate
Rehabilitation. The same Order also appointed respondent Mamerto A. Marcelo
as the rehabilitation receiver and set the initial hearing of the case on May 25,
2005.
APEC submitted to the Rehabilitation Court its proposed rehabilitation
plan. Under the terms thereof, APEC proposed the implementation of a Swap,
which will essentially give the plan holder a means to exit from the PEPTrads at
terms and conditions relative to a termination value that is more advantageous
than those provided under the educational plan in case of voluntary termination.
On February 16, 2006, the Rehabilitation Receiver submitted an Alternative
Rehabilitation Plan for the approval of the Rehabilitation Court. Under the ARP,
the benefits under the PEPTrads shall be translated into fixed-value benefits as of
December 31, 2004, which will be termed as Base Year-end 2004 Entitlement.
The creditors/oppositors did not oppose/comment on the Rehabilitation
Receivers ARP. Respondent commenced with the implementation of its ARP in
coordination with, and with clearance from, the Rehabilitation Receiver. In the
meantime, the value of the Philippine Peso strengthened and appreciated. In
view of this development, and considering that the trust fund of respondent is
mainly composed of NAPOCOR bonds that are denominated in US Dollars,
respondent submitted a manifestation with the Rehabilitation Court on February
29, 2008, stating that the continued appreciation of the Philippine Peso has
grossly affected the value of the U.S. Dollar-denominated NAPOCOR bonds, which
stood as security for the payment of the Net Translated Values of the PEPTrads.
Thereafter, the Rehabilitation Receiver filed a Manifestation with Motion
to Admit dated March 7, 2008, echoing the earlier tenor and substance of
respondents manifestation, and praying that the Modified Rehabilitation Plan be
approved by the Rehabilitation Court. Under the MRP, the ARP previously
approved by the Rehabilitation Court is modified. The Rehabilitation Court
issued a Resolution dated July 28, 2008 approving the MRP. Marilyn questioned
the approval of the MRP before the CA on September 26, 2008.Unfortunately for
her, despite motion for reconsideration, the CA denied the same on July 21, 2010.
Hence, this Petition for Review on Certiorari.
Issue:
Whether the MRP is ultra vires insofar as it reduces the original claim
and even the original amount that Marilyn was to receive under the ARP.
Ruling:
No, it is not.
The cram-down power of the Rehabilitation Court has long been
established and even codified under Section 23, Rule 4 of the Interim Rules. Such
prerogative was carried over in the Rehabilitation Rules, which maintains that
the court may approve a rehabilitation plan over the objection of the creditors if,
in its judgment, the rehabilitation of the debtors is feasible and the opposition of
the creditors is manifestly unreasonable. In Bank of the Philippine Islands v.
Sarabia Manor Hotel Corporation, where the Court elucidated the rationale
behind Section 23, Rule 4 of the Interim Rules, the Court said that a
rehabilitation plan may be approved even over the opposition of the creditors
holding a majority of the corporations total liabilities if there is a showing that
rehabilitation is feasible and the opposition of the creditors is manifestly
unreasonable.
Also known as the cram-down clause, this provision, which is currently
incorporated in the FRIA, is necessary to curb the majority creditors natural
tendency to dictate their own terms and conditions to the rehabilitation, absent
due regard to the greater long-term benefit of all stakeholders. Otherwise stated,
it forces the creditors to accept the terms and conditions of the rehabilitation
plan, preferring long-term viability over immediate but incomplete recovery.
Based on the aforequoted doctrine, petitioners outright censure of the
concept of the cram-down power of the rehabilitation court cannot be
countenanced. To adhere to the reasoning of petitioner would be a step
backward a futile attempt to address an outdated set of challenges. It is
undeniable that there is a need to move to a regime of modern restructuring,
cram-down and court supervision in the matter of corporation rehabilitation in
order to address the greater interest of the public. This is clearly manifested in
Section 64 of Republic Act No. 10142, otherwise known as Financial
Rehabilitation and Insolvency Act of 2010.
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BPI FAMILY SAVINGS BANKC, INC. vs. ST. MICHAEL MEDICAL CENTER, INC.
G.R. No. 205469, March 25, 2015, J. Perlas-Bernabe
It is well to emphasize that the remedy of rehabilitation should be denied
to corporations that do not qualify under the Rules. Neither should it be allowed to
corporations whose sole purpose is to delay the enforcement of any of the rights of
the creditors, which is rendered obvious by: (a) the absence of a sound and
workable business plan; (b) baseless and unexplained assumptions, targets, and
goals; and (c) speculative capital infusion or complete lack thereof for the
execution of the business plan. In this case, not only has the petitioning debtor
failed to show that it has formally began its operations which would warrant
restoration, but also it has failed to show compliance with the key requirements
under the Rules, the purpose of which are vital in determining the propriety of
rehabilitation. Thus, for all the reasons hereinabove explained, the Court is
constrained to rule in favor of BPI Family and hereby dismiss SMMCIs
Rehabilitation Petition.
Facts:
Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole
proprietors of St. Michael Hospital. With a vision to upgrade St. Michael Hospital
into a modern, well-equipped and full service tertiary 11-storey hospital, Sps.
Rodil purchased two (2) parcels of land adjoining their existing property and, on
May 22, 2003, incorporated SMMCI, with which entity they planned to eventually
consolidate St. Michael Hospitals operations. In order to finance the expansion of
the premises of the hospital, the Spouses Rodil obtained load from BPI Family
Savings Bank. The Spouses thereafter incurred problems with the first
contractor, so the building was not completed. SMMCI was only able to pay the
interest on its BPI Family loan, or the amount of 3,000,000.00 over a two-year
period, from the income of St. Michael Hospital.
On September 25, 2009, BPI Family demanded immediate payment of
the entire loan obligation and, soon after, filed a petition for extrajudicial
foreclosure of the real properties covered by the mortgage. The auction sale was
scheduled on December 11, 2009, which was postponed to February 15, 2010
with the conformity of BPI Family.
On August 11, 2010, SMMCI filed a Petition for Corporate Rehabilitation
(Rehabilitation Petition) before the RTC, with prayer for the issuance of a Stay
Order as it foresaw the impossibility of meeting its obligation to BPI Family, its
purported sole creditor. In its proposed Rehabilitation Plan,23 SMMCI merely
sought for BPI Family (a) to defer foreclosing on the mortgage and (b) to agree to
a moratorium of at least two (2) years during which SMMCI either through St.
Michael Hospital or its successor will retire all other obligations. After which,
SMMCI can then start servicing its loan obligation to the bank under a mutually
acceptable restructuring agreement. 24 SMMCI declared that it intends to
conclude pending negotiations for investments offered by a group of medical
doctors whose capital infusion shall be used (a) to complete the finishing
requirements for the 3rd and 5th floors of the new building; (b) to renovate the
old 5storey building where St. Michael Hospital operates; and (c) to pay, in whole
or in part, the bank loan with the view of finally integrating St. Michael Hospital
with SMMCI. Finding the Rehabilitation Petition to be sufficient in form and
substance, the RTC issued a Stay Order. In an Order 34 dated August 4, 2011, the
RTC approved the Rehabilitation Plan
Aggrieved, BPI Family elevated the matter before the CA, mainly arguing
that the approval of the Rehabilitation Plan violated its rights as an unpaid
creditor/mortgagee and that the same was submitted without prior consultation
with creditors. In a Decision dated August 30, 2012, the CA affirmed the RTCs
approval of the Rehabilitation Plan. Hence, this petition.
Issue:
Whether or not the CA correctly affirmed SMMCIs Rehabilitation Plan as
approved by the RTC.
Ruling:
No. that SMMCIs Rehabilitation Plan, an indispensable requisite in
corporate rehabilitation proceedings, failed to comply with the fundamental
requisites outlined in Section 18, Rule 3 of the Rules, particularly, that of a
material financial commitment to support the rehabilitation and an
accompanying liquidation analysis, all of the petitioning debtor: SEC. 18.
Rehabilitation Plan. - The rehabilitation plan shall include (a) the desired
business targets or goals and the duration and coverage of the rehabilitation; (b)
the terms and conditions of such rehabilitation which shall include the manner of
its implementation, giving due regard to the interests of secured creditors such
as, but not limited, to the nonimpairment of their security liens or interests; (c)
the material financial commitments to support the rehabilitation plan; (d) the
means for the execution of the rehabilitation plan, which may include debt to
equity conversion, restructuring of the debts, dacion en pago or sale exchange or
any disposition of assets or of the interest of shareholders, partners or members;
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(e) a liquidation analysis setting out for each creditor that the present value of
payments it would receive under the plan is more than that which it would
receive if the assets of the debtor were sold by a liquidator within a six-month
period from the estimated date of filing of the petition; and (f) such other
relevant information to enable a reasonable investor to make an informed
decision on the feasibility of the rehabilitation plan.
It is well to emphasize that the remedy of rehabilitation should be
denied to corporations that do not qualify under the Rules. Neither should it be
allowed to corporations whose sole purpose is to delay the enforcement of any of
the rights of the creditors, which is rendered obvious by: (a) the absence of a
sound and workable business plan; (b) baseless and unexplained assumptions,
targets, and goals; and (c) speculative capital infusion or complete lack thereof
for the execution of the business plan. Unfortunately, these negative indicators
have all surfaced to the fore, much to SMMCIs chagrin. While the Court
recognizes the financial predicaments of upstart corporations under the
prevailing economic climate, it must nonetheless remain forthright in limiting
the remedy of rehabilitation only to meritorious cases. As above-mentioned, the
purpose of rehabilitation proceedings is not only to enable the company to gain a
new lease on life but also to allow creditors to be paid their claims from its
earnings, when so rehabilitated. Hence, the remedy must be accorded only after
a judicious regard of all stakeholders interests; it is not a one-sided tool that may
be graciously invoked to escape every position of distress.
In this case, not only has the petitioning debtor failed to show that it has
formally began its operations which would warrant restoration, but also it has
failed to show compliance with the key requirements under the Rules, the
purpose of which are vital in determining the propriety of rehabilitation. Thus,
for all the reasons hereinabove explained, the Court is constrained to rule in
favor of BPI Family and hereby dismiss SMMCIs Rehabilitation Petition.
BANK OF COMMERCE vs. RADIO PHILIPPINES
NETWORK, INC., ET. AL.
G.R. No. 195615, April 21, 2014, J. Abad
Indubitably, it is clear that no merger took place between Bancommerce and
TRB as the requirements and procedures for a merger were absent. A merger does
not become effective upon the mere agreement of the constituent corporations. All
the requirements specified in the law must be complied with in order for merger to
take effect. Here, Bancommerce and TRB remained separate corporations with
distinct corporate personalities. What happened is that TRB sold and
Bancommerce purchased identified recorded assets of TRB in consideration of
Bancommerces assumption of identified recorded liabilities of TRB including
booked contingent accounts. There is no law that prohibits this kind of transaction
especially when it is done openly and with appropriate government approval.
Facts:
Traders Royal Bank (TRB) sold to petitioner Bank of Commerce
(Bancommerce) its banking business consisting of specified assets and liabilities
through a Purchase and Assumption (P & A) Agreement. Bangko Sentral ng
Pilipinas' (BSP's) approval of their P & A Agreement was however necessary. On
November 8, 2001 the BSP approved that agreement subject to the condition
that Bancommerce and TRB would set up an escrow fund of PSO million with
another bank to cover TRB liabilities for contingent claims that may
subsequently be adjudged against it, which liabilities were excluded from the
purchase. Subsequently, P & A Agreement was approved by BSP. To comply with
a BSP mandate, TRB placed P50 million in escrow with Metropolitan Bank and
Trust Co. (Metrobank) to answer for those claims and liabilities that were
excluded from the P & A Agreement and remained with TRB.
Shortly after acting in G.R. 138510, Traders Royal Bank v. Radio
Philippines Network (RPN), Inc., this Court ordered TRB to pay respondents
RPN, Intercontinental Broadcasting Corporation, and Banahaw Broadcasting
Corporation (collectively, RPN, et al.) actual damages plus 12% legal interest and
some amounts. Based on this decision, RPN, et al.filed a motion for execution
against TRB before the Regional Trial Court (RTC). But rather than pursue a levy
in execution of the corresponding amounts on escrow with Metrobank, RPN, et
al. filed a Supplemental Motion for Execution where they described TRB as "now
Bank of Commerce" based on the assumption that TRB had been merged into
MERGER AND CONSOLIDATION
Bancommerce.
Subsequently, the RTC issued the assailed Order directing the release to
the Sheriff of Bancommerces "garnished monies and shares of stock or their
monetary equivalent" and for the sheriff to pay 25% of the amount "to the
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respondents counsel representing his attorneys fees and appearance fees and
litigation expenses" and the balance to be paid to the respondents after
deducting court dues.
Issue:
Whether or not there was a merger or de facto merger between TRB and
Bancommerce thereby considering the latter as judgment debtor.
Ruling:
None.
Indubitably, it is clear that no merger took place
between Bancommerce and TRB as the requirements and
procedures for a merger were absent. A merger does not
become effective upon the mere agreement of the
constituent corporations. All the requirements specified in the law must be
complied with in order for merger to take effect. Section 79 of the Corporation
Code further provides that the merger shall be effective only upon the issuance
by the Securities and Exchange Commission (SEC) of a certificate of merger.
Here, Bancommerce and TRB remained separate corporations with distinct
corporate personalities. What happened is that TRB sold and Bancommerce
purchased identified recorded assets of TRB in consideration of Bancommerces
assumption of identified recorded liabilities of TRB including booked contingent
accounts. There is no law that prohibits this kind of transaction especially when
it is done openly and with appropriate government approval.
In his book, Philippine Corporate Law, Dean Cesar Villanueva explained
that under the Corporation Code, "a de facto merger can be pursued by one
corporation acquiring all or substantially all of the properties of another
corporation in exchange of shares of stock of the acquiring corporation. The
acquiring corporation would end up with the business enterprise of the target
corporation; whereas, the target corporation would end up with basically its only
remaining assets being the shares of stock of the acquiring corporation."
No de facto merger took place in the present case simply because the
TRB owners did not get in exchange for the banks assets and liabilities an
equivalent value in Bancommerce shares of stock. Moreover, Bancommerce and
TRB agreed with BSP approval to exclude from the sale the TRBs contingent
judicial liabilities, including those owing to RPN, et al. The Bureau of Internal
Revenue (BIR) treated the transaction between the two banks purely as a sale of
specified assets and liabilities when it rendered its opinion on the tax
consequences of the transaction given that there is a difference in tax treatment
between a sale and a merger or consolidation. Furthermore, what was
"consolidated" was the banking activities and transactions of Bancommerce and
TRB, not their corporate existence. The BSP did not remotely suggest a merger of
the two corporations.
To end, since there had been no merger, Bancommerce cannot be
considered as TRBs successor-in-interest and against which the Courts Decision
of October 10, 2002 in G.R. 138510 may be enforced. Bancommerce did not hold
the former TRBs assets in trust for it as to subject them to garnishment for the
satisfaction of the latters liabilities to RPN, et al. Bancommerce bought and
SECURITIES REGULATION CODE
acquired those assets and thus, became their absolute owner.
PROXY SOLICITATION
SECURITIES AND EXCHANGE COMMISSION, vs. THE HONORABLE COURT OF
APPEALS, OMICO CORPORATION, EMILIO S. TENG AND TOMMY KIN HING
TIA
ASTRA SECURITIES CORPORATION, vs. OMICO CORPORATION, EMILIO S.
TENG AND TOMMY KIN HING TIA,
G.R. No. 187702, October 22, 2014, CJ. SERENO,
The power of the SEC to investigate violations of its rules on proxy
solicitation is unquestioned when proxies are obtained to vote on matters
unrelated to the cases enumerated under Section 5 of Presidential Decree No. 902-
A. However, when proxies are solicited in relation to the election of corporate
directors, the resulting controversy, even if it ostensibly raised the violation of the
SEC rules on proxy solicitation, should be properly seen as an election controversy
within the original and exclusive jurisdiction of the trial courts by virtue of Section
5.2 of the SRC in relation to Section 5 (c) of Presidential Decree No. 902-A
Indeed, the validation of proxies in this case relates to the determination of
the existence of a quorum. Nonetheless, it is a quorum for the election of the
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directors, and, as such, which requires the presence in person or by proxy of the
owners of the majority of the outstanding capital stock of Omico. Also, the fact that
there was no actual voting did not make the election any less so, especially since
Astra had never denied that an election of directors took place.
Facts:
Omico Corporation (Omico) is a company whose shares of stock are
listed and traded in the Philippine Stock Exchange, Inc. Astra Securities
Corporation (Astra) is one of the stockholders of Omico owning about 18% of the
latters outstanding capital stock.
Omico scheduled its annual stockholders meeting. It set the deadline for
submission of proxies on and the validation of proxies. Astra objected to the
validation of the proxies issued in favor of Tommy Kin Hing Tia (Tia) as well as
the inclusion of the proxies issued in favor of Tia and/or Martin Buncio.
Astra maintained that the proxy issuers, who were brokers, did not
obtain the required express written authorization of their clients when they
issued the proxies in favor of Tia. In so doing, the issuers were allegedly in
violation of SRC or Republic Act No. 8799 Rules. Despite the objections of Astra,
Omicos Board of Inspectors declared that the proxies issued in favor of Tia were
valid.
Astra filed a Complaint before the Securities and Exchange Commission
(SEC) praying for the invalidation of the proxies issued in favor of Tia. Astra also
prayed for the issuance of a cease and desist order (CDO) enjoining the holding
of Omicos annual stockholders meeting until the SEC had resolved the issues
pertaining to the validation of proxies which SEC granted.
The stockholders meeting proceeded as scheduled prompting Astra to
institute before the SEC a Complaint for indirect contempt against Omico for
disobedience of the CDO. On the other hand, Omico filed before the CA a Petition
for Certiorari and Prohibition imputing grave abuse of discretion on the part of
the SEC for issuing the CDO. CA declared the CDO null and void since the
controversy was an intra-corporate dispute. The SRC expressly transferred the
jurisdiction over actions involving intracorporate controversies from the SEC to
the regional trial courts.
Issue:
Whether or not the SEC has jurisdiction over controversies arising from
the validation of proxies for the election of the directors of a corporation.
Ruling:
No, SEC has no jurisdiction over controversies arising from the
validation of proxies for the election of the directors of a corporation
In GSIS v. CA, it was necessary for the Court to determine whether the
action to invalidate the proxies was intimately tied to an election controversy.
Hence, the Court pronounced: Under Section 5(c) of Presidential Decree No. 902-
A, in relation to the SRC, the jurisdiction of the regular trial courts with respect to
election related controversies is specifically confined to "controversies in the
election or appointment of directors, trustees, officers or managers of
corporations, partnerships, or associations." Evidently, the jurisdiction of the
regular courts over so-called election contests or controversies under Section 5
(c) does not extend to every potential subject that may be voted on by
shareholders, but only to the election of directors or trustees, in which
stockholders are authorized to participate under Section 24 of the Corporation
Code.
This qualification allows for a useful distinction that gives due effect to
the statutory right of the SEC to regulate proxy solicitation, and the statutory
jurisdiction of regular courts over election contests or controversies. The power
of the SEC to investigate violations of its rules on proxy solicitation is
unquestioned when proxies are obtained to vote on matters unrelated to the
cases enumerated under Section 5 of Presidential Decree No. 902-A. However,
when proxies are solicited in relation to the election of corporate directors, the
resulting controversy, even if it ostensibly raised the violation of the SEC rules on
proxy solicitation, should be properly seen as an election controversy within the
original and exclusive jurisdiction of the trial courts by virtue of Section 5.2 of
the SRC in relation to Section 5 (c) of Presidential Decree No. 902-A.
The Court explained that the power of the SEC to regulate proxies
remains in place in instances when stockholders vote on matters other than the
election of directors. The test is whether the controversy relates to such election.
All matters affecting the manner and conduct of the election of directors are
properly cognizable by the regular courts. Otherwise, these matters may be
brought before the SEC for resolution based on the regulatory powers it
exercises over corporations, partnerships and associations.
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Indeed, the validation of proxies in this case relates to the determination
of the existence of a quorum. Nonetheless, it is a quorum for the election of the
directors, and, as such, which requires the presence in person or by proxy of
the owners of the majority of the outstanding capital stock of Omico. Also, the
fact that there was no actual voting did not make the election any less so,
especially since Astra had never denied that an election of directors took place.
Court finds no merit either in the proposal of Astra regarding the "two
(2) viable, non-exclusive and successive legal remedies to question the validity of
proxies." It suggests that the power to pass upon the validity of proxies to
determine the existence of a quorum prior to the conduct of the stockholders
meeting should lie with the SEC; but, after the stockholders meeting, questions
regarding the use of invalid proxies in the election of directors should be
cognizable by the regular courts, since there was already an election to speak of.
There is no point in making distinctions between who has jurisdiction before and
who has jurisdiction after the election of directors, as all controversies related
thereto - whether before, during or after - shall be passed upon by regular courts
SECURITIES AND EXCHANGE COMMISSION
as provided by law. The Court closes with an observation.
PRIMANILA PLANS, INC., HEREIN REPRESENTED BY EDUARDO S. MADRID
vs. SECURITIES AND EXCHANGE COMMISSION
G.R. No. 193791, August 6, 2014, J. Reyes
The authority of the SEC and the manner by which it can issue cease and
desist orders are provided in Section 64 of the SRC. The law is clear on the point
that a cease and desist order may be issued by the SEC motu proprio, it being
unnecessary that it results from a verified complaint from an aggrieved party. A
prior hearing is also not required whenever the Commission finds it appropriate to
issue a cease and desist order that aims to curtail fraud or grave or irreparable
injury to investors. It is beyond dispute that Primasa plans were not registered with
the SEC. Primanila was then barred from selling and offering for sale the said plan
product. A continued sale by the company would operate as fraud to its investors,
and would cause grave or irreparable injury or prejudice to the investing public,
grounds which could justify the issuance of a cease and desist order under Section
64 of the SRC.
Facts:
Primanilas website www.primanila.com was offering a pension plan
product called Primasa Plan. The website contains detailed instructions as to
how interested persons can apply for the said plan and where initial
contributions and succeeding installment payments can be made by applicants
and planholders.
Primanila failed to renew its Dealers License for 2008. In view of the
expiration of the said license, the SECs Non Traditional Securities and
Instruments Department (NTD) enjoined Primanila from selling and/or offering
for sale pre-need plans to the public.
Primanila has not been issued a secondary license to act as dealer or
general agent for pre-need pension plans for 2008. Also, no registration
statement has been filed by Primanila for the approval of a pension plan product
called Primasa Plan. This is shown in the certification issued by NTD upon the
request of SECs Compliance and Enforcement Department (CED).
It was discovered by CED Primanilas Bank
Account is still active when it deposited on March 6, 2008
the sum of Php 50.00. Among the many planholders of
PRIMANILA are enlisted personnel of the PNP. The PNP
remitted the total amount of Php 2,072,149.38 to PRIMANILA representing the
aforementioned premium collections via salary deductions of the 410 enlisted
personnel of PNP who are planholders. But Primanila failed to deposit the
required monthly contributions to the trust fund in violation of Pre-need Rule
19.1. This is shown in the Trust Fund Reports for the months of November and
December 2007 prepared by ASIATRUST BANK, the trustee of Primanila.
Primanila under-declared the total amount of its collections as shown in
its SEC Monthly Collection Reports which it submitted to NTD. Its reports show
that it only collected Php 302,081.00 from January to September 2007. However,
the remittance report of the PNP shows that Primanila received the amount of
Php 1,688,965.22 from the PNP planholders alone for the said period. Therefore,
it under-declared its report by Php 1,386,884.22.7
From these findings, the SEC declared that Primanila committed a
flagrant violation of Republic Act No. 8799, otherwise known as The Securities
Regulation Code (SRC), particularly Section 16 thereof. The SEC then issued the
subject cease and desist order "in order to prevent further violations and in
order to protect the interest of its plan holders and the public."
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Feeling aggrieved, Primanila filed a Motion for Reconsideration/Lift
Cease and Desist Order, arguing that it was denied due process as the order was
released without any prior issuance by the SEC of a notice or formal charge that
could have allowed the company to defend itself. The cease and desist order
issued on April 9, 2008 was then made permanent. The CA affirmed in toto the
issuances of the SEC.
Issue:
Whether or not Primanila was accorded due process notwithstanding
the SECs immediate issuance of the cease and desist order on April 9, 2008
Ruling:
Yes, the authority of the SEC and the manner by which it can issue cease
and desist orders are provided in Section 64 of the SRC.
The law is clear on the point that a cease and desist order may be issued
by the SEC motu proprio, it being unnecessary that it results from a verified
complaint from an aggrieved party. A prior hearing is also not required
whenever the Commission finds it appropriate to issue a cease and desist order
that aims to curtail fraud or grave or irreparable injury to investors. There is
good reason for this provision, as any delay in the restraint of acts that yield such
results can only generate further injury to the public that the SEC is obliged to
protect.
To equally protect individuals and corporations from baseless and
improvident issuances, the authority of the SEC under this rule is nonetheless
with defined limits. A cease and desist order may only be issued by the
Commission after proper investigation or verification, and upon showing that the
acts sought to be restrained could result in injury or fraud to the investing public.
Without doubt, these requisites were duly satisfied by the SEC prior to its
issuance of the subject cease and desist order.
Records indicate the prior conduct of a proper investigation on
Primanilas activities by the Commissions CED. Investigators of the CED
personally conducted an ocular inspection of Primanilas declared office, only to
confirm reports that it had closed even without the prior approval of the SEC.
Members of CED also visited the company website of Primanila, and discovered
the companys offer for sale thereon of the pension plan product called Primasa
Plan, with instructions on how interested applicants and planholders could pay
their premium payments for the plan. One of the payment options was through
bank deposit to Primanilas given Metrobank account which, following an actual
deposit made by the CED was confirmed to be active.
As part of their investigation, the SEC also looked into records relevant
to Primanilas business. Records with the SECs Non-Traditional Securities and
Instruments Department (NTD) disclosed Primanilas failure to renew its
dealers license for 2008, orto apply for a secondary license as dealer or general
agent for pre-need pension plans for the same year. SEC records also confirmed
Primanilas failureto file a registration statement for Primasa Plan, to fully remit
premium collections from planholders, and to declare truthfully its premium
collections from January to September 2007.
The SEC was not mandated to allow Primanila to participate in the
investigation conducted by the Commission prior to the cease and desist orders
issuance. Given the circumstances, it was sufficient for the satisfaction of the
demands of due process that the company was amply apprised of the results of
the SEC investigation, and then given the reasonable opportunity to present its
defense. Primanila was able to do this via its motion to reconsider and lift the
cease and desist order. After the CED filed its comment on the motion, Primanila
was further given the chance to explain its side to the SEC through the filing of its
reply. "Trite to state, a formal trial or hearing isnot necessary to comply with the
requirements of due process. Its essence is simply the opportunity to explain
ones position."
The validity of the SECs cease and desist order is further sustained for
having sufficient factual and legal bases.
The acts specifically restrained by the subject cease and desist order
were Primanilas sale, offer for sale and collection of payments specifically for its
Primasa plans. Notwithstanding the findings of both the SEC and the CA on
Primanilas activities, the company still argued in its petition that it neither sold
nor collected premiums for the Primasa product. Primanila argued that the offer
for sale of Primasa through the Primanila website was the result of mere
inadvertence, after the website developer whom it hired got hold of a copy of an
old Primasa brochure and then included its contents in the company website
even without the knowledge and prior approval of Primanila.
In the instant case, the substantial evidence is derived from the results
of the SEC investigation on Primanilas activities. Specifically on the product
Primasa plans, the SEC ascertained that there were detailed instructions on
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Primanilas website as to how interested persons could apply for a plan, together
with the manner by which premium payments therefor could be effected. A
money deposit by CED to Primanilas Metrobank account indicated in the
advertisement confirmed that the bank account was active.
There could be no better conclusion from the foregoing circumstances
that Primanila was engaged in the sale or, at the very least, an offer for sale to the
public of the Primasa plans. The offer for Primasa was direct and its reach was
even expansive, especially as it utilized its website as a medium and visits to it
were, as could be expected, from prospective clients.
It is beyond dispute that Primasa plans were not registered with the
SEC. Primanila was then barred from selling and offering for sale the said plan
product. A continued sale by the company would operate as fraud to its
investors, and would cause grave or irreparable injury or prejudice to the
investing public, grounds which could justify the issuance of a cease and desist
order under Section 64 of the SRC. Furthermore, even prior to the issuance of the
subject cease and desist order, Primanila was already enjoined by the SEC from
selling and/or offering for sale pre-need products to the public. The SEC Order
dated April 9, 2008 declared that Primanila failed to renew its dealers license for
2008, prompting the SECs NTD to issue a letter dated January3, 2008 addressed
to Primanilas Chairman and Chief Executive Officer Eduardo S. Madrid, enjoining
the company from selling and/or offering for sale pre-need plans to the public. It
also had not obtained a secondary license to act as dealer or general agent for
pre-need pension plans for 2008.
In view of the foregoing, Primanila clearly violated Section 16 of the SRC
and pertinent rules which barred the sale or offer for sale to the public of a pre-
need product except in accordance with SEC rules and regulations.
COSMOS BOTTLING CORPORATION vs. COMMISSION EN BANC of the
SECURITIES AND EXCHANGE COMMISSION (SEC) and JUSTINA F.
CALLANGAN, in her capacity as Director of the Corporation Finance
Department of the SEC
G.R. No. 199028, November 12, 2014, J. Perlas- Bernabe
As an administrative agency with both regulatory and adjudicatory
functions, the SEC was given the authority to delegate some of its functions to, inter
alia, its various operating departments, such as the SECCFD, the Enforcement and
Investor Protection Department, and the Company Registration and Monitoring
Department. In this case, the Court disagrees with the findings of both the SEC En
Banc and the CA that the Revocation Order emanated from the SEC En Banc.
Rather, such Order was merely issued by the SEC-CFD as one of the SECs operating
departments. In other words, the Revocation Order is properly deemed as a decision
issued by the SEC-CFD as one of the Operating Departments of the SEC, and
accordingly, may be appealed to the SEC En Banc, as what Cosmos properly did in
this case. Perforce, the SEC En Banc and the CA erred in deeming Cosmoss appeal
as a motion for reconsideration and ordering its dismissal on such ground.
Facts:
The instant case stemmed from Cosmoss failure to submit its 2005
Annual Report to the SEC within the prescribed period. In connection therewith,
it requested an extension of time within which to file the same. In response, the
SEC-Corporation Finance Department (SEC-CFD), through respondent Director
Callangan, sent Cosmos a letter denying the latters request and directing it to
submit its 2005 Annual Report. The same letter also ordered Cosmos to show
cause why the Cosmoss Registration of Securities/Permit to Sell Securities to the
Public (Subject Registration/Permit) should not be revoked for violating Section
17.1 (a) of Republic Act No. 8799, otherwise known as "The Securities Regulation
Code" (SRC).
Cosmos sent a reply-letter to the SEC-CFD, explaining that its failure to
file its 2005 Annual Report was due to the non-completion by its external
auditors of their audit procedures. For this reason, Cosmos implored the SEC-
CFD to reconsider its previous denial of Cosmoss request for additional time to
file its 2005 Annual Report. Thereafter, hearings for the suspension of the
Subject Registration/Permit commenced, with Cosmos advancing the same
reasons for the non- submission of its 2005 Annual Report. The SEC-CFD ordered
the suspension of the Subject Registration/Permit (suspension order) for a
period of 60 days from receipt of the same, or until Cosmos files its 2005 Annual
Report, whichever is earlier. The SEC-CFD also stated that Cosmoss failure to
submit its 2005 Annual Report within the 60-day period shall constrain the SEC
to initiate proceedings for revocation of the Subject Registration/Permit.
On October 31, 2007, Cosmos finally submitted its 2005 and 2006
Annual Reports to the SEC. In connection therewith, Cosmos requested SEC-CFD
that the latter lift the suspension order and abandon the revocation proceedings
against the former. The SEC-CFD referred the matter to the SEC En Banc for its
consideration. After the said meeting, the SEC En Banc issued Resolution No. 87,
series of (s.) 2008 wherein they resolved to: (a) deny Cosmoss request for the
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lifting of the suspension order; and (b) revoke the Subject Registration/Permit.
On the basis thereof, the SEC-CFD issued a Revocation Order echoing the
pronouncements indicated in the aforesaid resolution. On appeal, this resolution
was later on affirmed by SEC En Banc and CA stating that the Revocation Order
was a mere articulation of the SEC En Bancs Resolution No. 87, s. 2008, and thus,
should be considered an issuance of the SEC En Banc itself. The SEC En Banc
deemed Cosmoss appeal as a motion for reconsideration, a prohibited pleading
under Section 3-6, Rule III of the 2006 SEC Rules of Procedure. Furthermore, CA
held that Cosmoss appeal, which was treated as a prohibited motion for
reconsideration under the 2006 SEC Rules of Procedure, did not toll the
reglementary period for filing an appeal before it. As such, the SEC En Bancs
Ruling, as well as the Revocation Order, had already lapsed into finality and
could no longer be disturbed.
Issue:
Whether or not the CA correctly treated Cosmoss appeal before the SEC
En Banc as a motion for reconsideration, and consequently, affirmed its dismissal
for being a prohibited pleading under the 2006 SEC Rules of Procedure.
Ruling:
No.
As an administrative agency with both regulatory and adjudicatory
functions, the SEC was given the authority to delegate some of its functions to,
inter alia, its various operating departments, such as the SECCFD, the
Enforcement and Investor Protection Department, and the Company Registration
and Monitoring Department, pursuant to Section 4.6 of the SRC. Naturally, the
aforesaid provision also gives the SEC the power to review the acts performed by
its operating departments in the exercise of the formers delegated functions.
This power of review is squarely addressed by Section 11-1, Rule XI of the 2006
SEC Rules of Procedure.
In this case, the Court disagrees with the findings of both the SEC En
Banc and the CA that the Revocation Order emanated from the SEC En Banc.
Rather, such Order was merely issued by the SEC-CFD as one of the SECs
operating departments, as evidenced by the following: (a) it was printed and
issued on the letterhead of the SEC-CFD, and not the SEC En Banc; (b) it was
docketed as a case under the SEC-CFD as an operating department of the SEC,
since it bore the serial number "SEC-CFD Order No. 027, [s.] 2008;" and (c) it was
signed solely by Director Callangan as director of the SEC-CFD, and not by the
commissioners of the SEC En Banc. Further, both the SEC En Banc and the CA
erred in holding that the Revocation Order merely reflected Resolution No. 87, s.
2008, and thus, should already be considered as the ruling of the SEC En Banc in
this case. As admitted by respondents, the SEC-CFDs referral of the case to the
SEC En Banc for its consideration in its March 13, 2008 meeting, which
eventually resulted in the issuance of Resolution No. 87, s.2008, was merely an
internal procedure inherent in the exercise by the SEC of its administrative and
regulatory functions.
In sum, the Revocation Order is properly deemed as a decision issued by
the SEC-CFD as one of the Operating Departments of the SEC, and accordingly,
may be appealed to the SEC En Banc, as what Cosmos properly did in this case.
Perforce, the SEC En Banc and the CA erred in deeming Cosmoss appeal as a
motion for reconsideration and ordering its dismissal on such ground. In view
thereof, the Court deems it prudent to reinstate and remand the case to the SEC
En Banc for its resolution on the merits.
SPECIAL COMMERCIAL LAWS
DOA ADELA EXPORT INTERNATIONAL, INC. vs. TRADE AND INVESTMENT
DEVELOPMENT CORPORATION and the BANK OF THE PHILIPPINE ISLANDS
G.R. No. 201931, February 11, 2015, J. Villarama, Jr.
Section 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits, provides
for exceptions when records of deposits may be disclosed. These are under any of
the following instances: (a) upon written permission of the depositor, (b) in cases of
impeachment, (c) upon order of a competent court in the case of bribery or
dereliction of duty of public officials or, (d) when the money deposited or invested is
the subject matter of the litigation, and (e) in cases of violation of the Anti-Money
Laundering Act, the Anti-Money Laundering Council may inquire into a bank
account upon order of any competent court. The Joint Motion to Approve
Agreement was executed by BPI and TIDCORP only. There was no written consent
given by Doa Adela or its representative that it is waiving the confidentiality of its
bank deposits.It is clear therefore that Doa Adela is not bound by the said
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provision since it was without the express consent of Doa Adela who was not a
party and signatory to the said agreement.
Facts:
Doa Adela Export International, Inc. (Doa Adela) filed a Petition for
Voluntary Insolvency. The RTC, after finding the petition sufficient inform and
substance, issued an order declaring Doa Adela as insolvent and staying all civil
proceedings against it.
Thereafter, Atty. Arlene Gonzales was appointed as receiver.
Subsequently, Atty. Gonzales filed a Motion for Parties to Enter Into Compromise
Agreement incorporating her proposed terms of compromise.
Creditors Trade and Investment Development Corporation (TIDCORP)
and Bank of the Philippine Islands (BPI) also filed a Joint Motion to Approve the
Compromise Agreement.
One of the stipulations of the agreement was the waiver of
confidentiality in which Doa Adela shall waive all rights to confidentiality
provided under the provisions of Republic Act No. 1405, as amended, otherwise
known as the Law on Secrecy of Bank Deposits, and Republic Act No. 8791,
otherwise known as The General Banking Law of 2000. Furthermore Doa Adela
will grant TIDCORP and BPI access to any deposit or other accounts maintained
by them with any bank.
The RTC approved the Compromise Agreement filed by TIDCORP and
BPI.
Doa Adela filed a motion for partial reconsideration and claimed that
TIDCORP and BPIs agreement imposes on it several obligations such as waiver
of confidentiality of its bank deposits but it is not a party and signatory to the
said agreement. Furthermore, there must be an express and written waiver from
the depositor concerned as required by law before any third person or entity is
allowed to examine bank deposits or bank records.
BPI counters that Doa Adela is estopped from questioning the BPI-
TIDCORP compromise agreement because Doa Adela and its counsel
participated in all the proceedings involving the subject compromise agreement
and did not object when the compromise agreement was considered by the RTC.
The RTC denied the motion and held that Doa Adelas silence and
acquiescence to the joint motion to approve compromise agreement while it was
set for hearing by creditors BPI and TIDCORP is tantamount to admission and
acquiescence.
Issue:
Whether the waiver of confidentiality provision in the Agreement
between TIDCORP and BPI is valid despite Doa Adela not being a party and
signatory to the same.
Ruling:
No.
Section 2 of R.A. No. 1405, the Law on Secrecy of Bank Deposits,
provides for exceptions when records of deposits may be disclosed. These are
under any of the following instances: (a) upon written permission of the
depositor, (b) in cases of impeachment, (c) upon order of a competent court in
the case of bribery or dereliction of duty of public officials or, (d) when the
money deposited or invested is the subject matter of the litigation, and (e) in
cases of violation of the Anti-Money Laundering Act, the Anti-Money Laundering
Council may inquire into a bank account upon order of any competent court.
In this case, the Joint Motion to Approve Agreement was executed by BPI
and TIDCORP only. There was no written consent given by Doa Adela or its
representative, Epifanio Ramos, Jr., that Doa Adela is waiving the confidentiality
of its bank deposits. The provision on the waiver of the confidentiality of Doa
Adelas bank deposits was merely inserted in the agreement. It is clear therefore
that Doa Adela is not bound by the said provision since it was without the
express consent of Doa Adela who was not a party and signatory to the said
agreement.
Neither can be Doa Adela deemed to have given its permission by
failure to interpose its objection during the proceedings. It is an elementary rule
that the existence of a waiver must be positively demonstrated since a waiver by
implication is not normally countenanced. The norm is that a waiver must not
only be voluntary, but must have been made knowingly, intelligently, and with
sufficient awareness of the relevant circumstances and likely consequences.
Furthermore, it is basic in law that a compromise agreement, as a
contract, is binding only upon the parties to the compromise, and not upon non-
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parties. This is the doctrine of relativity of contracts. The sound reason for the
exclusion of non-parties to an agreement is the absence of a vinculum or juridical
tie which is the efficient cause for the establishment of an obligation. Hence, a
court judgment made solely on the basis of a compromise agreement binds only
the parties to the compromise, and cannot bind a party litigant who did not take
part in the compromise agreement.
BPI FAMILY SAVINGS BANKC, INC. vs. ST. MICHAEL MEDICAL CENTER, INC.
G.R. No. 205469, March 25, 2015, J. Perlas-Bernabe
It is well to emphasize that the remedy of rehabilitation should be denied
to corporations that do not qualify under the Rules. Neither should it be allowed to
corporations whose sole purpose is to delay the enforcement of any of the rights of
the creditors, which is rendered obvious by: (a) the absence of a sound and
workable business plan; (b) baseless and unexplained assumptions, targets, and
goals; and (c) speculative capital infusion or complete lack thereof for the
execution of the business plan. In this case, not only has the petitioning debtor
failed to show that it has formally began its operations which would warrant
restoration, but also it has failed to show compliance with the key requirements
under the Rules, the purpose of which are vital in determining the propriety of
rehabilitation. Thus, for all the reasons hereinabove explained, the Court is
constrained to rule in favor of BPI Family and hereby dismiss SMMCIs
Rehabilitation Petition.
Facts:
Spouses Virgilio and Yolanda Rodil (Sps. Rodil) are the owners and sole
proprietors of St. Michael Hospital. With a vision to upgrade St. Michael Hospital
into a modern, well-equipped and full service tertiary 11-storey hospital, Sps.
Rodil purchased two (2) parcels of land adjoining their existing property and, on
May 22, 2003, incorporated SMMCI, with which entity they planned to eventually
consolidate St. Michael Hospitals operations. In order to finance the expansion of
the premises of the hospital, the Spouses Rodil obtained load from BPI Family
Savings Bank. The Spouses thereafter incurred problems with the first
contractor, so the building was not completed. SMMCI was only able to pay the
interest on its BPI Family loan, or the amount of 3,000,000.00 over a two-year
period, from the income of St. Michael Hospital.
On September 25, 2009, BPI Family demanded immediate payment of
the entire loan obligation and, soon after, filed a petition for extrajudicial
foreclosure of the real properties covered by the mortgage. The auction sale was
scheduled on December 11, 2009, which was postponed to February 15, 2010
with the conformity of BPI Family.
On August 11, 2010, SMMCI filed a Petition for Corporate
Rehabilitation18 (Rehabilitation Petition) before the RTC, with prayer for the
issuance of a Stay Order as it foresaw the impossibility of meeting its obligation
to BPI Family, its purported sole creditor. In its proposed Rehabilitation Plan,23
SMMCI merely sought for BPI Family (a) to defer foreclosing on the mortgage
and (b) to agree to a moratorium of at least two (2) years during which SMMCI
either through St. Michael Hospital or its successor will retire all other
obligations. After which, SMMCI can then start servicing its loan obligation to the
bank under a mutually acceptable restructuring agreement. 24 SMMCI declared
that it intends to conclude pending negotiations for investments offered by a
group of medical doctors whose capital infusion shall be used (a) to complete the
finishing requirements for the 3rd and 5th floors of the new building; (b) to
renovate the old 5storey building where St. Michael Hospital operates; and (c) to
pay, in whole or in part, the bank loan with the view of finally integrating St.
Michael Hospital with SMMCI. Finding the Rehabilitation Petition to be sufficient
in form and substance, the RTC issued a Stay Order. In an Order 34 dated August
4, 2011, the RTC approved the Rehabilitation Plan
Aggrieved, BPI Family elevated the matter before the CA, mainly arguing
that the approval of the Rehabilitation Plan violated its rights as an unpaid
creditor/mortgagee and that the same was submitted without prior consultation
with creditors. In a Decision dated August 30, 2012, the CA affirmed the RTCs
approval of the Rehabilitation Plan. Hence, this petition.
Issue:
Whether or not the CA correctly affirmed SMMCIs Rehabilitation Plan as
approved by the RTC.
Ruling:
No. that SMMCIs Rehabilitation Plan, an indispensable requisite in
corporate rehabilitation proceedings, failed to comply with the fundamental
requisites outlined in Section 18, Rule 3 of the Rules, particularly, that of a
material financial commitment to support the rehabilitation and an
accompanying liquidation analysis, all of the petitioning debtor: SEC. 18.
Rehabilitation Plan. - The rehabilitation plan shall include (a) the desired
business targets or goals and the duration and coverage of the rehabilitation; (b)
the terms and conditions of such rehabilitation which shall include the manner of
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its implementation, giving due regard to the interests of secured creditors such
as, but not limited, to the nonimpairment of their security liens or interests; (c)
the material financial commitments to support the rehabilitation plan; (d) the
means for the execution of the rehabilitation plan, which may include debt to
equity conversion, restructuring of the debts, dacion en pago or sale exchange or
any disposition of assets or of the interest of shareholders, partners or members;
(e) a liquidation analysis setting out for each creditor that the present value of
payments it would receive under the plan is more than that which it would
receive if the assets of the debtor were sold by a liquidator within a six-month
period from the estimated date of filing of the petition; and (f) such other
relevant information to enable a reasonable investor to make an informed
decision on the feasibility of the rehabilitation plan.
It is well to emphasize that the remedy of rehabilitation should be
denied to corporations that do not qualify under the Rules. Neither should it be
allowed to corporations whose sole purpose is to delay the enforcement of any of
the rights of the creditors, which is rendered obvious by: (a) the absence of a
sound and workable business plan; (b) baseless and unexplained assumptions,
targets, and goals; and (c) speculative capital infusion or complete lack thereof
for the execution of the business plan. Unfortunately, these negative indicators
have all surfaced to the fore, much to SMMCIs chagrin. While the Court
recognizes the financial predicaments of upstart corporations under the
prevailing economic climate, it must nonetheless remain forthright in limiting
the remedy of rehabilitation only to meritorious cases. As above-mentioned, the
purpose of rehabilitation proceedings is not only to enable the company to gain a
new lease on life but also to allow creditors to be paid their claims from its
earnings, when so rehabilitated. Hence, the remedy must be accorded only after
a judicious regard of all stakeholders interests; it is not a one-sided tool that may
be graciously invoked to escape every position of distress.
In this case, not only has the petitioning debtor failed to show that it has formally
began its operations which would warrant restoration, but also it has failed to
show compliance with the key requirements under the Rules, the purpose of
which are vital in determining the propriety of rehabilitation. Thus, for all the
reasons hereinabove explained, the Court is constrained to rule in favor of BPI
Family and hereby dismiss SMMCIs Rehabilitation Petition.
SPOUSES EDUARDO AND LYDIA SILOS vs. PHILIPPINE NATIONAL BANK
G.R. No. 181045, July 2, 2014, J. Del Castillo
Plainly, with the subject credit agreement, the element of consent or
agreement by the borrower is now completely lacking, which makes [PNBs]
unlawful act all the more reprehensible.
Accordingly, [Spouses Silos] are correct in arguing that estoppels should
not apply to them, for estoppels cannot be predicated on an illegal act. As between
the parties to a contract, validity cannot be given to it by estoppels if it is prohibited
by law or public policy. It appears that by its acts, PNB violated the Truth in
Lending Act or Republic Act No. 3765 which was enacted to protect citizens from a
lack of awareness of the true cost of credit to the use by using a full disclosure of
such cost with a view of preventing the uninformed use of credit to the detriment of
the national economy.
Facts:
Spouses Silos were engaged in retail business since 1980s and for which
they secured several loans from PNB. Consequently, the following agreements
were executed, to wit:
1. Real Estate Mortgage to secure the credit line of PhP150,000.00;
2. Supplement to the Real Estate Mortgage to secure the credit line
which was first raised to PhP1.8 Million then to PhP2.5 Million;
3. Credit Agreement of July 1989 and Eight (8) Promissory Notes; and,
4. Amendment to Credit Agreement of August 1991 and Eighteen (18)
Promissory Notes.
The original Credit Agreement provided an interest of 19.5% per annum
and authorized PNB to modify the interest rate without need of notice to Spouses
Silos and depending on whatever policy the Bank may adopt. All of the
agreements and promissory notes contained stipulations respecting this
unilateral modification of interest rate.
PNB renewed the credit line from 1990 up to 1997 and Spouses Silos
religiously paid their accounts. In 1997, due to the Asian Financial Crisis, Spouses
Silos failed to make good on their outstanding promissory note for PhP2.5
Million, which provided for a penalty clause equivalent to 24% per annum in case
of default. Thus, PNB prepared a Statement of Account showing aggregate
accountabilities in the amount of PhP3,620,541.60 against Spouses Silos. Failing
to heed PNBs demand, the mortgages were foreclosed and sold to the Bank at
auction for the amount of PhP4,324,172.96.
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Spouses Silos commenced a complaint for annulment of foreclosure sale
with prayer for accounting of their credit with PNB. After hearing the opposing
arguments of the parties on the disputed stipulations, the trial court ruled in
favor of PNB and upheld the accounting of debts, foreclosure sale and
agreements between the parties among others. On appeal, the CA affirmed the
judgment of the trial court but with modifications respecting the applicable
interest on the unpaid promissory note, attorneys fees of 10% and
reimbursement of the difference between the bid price and the total amount due.
Issues:
1. Whether or not the provision conferring upon PNB the power to
solely determine and change the interest rate stated in the subject
credit agreement is contrary to law.
2. What is the appropriate interest that may be applied to the
remaining monetary obligation of Spouses Silos?
3. Whether or not the penalty charge in the still unpaid promissory
note is also covered by the security.
Ruling:
1. YES, the provision runs counter to Article 1308 of the Civil Code and
the Truth in Lending Act.
In a long line of cases, the Court has struck down provisions in credit
documents issued by PNB to its borrowers, which allow it to increase or decrease
interest rate within the limits allowed by law at any time depending on whatever
policy it may adopt in the future. In the cases of PNB vs. CA circa 1991 and 1994,
the Court took the position that P.D. No. 1684 and C.B. Circular No. 905,
respecting the non-application of the usury law in loans and certain
forbearances, no more than allow contracting parties to stipulate freely regarding
any subsequent adjustment in the interest rate that shall accrue on a loan or
forbearance of money, goods or credits. In other words, the parties can agree to
adjust, upward or downward, the interest stipulated. Nevertheless, the Court
pointed out that the said law and circular did not authorize either party to
unilaterally raise the interest rate without the others consent. Thus, it was held
that such clause introduced by PNB ran afoul with the principle of mutuality of
contracts ordained in Article 1308 of the Civil Code.
In Spouses Almeda vs. CA, the Court also invalidated the very same
provisions in PNBs prepared Credit Agreement and mainly ratiocinated that
[e]scalation clauses are not basically wrong or legally objectionable so long as
they are not solely potestative but based on reasonable and valid grounds [and in
this case] not only are the increases of the interest rates on the basis of escalation
clause patently unreasonable and unconscionable, but also there are no valid and
reasonable standards upon which the increases are anchored.
In another PNB vs. CA case, circa 1996, the disquisition went in this wise:
while the Usury Law ceiling on interest rates was lifted by C.B. No. 905, nothing in
the said circular could possibly be read as granting PNB carte blanche authority to
raise interest rates to levels which would either enslave its borrowers or lead to a
hemorrhaging of their assets.
An equally relevant case, New Sampaguita Builders Construction, Inc. vs.
PNB, this Court pronounced that excessive interests, penalties and other charges
not revealed in the disclosure statements issued by banks, even it stipulated in the
promissory notes, cannot be given effect under the Truth in Lending Act.
Withal, in the light of these cases, the stipulations found in the Credit
Agreement, Amendment to the Credit Agreement and the promissory notes
prepared by PNB in the instant case must be once more invalidated. The lack of
consent by Spouses Silos has been made obvious by the fact that they signed the
promissory notes in blank for PNB to fill. The witness for PNB, Branch Manager
Aspa, admitted that interest rates were fixed solely by its Treasury Department
in Manila, which were then simply communicated to all PNB branches for imple-
mentation. If this were the case, then this would explain why Spouses Silos had
to sign the promissory notes in blank, since the imposable interest rates have yet
to be determined and fixed by PNB Treasury Department.
Further, in Aspas enumeration of factors that determine the interest
rates, it can be seen that considerations which affect PNBs borrowers are
ignored. A borrowers current financial state, his feedback or opinions, the
nature and purpose of his borrowings, the effect of foreign currency values or
fluctuations on his business or borrowing, etc. these are not factors which
influence the fixing of interest rates to be imposed on him. Clearly, PNBs method
of fixing interest rates based on one-sided, indeterminate, and subjective criteria
such as profitability, cost of money, bank cost etc. is arbitrary for there is no fixed
standard or margin above or below these considerations.
To repeat what has been said in the cited cases, any modification in the
contract, such as interest rates must be made with the consent of the contracting
parties. The minds of all the parties must meet as to the proposed modification,
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especially when it affects an important aspect of the agreement. In the case of
loan agreements, the rate of interest is a principal condition, if not the most
important component. Thus, any modification thereof must be mutually agreed
upon; otherwise, it has no binding effect.
What is even more glaring in the present case is that, the stipulations in
question no longer provide that the parties shall agree upon the interest rate to
be fixed; instead, they are worded in such a way that Spouses Silos shall agree to
whatever interest rate PNB fixes. Plainly, with the subject credit agreement, the
element of consent or agreement by Spouses Silos is now completely lacking,
which makes PNBs unlawful act all the more reprehensible.
Accordingly, Spouses Silos are correct in arguing that estoppels should
not apply to them, for estoppels cannot be predicated on an illegal act. As
between the parties to a contract, validity cannot be given to it by estoppels if it
is prohibited by law or public policy. It appears that by its acts, PNB violated the
Truth in Lending Act or Republic Act No. 3765 which was enacted to protect
citizens from a lack of awareness of the true cost of credit to the use by using a
full disclosure of such cost with a view of preventing the uninformed use of
credit to the detriment of the national economy.
However, the one-year period within which an action for violation of the
Truth in Lending Act may be filed evidently prescribed long ago, or sometime in
2001, one year after Spouses Silos received the March 2000 demand letter which
contained the illegal charges.
The fact that Spouses Silos later received several statements of account
detailing its outstanding obligations does not cure PNBs breach. To repeat, the
belated discovery of the true cost of credit does not reverse the ill effects of an
already consummated business decision. Neither may the statements be
considered proposals sent to secure Spouses Silos conformity; they were sent
after the imposition and application of the interest rate, and not before.
2. The loan shall be subject to the original or stipulated rate of interest
and upon maturity, the amount due shall be subject to legal interest
at the rates of 12% and then 6% per annum.
Since the escalation clause is annulled, the principal amount of the loan
is subject to the original or stipulated rate of interest and upon maturity, the
amount due shall be subject to legal interest at the rate of 12% per annum. The
interests paid by Spouses Silos should be applied first to the payment of the
stipulated or legal and unpaid interest, as the case may be and later, to the capital
or principal. PNB should then refund the excess amount of interest that it has
illegally imposed upon Spouses Silos; the amount to be refunded refers to that
paid by Spouses Silos when they had no obligation to do so. Thus, the parties
original agreement stipulated the payment of 19.5% interest; however, this rate
was intended to apply only to the first promissory note which expired in
November 1989 and was paid by Spouses Silos; it was not intended to apply to
the whole duration of the loan. Subsequent higher interest rates have been
declared illegal; but because only the rates are found to be improper, the
obligation to pay interest subsists, the same to be fixed at the legal rate of 12%
per annum. However, the 12% interest shall apply only until June 30, 2013.
Starting July 01, 2013, the prevailing rate of interest shall be 6% per annum
pursuant to BSP Monetary Board Circular No. 799.
3. NO, the penalty charge must be excluded for not being expressly
covered by the credit agreement.
The unpaid promissory note provides that failure to pay it or any
installment thereon, when due, shall constitute default, and a penalty charge of
24% per annum based on the defaulted principal amount shall be imposed. This
penalty charge can no longer be sustained based on the above disquisition.
Having found the credit agreements and promissory notes to be tainted, the
mortgages must likewise be accorded with the same treatment. After all, a
mortgage and a note secured by it are deemed parts of one transaction and are
construed together. Being so tainted and having attributes of a contract of
adhesion as the principal credit documents, the mortgages must be construed
strictly and against the party who drafted it. An examination of the mortgage
agreements reveals that nowhere it is stated that penalties are to be included in
the secured amount. Construing the silence strictly against PNB, the Court can
only conclude that the parties did not intend to include the penalty allowed
under the subject note as part of the secured amount.
PHILIPPINE AMANAH BANK (NOW AL-AMANAH ISLAMIC INVESTMENT
BANK OF THE PHILIPPINES, ALSO KNOWN AS ISLAMIC BANK) vs.
EVANGELISTA CONTRERAS
G.R. No. 173168, September 29, 2014, J. Brion
In the present case, however, nothing in the documents presented by
Calinico would arouse the suspicion of PAB to prompt a more extensive inquiry.
When the Ilogon spouses applied for a loan, they presented as collateral a parcel of
land evidenced by an OCT issued by the Office of the Register of Deeds and
registered in the name of Calinico. This document did not contain any inscription or
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annotation indicating that Contreras was the owner or that he has any interest in
the subject land. In fact, he admitted that there was no encumbrance annotated on
Calinicos title at the time of the latters loan application. Any private arrangement
between Calinico and him regarding the proceeds of the loan was not the concern
of PAB, as it was not a privy to this agreement. If Calinico violated the terms of his
agreement with Contreras on the turn-over of the proceeds of the loan, then the
latter's proper recourse was to file the appropriate criminal action in court.
Facts:
In July 1981, Respondent Contreras filed a complaint for annulment of
real estate mortgage, cancellation of original certificate of title, reconveyance,
recovery of possession and damages before the RTC against Spouses Calinico and
Elnora Ilogon and Petitioner Philippine Amanah Bank (PAB). Prior to the
escalation of the issue to a civil suit, Contreras approached Spouses Ilogon to ask
for help in obtaining a loan from PAB. Thereafter, Contreras and Calinico
executed documents to the effect that the property owned by the former is open
for mortgage as security for a loan and that Calinico was going to facilitate this
transaction with PAB.
Eventually, a loan was due for release by PAB but Contreras forthwith
requested that the same should not be released to Calinico. To her dismay,
however, PAB released a total of PhP 100,000.00 to Calinico. Consequently, when
he failed to settle the loan, PAB was forced to extrajudicially foreclose the
mortgage and ultimately it consolidated its ownership over the same. Hence,
Contreras had to file the complaint before the RTC.
The trial court ruled in favor of PAB, pointing out that the bank had no
knowledge about the internal agreements between Contreras and Calinico.
Contreras moved for reconsideration but it was denied for having been filed out
of time and then later a petition for relief from judg-ment which was likewise
denied. The CA reversed this decision by the trial court. It found that there is
sufficient evidence showing that PAB knew of certain conflicting claims over the
land and that it ignored the Contreras representations that Calinocos title was
defective.
Issue:
Whether or not PAB exercised extraordinary diligence in dealing with
Calinico over the subject property.
Ruling:
YES, PAB cannot be faulted in accepting the property as mortgage and
releasing the loan to Spouses Ilongon.
[The Court is aware] of the rule that banks are expected to exercise more
care and prudence than private individuals in their dealings, even those
involving registered lands, since their business is impressed with public interest.
The rule that persons dealing with registered lands can rely solely on the
certificate of title does not apply to banks. Simply put, the ascertainment of the
status or condition of a property offered to it as security for a loan must be a
standard and indispensable part of a banks operations.
In the present case, however, nothing in the documents presented by
Calinico would arouse the suspicion of [PAB] to prompt a more extensive
inquiry. When the Ilogon spouses applied for a loan, they presented as collateral
a parcel of land evidenced by [an OCT] issued by the Office of the Register of
Deeds and registered in the name of Calinico. This document did not contain
any inscription or annotation indicating that [Contreras] was the owner or that
he has any interest in the subject land. In fact, [he] admitted that there was no
encumbrance annotated on Calinicos title at the time of the latters loan
application. Any private arrangement between Calinico and [him] regarding the
proceeds of the loan was not the concern of [PAB], as it was not a privy to this
agreement. If Calinico violated the terms of his agreement with [Contreras] on
the turn-over of the proceeds of the loan, then the latter's proper recourse was to
file the appropriate criminal action in court.
[Contreras] also failed to prove its allegation that the petitioner bank
knew, thru a letter sent by the formers lawyer, Atty. Crisanto Mutya, Jr., that the
sale of the subject land between him and Calinico was made only for loan
purposes, and that failure of Calinico to turn over the proceeds of the loan will
invalidate the sale.
Even assuming, for the sake of argument, that the petitioner bank
received a copy of Atty. Mutyas letter, it was still well-within its discretion to
grant or deny the loan application after evaluating the documents submitted for
loan applicant. As earlier stated, [the certificate of title]issued in Calinicos favor
was free from any encumbrances. [PAB] is not anymore privy to whatever
arrangements the owner entered into regarding the proceeds of the loan.
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Finally, [the Court points] out that [PAB] is a [GOCC]. While [the OCT]
issued in favor of Calinico by virtue of the deed of confirmation of sale contained
a prohibition against the alienation and encumbrance from the date of the
patent, the CA failed to mention that by the express wordings of the OCT itself,
the prohibition does not cover the alienation and encum-brance in favor of the
Government or any of its branches, units or institutions.
PHILIPPINE BANK OF COMMUNICATIONS vs. BASIC POLYPRINTERS AND
PACKAGING CORPORATION
G.R. No. 187581, October 20, 2014, J. Bersamin
A material financial commitment becomes significant in gauging the
resolve, determination, earnestness and good faith of the distressed corporation in
financing the proposed rehabilitation plan. This commitment may include the
voluntary undertakings of the stockholders or the would-be investors of the debtor-
corporation indicating their readiness, willingness and ability to contribute funds
or property to guarantee the continued successful operation of the debtor
corporation during the period of rehabilitation. In this case, the financial
commitments presented by Basic Polyprinters were insufficient for the purpose of
rehabilitation. Thus, its petition for corporate rehabilitation must necessarily fail.
Facts:
Basic Polyprinters and Packaging Corporation (Basic Polyprinters) was
a domestic corporation engaged in the business of printing greeting cards, gift
wrappers, gift bags, calendars, posters, labels and other novelty items.
On February 27, 2004, Basic Polyprinters, along with the eight other
corporations belonging to the Limtong Group of Companies (namely: Cuisine
Connection, Inc., Fine Arts International, Gibson HP Corporation, Gibson Mega
Corporation, Harry U. Limtong Corporation, Main Pacific Features, Inc., T.O.L.
Realty & Development Corp., and Wonder Book Corporation), filed a joint
petition for suspension of payments with approval of the proposed rehabilitation
in the RTC.
Included in its overall Rehabilitation Program was the full payment of its
outstanding loans in favor of Philippine Bank of Communications (PBCOM),
RCBC, Land Bank, EPCIBank and AUB via repayment over 15 years with
moratorium of two-years for the interest and five years for the principal at 5%
interest per annum and a dacion en pago of its affiliate property in favor of
EPCIBank.
Finding the petition sufficient in form and substance, the RTC issued the
stay order dated August 31, 2006. It appointed Manuel N. Cacho III as the
rehabilitation receiver, and required all creditors and interested parties,
including the Securities and Exchange Commission (SEC), to file their comments.
After the initial hearing and evaluation of the comments and opposition
of the creditors, including PBCOM, the RTC gave due course to the petition and
referred it to the rehabilitation receiver for evaluation and recommendation.
On October 18, 2007, the rehabilitation receiver submitted his report
recommending the approval of the rehabilitation plan. On December 19, 2007,
the rehabilitation receiver submitted his clarifications and corrections to his
report and recommendations.
On January 11, 2008, the RTC issued an order approving the
rehabilitation plan.
In the assailed decision promulgated on December 16, 2008, the CA
affirmed the questioned order of the RTC, agreeing with the finding of the
rehabilitation receiver that there were sufficient evidence, factors and actual
opportunities in the rehabilitation plan indicating that Basic Polyprinters could
be successfully rehabilitated in due time.
The PBCOM claims that the CA did not pass upon the issues presented in
its petition, that the rehabilitation plan did not contain the material financial
commitments required by Section 5, Rule 4 of the Interim Rules of Procedure for
Corporate Rehabilitation (Interim Rules); that, accordingly, the proposed
repayment scheme did not constitute a material financial commitment, and the
proposed dacion en pago was not proper because the property subject thereof
had been mortgaged in its favor;
Issue:
Whether or not Basic Polyprinters can be rehabilitated.
Ruling:
No. Basic Polyprinters cannot be rehabilitated.
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A material financial commitment becomes significant in gauging the
resolve, determination, earnestness and good faith of the distressed corporation
in financing the proposed rehabilitation plan. This commitment may include the
voluntary undertakings of the stockholders or the would-be investors of the
debtor-corporation indicating their readiness, willingness and ability to
contribute funds or property to guarantee the continued successful operation of
the debtor corporation during the period of rehabilitation.
Basic Polyprinters presented financial commitments, as follows:
5. Additional P10 million working capital to be sourced from the
insurance claim;
6. Conversion of the directors and shareholders deposit for future
subscription to common stock;
7. Conversion of substituted liabilities, if any, to additional paid-in
capital to increase the companys equity; and
8. All liabilities (cash advances made by the stockholders) of the
company from the officers and stockholders shall be treated as trade
payables.
the shareholders deficit because their amounts were not reflected in the
financial statements contained in the rollo.
Basic Polyprinterss rehabilitation plan likewise failed to offer any
proposal on how it intended to address the low demands for their products and
the effect of direct competition from stores like SM, Gaisano, Robinsons, and
other malls. Even the P245 million insurance claim that was supposed to cover
the destroyed inventories worth P264 million appears to have been written-off
with no probability of being realized later on.
The Supreme Court observes, too, that Basic Polyprinterss proposal to
enter into the dacion en pago to create a source of fresh capital was not feasible
because the object thereof would not be its own property but one belonging to its
affiliate, TOL Realty and Development Corporation, a corporation also
undergoing rehabilitation. Moreover, the negotiations (for the return of books
and magazines from Basic Polyprinterss trade creditors) did not partake of a
voluntary undertaking because no actual financial commitments had been made
thereon.

However, these financial commitments were insufficient for the
purpose.
The commitment to add P10,000,000.00 working capital appeared to be
doubtful considering that the insurance claim from which said working capital
would be sourced had already been written-off by Basic Polyprinterss affiliate,
Wonder Book Corporation. A claim that has been written-off is considered a bad
debt or a worthless asset, and cannot be deemed a material financial
commitment for purposes of rehabilitation. At any rate, the proposed additional
P10,000,000.00 working capital was insufficient to cover at least half of the
shareholders deficit that amounted to P23,316,044.00 as of June 30, 2006.
The Supreme Court also declared in Wonder Book Corporation v.
Philippine Bank of Communications (Wonder Book) that the conversion of all
deposits for future subscriptions to common stock and the treatment of all
payables to officers and stockholders as trade payables was hardly constituting
material financial commitments. Such conversion of cash advances to trade
payables was, in fact, a mere re-classification of the liability entry and had no
effect on the shareholders deficit. On the other hand, the Supreme Court cannot
determine the effect of the conversion of the directors and shareholders
deposits for future subscription to common stock and substituted liabilities on
Worthy of note here is that Wonder Book Corporation was a sister
company of Basic Polyprinters, being one of the corporations that had filed the
joint petition for suspension of payments and rehabilitation in SEC. Both of them
submitted identical commitments in their respective rehabilitation plans. As a
result, as the Court observed in Wonder Book, the commitments by Basic
Polyprinters could not be considered as firm assurances that could convince
creditors, future investors and the general public of its financial and operational
viability.
Due to the rehabilitation plan being an indispensable requirement in
corporate rehabilitation proceedings, Basic Polyprinters was expected to exert a
conscious effort in formulating the same, for such plan would spell the future not
only for itself but also for its creditors and the public in general. The contents
and execution of the rehabilitation plan could not be taken lightly.
The Supreme Court is not oblivious to the plight of corporate debtors
like Basic Polyprinters that have inevitably fallen prey to economic recession and
unfortunate incidents in the course of their operations. However, the Supreme
Court must endeavor to balance the interests of all the parties that had a stake in
the success of rehabilitating the debtors. In doing so here, the Supreme Court
cannot now find the rehabilitation plan for Basic Polyprinters to be genuine and

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in good faith, for it was, in fact, unilateral and detrimental to its creditors and the
public.
INTELLECTUAL PROPERTY LAW
GMA NETWORK, INC. vs. CENTRAL CATV, INC.
G.R. No. 176694, July 18, 2014, J. Brion
The must-carry rule mandates that the local television (TV) broadcast
signals of an authorized TV broadcast station, such as the GMA Network, Inc.,
should be carried in full by the cable antenna television (CATV) operator, without
alteration or deletion. In this case, the Central CATV, Inc. was found not to have
violated the must-carry rule when it solicited and showed advertisements in its
cable television (CATV) system. Such solicitation and showing of advertisements did
not constitute an infringement of the television and broadcast markets under
Section 2 of E.O. No. 205.
Facts:
Sometime in February 2000, GMA Network, Inc. (GMA), together with
the Kapisanan ng mga Brodkaster ng Pilipinas, Audiovisual Communicators,
Incorporated, Filipinas Broadcasting Network and Rajah Broadcasting Network,
Inc. (complainants), filed with the NTC a complaint against Central CATV, Inc.
(Central CATV) to stop it from soliciting and showing advertisements in its cable
television (CATV) system, pursuant to Section 2 of Executive Order (EO) No. 205.
Under this provision, a grantees authority to operate a CATV system shall not
infringe on the television and broadcast markets. GMA alleged that the phrase
television and broadcast markets includes the commercial or advertising
market.
In its answer, Central CATV admitted the airing of commercial
advertisement on its CATV network but alleged that Section 3 of EO No. 436
expressly allowed CATV providers to carry advertisements and other similar
paid segments provided there is consent from their program providers.
After GMA presented and offered its evidence, Central CATV filed a
motion to dismiss by demurrer to evidence claiming that the evidence presented
by the complainants failed to show how Central CATVs acts of soliciting and/or
showing advertisements infringed upon the television and broadcast market.
The NTC granted Central CATVs demurrer to evidence and dismissed
the complaint. It ruled that since EO No. 205 does not define infringement, EO
No. 436 merely clarified or filled in the details of the term to mean that the CATV
operators may show advertisements, provided that they secure the consent of
their program providers. In the present case, the documents attached to Central
CATVs demurrer to evidence showed that its program providers have given such
consent.
The NTC added that since the insertion of advertisements under EO No.
436 would result in the alteration or deletion of the broadcast signals of the
consenting television broadcast station, its ruling necessarily results in the
amendment of these provisions. The second paragraph 9 of Section 3 of EO No.
436 is deemed to amend the previous provisional authority issued to Central
CATV, as well as Sections 6.2.1 and 6.4 of the NTCs Memorandum Circular (MC)
4-08-88. Sections 6.2.1 and 6.4 require the CATV operators within the Grade A or
B contours of a television broadcast station to carry the latters television
broadcast signals in full, without alteration or deletion. This is known as the
must-carryrule.
GMA went to the CA, which, in turn, upheld the NTC ruling. Hence, GMA
filed a petition for review on certiorari before the Supreme Court.
GMA alleges that the NTC gravely erred in failing to differentiate
between EO No. 205, which is a law, and EO No. 436 which is merely an executive
issuance. An executive issuance cannot make a qualification on the clear
prohibition in the law, EO No. 205.
On the other hand, Central CATV contends that EO No. 205 does not
expressly prohibit CATV operators from soliciting and showing advertisements.
The non-infringement limitation under Section 2 thereof, although couched in
general terms, should not be interpreted in such a way as to deprive CATV
operators of legitimate business opportunities. Also, EO No. 436, being an
executive issuance and a valid administrative legislation, has the force and effect
of a law and cannot be subject to collateral attack.
Issue:
Whether Central CATV, as a CATV operator, could show commercial
advertisements in its CATV networks.
Ruling:
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Yes. Central CATV could show commercial advertisements in its CATV
networks.
First, EO No. 205 is a law while EO No. 436 is an executive issuance. The
NTC and the CA proceeded from the wrong premise that both EO No. 205 and EO
No. 436 are statutes.
EO No. 205 was issued by President Corazon Aquino. At the time of the
issuance of EO No. 205, President Aquino was still exercising legislative powers.
EO No. 436, on the other hand, is an executive order which was issued by
President Ramos in the exercise purely of his executive power. In short, it is not a
law. In considering EO No. 436 as a law, the NTC and the CA hastily concluded
that it has validly qualified Section 2 of EO No. 205 and has amended the
provisions of MC 4-08-88. Following this wrong premise, the NTC and the CA
ruled that Central CATV has a right to show advertisements under Section 3 of
EO No. 436. While Central CATV indeed has the right to solicit and show
advertisements, the NTC and the CA incorrectly interpreted and appreciated the
relevant provisions of the law and rules. The Court seeks to correct this error by
ruling that MC 4-08-88 alone sufficiently resolves the issue on whether Central
CATV could show advertisements in its CATV networks. In other words, EO No.
436 is not material in resolving the substantive issue before us.
Second, the CATV operators are not prohibited from showing
advertisements under EO No. 205 and its implementing rules and regulations,
MC 4-08-88.
MC 4-08-88 has sufficiently filled in the details of Section 2 of EO No.
205, specifically the contentious proviso that the authority to operate [CATV]
shall not infringe on the television and broadcast markets. It is clear from
Section 6.1 of MC 040888 that the phrase television market connotes
audience or viewers in geographic areas and not the commercial or
advertising market as what GMA claims.
The kind of infringement prohibited by Section 2 of EO No. 205 was
particularly clarified under Sections 6.2, 6.2.1, 6.4(a)(1) and 6.4(b) of MC
040888, which embody the mustcarry rule. This rule mandates that the local
TV broadcast signals of an authorized TV broadcast station, such as GMA, should
be carried in full by the CATV operator, without alteration or deletion.
MC 4-08-88 mirrored the legislative intent of EO No. 205 and
acknowledged the importance of the CATV operations in the promotion of the
general welfare. The circular provides in its whereas clause that the CATV has
the ability to offer additional programming and to carry much improved
broadcast signals in the remote areas, thereby enriching the lives of the rest of
the population through the dissemination of social, economic and educational
information, and cultural programs. Unavoidably, however, the improved
broadcast signals that CATV offers may infringe or encroach upon the audience
or viewer market of the freesignal TV. This is so because the latters signal may
not reach the remote areas or reach them with poor signal quality. To foreclose
this possibility and protect the free-TV market (audience market), the
must-carry rule was adopted to level the playing field. With the must-carry rule
in place, the CATV networks are required to carry and show in full the free-local
TVs programs, including advertisements, without alteration or deletion. This, in
turn, benefits the public who would have a wide range of choices of programs or
broadcast to watch. This also benefits the free-TV signal as their broadcasts are
carried under the CATVs much-improved broadcast signals thus expanding their
viewers share.
The Court finds that the Sections 6.2, 6.2.1, 6.4(a)(1) and 6.4(b) of MC
40888, which embody the mustcarry rule, are the governing rules in the
present case. Under these rules, the phrase television and broadcast markets
means viewers or audience market and not commercial advertisement market as
claimed by GMA. Therefore, Central CATVs act of showing advertisements does
not constitute an infringement of the television and broadcast markets under
Section 2 of EO No. 205.
SHANG PROPERTIES REALTY CORPORATION (formerly THE SHANG GRAND
TOWER CORPORATION) and SHANG PROPERTIES, INC. (formerly EDSA
PROPERTIES HOLDINGS, INC.), vs. ST. FRANCIS DEVELOPMENT
CORPORATION
G.R. No. 190706, July 21, 2014, J. Perlas-Bernabe
Section 168 of Republic Act No. 8293, otherwise known as the Intellectual
Property Code of the Philippines (IP Code), provides for the rules and regulations
on unfair competition. Section 168.2 proceeds to the core of the provision,
describing forthwith who may be found guilty of and subject to an action of unfair
competition that is, any person who shall employ deception or any other means
contrary to good faith by which he shall pass off the goods manufactured by him or
in which he deals, or his business, or services for those of the one having established
such goodwill, or who shall commit any acts calculated to produce said result x x x.
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In this case, the Court finds the element of fraud to be wanting hence, there can be
no unfair competition.
Facts:
St. Francis Development Corporation (SFDC) a domestic corporation
engaged in the real estate business and the developer of the St. Francis Square
Commercial Center, built sometime in 1992, located at Ortigas Center,
Mandaluyong City, Metro Manila (Ortigas Center) filed an intellectual property
violation case for unfair competition, false or fraudulent declaration, and
damages arising from Shang Properties use and filing of applications for the
registration of the marks THE ST. FRANCIS TOWERS and THE ST. FRANCIS
SHANGRI-LA PLACE against Shang Properties before the IPO Bureau of Legal
Affairs (BLA).
In its complaints, SFDC alleged that it has used the mark ST. FRANCIS
to identify its numerous property development projects located at Ortigas
Center. SFDC added that as a result of its continuous use of the mark ST.
FRANCIS in its real estate business, it has gained substantial goodwill with the
public that consumers and traders closely identify the said mark with its
property development projects.
Shang Properties contended that SFDC is barred from claiming
ownership and exclusive use of the mark ST. FRANCIS because the same is
geographically descriptive of the goods or services for which it is intended to be
used. This is because SFDCs as well as Shang Properties real estate development
projects are located along the streets bearing the name St. Francis, particularly,
St. Francis Avenue and St. Francis Street (now known as Bank Drive), both within
the vicinity of the Ortigas Center.
The BLA rendered a decision and found that Shang Properties
committed acts of unfair competition against SFDC by its use of the mark THE
ST. FRANCIS TOWERS but not with its use of the mark THE ST. FRANCIS
SHANGRI-LA PLACE. The BLA considered SFDC to have gained goodwill and
reputation for its mark, which therefore entitles it to protection against the use
by other persons, at least, to those doing business within the Ortigas Center.
Both parties appealed the BLA decision. The IPO Director-General
reversed the BLAs finding that Shang Properties committed unfair competition
through their use of the mark THE ST. FRANCIS TOWERS, thus dismissing such
charge. He found that SFDC could not be entitled to the exclusive use of the mark
ST. FRANCIS, even at least to the locality where it conducts its business,
because it is a geographically descriptive mark, considering that it was Shang
Properties as well as SFDCs intention to use the mark ST. FRANCIS in order to
identify, or at least associate, their real estate development projects/businesses
with the place or location where they are situated/conducted, particularly, St.
Francis Avenue and St. Francis Street (now known as Bank Drive), Ortigas
Center.
SFDC elevated the case to the CA. The appellate court found Shang
Properties guilty of unfair competition not only with respect to their use of the
mark THE ST. FRANCIS TOWERS but also of the mark THE ST. FRANCIS
SHANGRI-LA PLACE. It ruled that SFDC which has exclusively and
continuously used the mark ST. FRANCIS for more than a decade, and, hence,
gained substantial goodwill and reputation thereby is very much entitled to be
protected against the indiscriminate
usage by other companies of the trademark/name it has so painstakingly tried to
establish and maintain.
Issue:
Whether or not Shang Properties companies are guilty of unfair
competition in using the marks THE ST. FRANCIS TOWERS and THE ST.
FRANCIS SHANGRI-LA PLACE.
Ruling:
No. Shang Properties are not guilty of unfair competition in using the
marks THE ST. FRANCIS TOWERS and THE ST. FRANCIS SHANGRI-LA PLACE.
Section 168 of Republic Act No. 8293, otherwise known as the
Intellectual Property Code of the Philippines (IP Code), provides for the rules
and regulations on unfair competition. Section 168.2 proceeds to the core of the
provision, describing forthwith who may be found guilty of and subject to an
action of unfair competition that is, any person who shall employ deception
or any other means contrary to good faith by which he shall pass off the goods
manufactured by him or in which he deals, or his business, or services for those
of the one having established such goodwill, or who shall commit any acts
calculated to produce said result x x x.
The true test of unfair competition has thus been whether the acts of
the defendant have the intent of deceiving or are calculated to deceive the
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ordinary buyer making his purchases under the ordinary conditions of the
particular trade to which the controversy relates. It is therefore essential to
prove the existence of fraud, or the intent to deceive, actual or probable,
determined through a judicious scrutiny of the factual circumstances attendant
to a particular case.
Here, the Court finds the element of fraud to be wanting hence, there
can be no unfair competition. What the CA appears to have disregarded or been
mistaken in its disquisition, however, is the geographically-descriptive nature of
the mark ST. FRANCIS which thus bars its exclusive appropriability, unless a
secondary meaning is acquired.
Under Section 123.2 of the IP Code, specific requirements have to be met
in order to conclude that a geographically-descriptive mark has acquired
secondary meaning, to wit: (a) the secondary meaning must have arisen as a
result of substantial commercial use of a mark in the Philippines (b) such use
must result in the distinctiveness of the mark insofar as the goods or the
products are concerned and (c) proof of substantially exclusive and continuous
commercial use in the Philippines for five (5) years before the date on which the
claim of distinctiveness is made. Unless secondary meaning has been established,
a geographically-descriptive mark, due to its general public domain
classification, is perceptibly disqualified from trademark registration.
The records are bereft of any showing that Shang Properties gave their
goods/services the general appearance that it was SFDC which was offering the
same to the public. Neither did Shang Properties employ any means to induce the
public towards a false belief that it was offering SFDCs goods/services. Nor did
Shang Properties make any false statement or commit acts tending to discredit
the goods/services offered by SFDC. Accordingly, the element of fraud which is
the core of unfair competition had not been established.
Besides, SFDC was not able to prove its compliance with the
requirements stated in Section 123.2 of the IP Code to be able to conclude that it
acquired a secondary meaning and, thereby, an exclusive right to the ST.
FRANCIS mark, which is, as the IPO Director-General correctly pointed out,
geographically-descriptive of the location in which its realty developments have
been built. While it is true that SFDC had been using the mark ST. FRANCIS
since 1992, its use thereof has been merely confined to its realty projects within
the Ortigas Center. As its use of the mark is clearly limited to a certain locality, it
cannot be said that there was substantial commercial use of the same recognized
all throughout the country. Neither is there any showing of a mental recognition
in buyers and potential buyers minds that products connected with the mark
ST. FRANCIS are associated with the same source that is, the enterprise of
SFDC. Thus, absent any showing that there exists a clear goods/service-
association between the realty projects located in the aforesaid area and herein
SFDC as the developer thereof, the latter cannot be said to have acquired a
secondary meaning as to its use of the ST. FRANCIS mark.
ROBERTO CO vs. KENG HUAN JERRY YEUNG and EMMA YEUNG
G.R. No. 212705, September 10, 2014, J. Perlas-Bernabe
Unfair competition is defined as the passing off (or palming off) or
attempting to pass off upon the public of the goods or business of one person as the
goods or business of another with the end and probable effect of deceiving the
public. This takes place where the defendant gives his goods the general
appearance of the goods of his competitor with the intention of deceiving the public
that the goods are those of his competitor. Here, it has been established that Co
conspired with the Laus in the sale/distribution of counterfeit Greenstone products
to the public, which were even packaged in bottles identical to that of the original,
thereby giving rise to the presumption of fraudulent intent. In light of the foregoing
definition, it is thus clear that Co, together with the Laus, committed unfair
competition, and should, consequently, be held liable therefor. Although liable for
unfair competition, the Court deems it apt to clarify that Co was properly
exculpated from the charge of trademark infringement considering that the
registration of the trademark "Greenstone" essential as it is in a trademark
infringement case was not proven to have existed during the time the acts
complained of were committed.
Facts:
At the core of the controversy is the product Greenstone Medicated Oil
Item No. 16 (Greenstone) which is manufactured by Greenstone Pharmaceutical,
a traditional Chinese medicine manufacturing firm based in Hong Kong and
owned by Keng Huan Jerry Yeung (Yeung), and is exclusively imported and
distributed in the Philippines by Taka Trading owned by Yeungs wife, Emma
Yeung (Emma).
On July 27, 2000, Sps. Yeung filed a civil complaint for trademark
infringement and unfair competition before the RTC against Ling Na Lau, her
sister Pinky Lau (the Laus), and Cof or allegedly conspiring in the sale of
counterfeit Greenstone products to the public. In the complaint, Sps. Yeung
averred that on April 24, 2000, Emmas brother, Jose Ruivivar III (Ruivivar),
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bought a bottle of Greenstone from Royal Chinese Drug Store (Royal) in Binondo,
Manila, owned by Ling Na Lau. However, when he used the product, Ruivivar
doubted its authenticity considering that it had a different smell, and the heat it
produced was not as strong as the original Greenstone he frequently used.
Having been informed by Ruivivar of the same, Yeung, together with his son,
John Philip, went to Royal on May 4, 2000 to investigate the matter, and, there,
found seven (7) bottles of counterfeit Greenstone on display for sale. He was
then told by Pinky Lau (Pinky) the stores proprietor thatthe items came from
Co of Kiao An Chinese Drug Store. According to Pinky, Co offered the products on
April 28, 2000 as "Tienchi Fong Sap Oil Greenstone" (Tienchi) which she
eventually availed from him. Upon Yeungs prodding, Pinky wrote a note stating
these events.
In defense, Co denied having supplied counterfeit items to Royal and
maintained that the stocks of Greenstone came only from Taka Trading.
Meanwhile, the Laus denied selling Greenstone and claimed that the seven (7)
items of Tienchi were left by an unidentified male person at the counter of their
drug store and that when Yeung came and threatened to report the matter to the
authorities, the items were surrendered to him. As to Pinkys note, it was claimed
that she was merely forced by Yeung to sign the same.
The RTC ruled in favor of Sps. Yeung. The CA affirmed the RTC Decision.
The Laus and Co respectively moved for reconsideration but were, however,
denied. Hence, Co filed the instant petition.
Issue:
Whether or not the CA correctly upheld Cos liability for unfair
competition.
Ruling:
The petition is without merit.
Unfair competition is defined as the passing off (or palming off) or
attempting to pass off upon the public of the goods or business of one person as
the goods or business of another with the end and probable effect of deceiving
the public. This takes place where the defendant gives his goods the general
appearance of the goods of his competitor with the intention of deceiving the
public that the goods are those of his competitor.
Here, it has been established that Co conspired with the Laus in the
sale/distribution of counterfeit Greenstone products to the public, which were
even packaged in bottles identical to that of the original, thereby giving rise to
the presumption of fraudulent intent. In light of the foregoing definition, it is thus
clear that Co, together with the Laus, committed unfair competition, and should,
consequently, be held liable therefor.
Although liable for unfair competition, the Court deems it apt to clarify
that Co was properly exculpated from the charge of trademark infringement
considering that the registration of the trademark "Greenstone" essential as it
is in a trademark infringement case was not proven to have existed during the
time the acts complained of were committed, i.e., in May 2000. In this relation,
the distinctions between suits for trademark infringement and unfair
competition prove useful: (a) the former is the unauthorized use of a trademark,
whereas the latter is the passing off of one's goods as those of another; (b)
fraudulent intent is unnecessary in the former, while it is essential in the latter;
and (c) in the former, prior registration of the trademark is a pre-requisite to the
action, while it is not necessary in the latter.
TAIWAN KOLIN CORPORATION, LTD. vs. KOLIN ELECTRONICS CO., INC.,
G.R. No. 209843, March 25, 2015, J. Velasco, Jr.
In trademark registration, while both competing marks refer to the word
KOLIN written in upper case letters and in bold font, but one is italicized and
colored black while the other is white in pantone red color background and there
are differing features between the two, registration of the said mark could be
granted. It is hornbook doctrine that emphasis should be on the similarity of the
products involved and not on the arbitrary classification or general description of
their properties or characteristics. The mere fact that one person has adopted and
used a trademark on his goods would not, without more, prevent the adoption and
use of the same trademark by others on unrelated articles of a different kind.
Facts:
Taiwan Kolin filed with the IPO, then BPTTT, a trademark application,
for the use of KOLIN on a combination of goods, including colored televisions,
refrigerators, window-type and split-type air conditioners, electric fans and
water dispensers with Taiwan Kolin electing Class 9 as the subject of its
application. Kolin Electronics opposed Taiwan Kolins application arguing that
the mark Taiwan Kolin seeks to register is identical, if not confusingly similar,
with its registered KOLIN mark covering products under Class 9 of the NCL.
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BLA-IPO denied Taiwan Kolins application, citing Sec. 123(d) of the IP
Code that a mark cannot be registered if it is identical with a registered mark
belonging to a different proprietor in respect of the same or closely-related
goods. Accordingly, Kolin Electronics, as the registered owner of the mark
KOLIN for goods falling under Class 9 of the NCL, should then be protected
against anyone who impinges on its right, including Taiwan Kolin who seeks to
register an identical mark to be used on goods also belonging to Class 9 of the
NCL.
Taiwan Kolin appealed the above Decision to the Office of the Director
General of the IPO which gave due course to the appeal ratiocinating that
product classification alone cannot serve as the decisive factor in the resolution
of whether or not the goods are related and that emphasis should be on the
similarity of the products involved and not on the arbitrary classification or
general description of their properties or characteristics.
Kolin Electronics elevated the case to the CA which found for Kolin
Electronics on the strength of the following premises: (a) the mark sought to be
registered by Taiwan Kolin is confusingly similar to the one already registered in
favor of Kolin Electronics; (b) there are no other designs, special shape or easily
identifiable earmarks that would differentiate the products of both competing
companies; and (c) the intertwined use of television sets with amplifier, booster
and voltage regulator bolstered the fact that televisions can be considered as
within the normal expansion of Kolin Electronics, and is thereby deemed covered
by its trademark as explicitly protected under Sec. 138 of the IP Code.
Issue:
Whether or not Taiwan Kolin is entitled to its trademark registration of
KOLIN over its specific goods of television sets and DVD players.
Ruling:
Yes, Taiwan Kolin is entitled.
Whether or not the products covered by the trademark sought to be
registered by Taiwan Kolin, on the one hand, and those covered by the prior
issued certificate of registration in favor of Kolin Electronics, on the other, fall
under the same categories in the NCL is not the sole and decisive factor in
determining a possible violation of Kolin Electronics intellectual property right
should Taiwan Kolins application be granted. It is hornbook doctrine that
emphasis should be on the similarity of the products involved and not on the
arbitrary classification or general description of their properties or
characteristics. The mere fact that one person has adopted and used a trademark
on his goods would not, without more, prevent the adoption and use of the same
trademark by others on unrelated articles of a different kind.
It must be noted that the products covered by Taiwan Kolins application
and Kolin Electronics registration are unrelated.
A certificate of trademark registration confers upon the trademark
owner the exclusive right to sue those who have adopted a similar mark not only
in connection with the goods or services specified in the certificate, but also with
those that are related thereto.
In resolving one of the pivotal issues in this casewhether or not the
products of the parties involved are relatedthe doctrine in Mighty Corporation
is authoritative. There, the Court held that the goods should be tested against
several factors before arriving at a sound conclusion on the question of
relatedness. Among these are:
(a) the business (and its location) to which the goods belong;
(b) the class of product to which the goods belong;
(c) the products quality, quantity, or size, including the nature of the
package, wrapper or container;
(d) the nature and cost of the articles;
(e) the descriptive properties, physical attributes or essential
characteristics with reference to their form, composition, texture or
quality;
(f) the purpose of the goods;
(g) whether the article is bought for immediate consumption, that is,
day-to-day household items;
(h) the fields of manufacture;
(i) the conditions under which the article is usually purchased; and
(j) the channels of trade through which the goods flow, how they are
distributed, marketed, displayed and sold.
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As mentioned, the classification of the products under the NCL is merely
part and parcel of the factors to be considered in ascertaining whether the goods
are related. It is not sufficient to state that the goods involved herein are
electronic products under Class 9 in order to establish relatedness between the
goods, for this only accounts for one of many considerations enumerated in
Mighty Corporation.
Clearly then, it was erroneous for Kolin Electronics to assume over the
CA to conclude that all electronic products are related and that the coverage of
one electronic product necessarily precludes the registration of a similar mark
over another. In this digital age wherein electronic products have not only
diversified by leaps and bounds, and are geared towards interoperability, it is
difficult to assert readily, as Kolin Electronics simplistically did, that all devices
that require plugging into sockets are necessarily related goods.
As a matter of fact, while both competing marks refer to the word
KOLIN written in upper case letters and in bold font, the Court at once notes
the distinct visual and aural differences between them: Kolin Electronics mark is
italicized and colored black while that of Taiwan Kolin is white in pantone red
color background. The differing features between the two, though they may
appear minimal, are sufficient to distinguish one brand from the other.
Finally, in line with the foregoing discussions, more credit should be
given to the ordinary purchaser. Cast in this particular controversy, the
ordinary purchaser is not the completely unwary consumer but is the
ordinarily intelligent buyer considering the type of product involved
All told, We are convinced that Taiwan Kolins trademark registration
not only covers unrelated good, but is also incapable of deceiving the ordinary
intelligent buyer. The ordinary purchaser must be thought of as having, and
credited with, at least a modicum of intelligence to be able to see the differences
between the two trademarks in question.
TRANSPORTATION LAW
VIGILANCE OVER GOODS
ASIAN TERMINALS, INC. vs. FIRST LEPANTO-TAISHO INSURANCE
CORPORATION
G.R. No. 185964, June 16, 2014, J. Reyes
The shipment received by the ATI from the vessel of COCSCO was found to
have sustained loss and damages. An arrastre operators duty is to take good care
of the goods and to turn them over to the party entitled to their possession. It must
prove that the losses were not due to its negligence or to that of its employees. The
Court held that ATI failed to discharge its burden of proof. ATI blamed COSCO but
when the damages were discovered, the goods were already in ATIs custody for
two weeks. Witnesses also testified that the shipment was left in an open area
exposed to the elements, thieves and vandals.
Facts:
About 3,000 bags of sodium tripolyphosphate contained in 100 plain
jumbo bags were loaded on M/V Da Feng owned by China Ocean Shipping Co.
(COSCO) in favor of Grand Asian Sales, Inc. (GASI). It was insured by GASI with
FIRST LEPANTO for P7,959,550.50 under Marine Open Policy No. 0123.
The shipment arrived in Manila and was discharged into the custody of
ATI, which was engaged in arrastre business. It remained at ATIs storage area
until withdrawen by broker, Proven Customs Brokerage Corporation (PROVEN)
for delivery to GASI.
Upon receipt, GASI found that the goods incurred shortages of 8,600 kg.
and spillages of 3,315 kg. for a total of loss valued at P166,722.41. GASI sought
recompense from COSCO through its Philippine agent Smith Bell Shipping Lines,
Inc. (SMITH BELL), ATI, and PROVEN, but was denied. Thus, FIRST LEPANTO
paid P165,772.40 as insurance indemnity.
Then GASI executed a Release of Claim, discharging FIRST LEPANTO
from any and all liabilities pertaining to the damaged shipment and subrogating
it to all the rights of recovery and claims the former may have against any person
or corporation in relation to the damaged shipment.
FIRST LEPANTO demanded reimbursement from COSCO through SMITH
BELL, PROVEN, and ATI. When denied, it filed a Complaint for sum of money
before the MeTC.
ATI denied liability and claimed it exercised due diligence and care in
handling the goods. ATI alleged that upon arrival, it was discovered that one
jumbo bag sustained loss/damage while in custody of COSCO as evidenced by
Turn Over Survey of Bad Order Cargo No. 47890. During withdrawal of PROVEN,
it was re-examined and the goods were found to be in the same condition as
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when it was turned over to ATI such that one jumbo bag was damaged. ATI also
averred that even if it was liable, its contract for cargo handling service limits its
liability to not more than P5,000 per package.
PROVEN also denied liability and claimed that the damages were
sustained before they were withdrawn from ATIs custody under which the
shipment was left in an open area exposed to the elements, thieves and vandals.
Despite receipt of summons, COSCO and SMITH BELL failed to file an answer to
the complaint.
MeTC dismissed the claim, absolving ATI and PROVEN of liability and
finding COSCO to be liable but ruling that it had no jurisdiction over it since it
was a foreign corporation and it was not established that SMITH BELL is its
Philippine Agent. On appeal, the RTC reversed this decision, by which it held ATI
liable. ATI challenged the RTCs decision before the Court of Appeals in which it
argued that there was no valid subrogation because FIRST LEPANTO failed to
present a valid and existing Marine Open Policy or insurance contract. The CA
dismissed the appeal.
Issue:
1. Is ATI liable for the damages of the shipment?
2. Whether or not the presentation of the insurance policy is
indispensable in proving right of FIRST LEPANTO to be subrogated
Ruling:
1. Yes, ATI failed to prove that it exercised due care and diligence while
shipment was under its custody, control and possession as arrastre operator.
Factual questions pertaining to ATIs liability has already been settled in
the uniform factual findings of the RTC and the CA. Such findings are binding and
conclusive upon the Supreme Court. Only questions of law are allowed in
petitions for review on certiorari under Rule 45 of the Rules of Court.
The relationship between the consignee and the arrastre operator is
akin to that existing between the consignee and/or the owner of the shipped
goods and the common carrier, or that between a depositor and a
warehouseman. Hence, in the performance of its obligations, an arrastre
operator should observe the same degree of diligence as that required of a
common carrier and a warehouseman. An arrastre operators duty is to take
good care of the goods and to turn them over to the party entitled to their
possession.
Since the safekeeping of the goods is its responsibility, it must prove that
the losses were not due to its negligence or to that of its employees. ATI failed to
discharge its burden of proof. Instead, it insisted on shifting the blame to COSCO
on the basis of the Request for Bad Order Survey, purportedly showing that
when ATI received the shipment, one jumbo bag thereof was already in damaged
condition.
The Court affirmed the finding of the RTC and CA that ATIs contention
was improbable and illogical. The date of the said document was too distant from
the date when the shipment was actually received by ATI from COSCO. In fact,
what the document established is that when the loss/damage was discovered,
the shipment has been in ATIs custody for at least two weeks. This circumstance,
coupled with the undisputed declaration of PROVENs witnesses that while the
shipment was in ATIs custody, it was left in an open area exposed to the
elements, thieves and vandals, all generate the conclusion that ATI failed to
exercise due care and diligence.
2. No, the non-presentation of the insurance contract is not fatal to
FIRST LEPANTOs cause of action.
ATI put in issue the submission of the insurance contract for the first
time before the CA. ATI also failed to allege the necessity of the insurance
contract in its answer to the complaint before the MeTC. Neither was the same
considered during pre-trial as one of the decisive matters in the case.
Since it was not agreed during the pre-trial proceedings that FIRST
LEPANTO will have to prove its subrogation rights by presenting a copy of the
insurance contract, ATI is barred from pleading the absence of such contract in
its appeal. It is imperative for the parties to disclose during pre-trial all issues
they intend to raise during the trial because they are bound by the delimitation
of such issues. The determination of issues during the pre-trial conference bars
the consideration of other questions, whether during trial or on appeal.
However, the Court ruled that the non-presentation of the insurance
contract is not fatalto FIRST LEPANTOs right to collect reimbursement.
Subrogation is the substitution of one person in the place of another with
reference to a lawful claim or right, so that he who is substituted succeeds to the
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rights of the other in relation to a debt or claim, including its remedies or
securities.
As a general rule, the marine insurance policy needs to be presented in
evidence before the insurer may recover the insured value of the lost/damaged
cargo in the exercise of its subrogatory right. Presentation of the contract
constitutive of the insurance relationship between the consignee and insurer is
critical because it is the legal basis of the latters right to subrogation.
But the Court held that there are exceptions to this rule. The right of
subrogation accrues simply upon payment by the insurance company of the
insurance claim. Hence, presentation in evidence of the marine insurance policy
is not indispensable before the insurer may recover from the common carrier the
insured value of the lost cargo in the exercise of its subrogatory right. The
subrogation receipt, by itself, was held sufficient to establish not only the
relationship between the insurer and consignee, but also the amount paid to
settle the insurance claim.
It was held that the Certificate of Insurance and the Release of Claim
presented as evidence sufficiently established FIRST LEPANTOs right to collect
reimbursement as the subrogee of GASI.
LIABILITY FOR ACTS OF OTHERS
MARIANO C. MENDOZA AND ELVIRA LIM vs. SPOUSES LEONORA J. GOMEZ
AND GABRIEL V. GOMEZ
G.R. No. 160110, June 18, 2014, J. Perez
The operator of a bus company cannot renege on the obligation brought
about by collision of vehicles by claiming that she is not the true owner of the bus.
In case of collision of motor vehicles, the person whose name appears in the
certificate of registration shall be considered the employer of the person driving the
vehicle and shall be directly and primarily liable with the driver under the principle
of vicarious liability.
Facts:
An Isuzu Elf truck (Isuzu truck) owned by Leonora J. Gomez
(Leonora) and driven by Antenojenes Perez (Perez), was hit by a Mayamy
Transportation bus (Mayamy bus) with registered under the name of Elvira Lim
(Lim) and driven by Mariano C. Mendoza (Mendoza). Mendoza was charged with
reckless imprudence resulting in damage to property and multiple physical
injuries, however, he eluded arrest, prompting the spouses Gomez to file a
separate complaint for damages against Mendoza and Lim, seeking actual
damages, compensation for lost income, moral damages, exemplary damages,
attorneys fees and costs of the suit.
At the trial, it was found out that the Isuzu truck was on its right lane
when the Mayamy bus intruded the lane which caused the collision. As a result,
the helpers on board the truck sustained injuries necessitating medical
treatment amounting to P11,267.35, which amount was shouldered by spouses
Gomez. The spouses also contended that the collision deprived them the daily
income of P1,000.00 as they were engaged in buying plastic scraps and
delivering them to recycling plants, truck was vital in the furtherance of the
business. Lastly, the spouses claimed that the Isuzu truck sustained extensive
damages on its cowl, chassis, lights and steering wheel, amounting
to P142,757.40.
Lim raised the issue of ownership of the bus in question that although
the registered owner was Lim, the actual owner of the bus was one SPO1 Cirilo
Enriquez, who had the bus attached with Mayamy Transportation Company
under the so-called "kabit system."
The RTC found Mendoza liable for direct personal negligence under
Article 2176 of the Civil Code, and it also found Lim vicariously liable under
Article 2180 of the same Code. The RTC relied on the Certificate of Registration
in concluding that she is the registered owner of the bus in question. Although
actually owned by Enriquez, following the established principle in transportation
law, Lim, as the registered owner, is the one who can be held liable. Mendoza and
Lim were ordered to pay spouses Gomez 1) the costs of repair of the damaged
vehicle in the amount of P142,757.40; 2) the amount ofP1,000.00 per day from
March 7, 1997 up to November 1997 representing the unrealized income of the
spouses Gomez when the incident transpired up to the time the damaged Isuzu
truck was repaired; 3) P100,000.00 as moral damages, plus a separate amount
of P50,000.00 as exemplary damages; 4) P50,000.00 as attorneys fees; and lastly
5) the costs of suit. Aggrieved, Mendoza appealed to the CA which affirmed the
decision of the RTC with the exception of the award of unrealized income. Hence,
the present petition.
Issues:
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1. Whether or not Lim is liable as the employer despite the fact that the
original owner of the bus is Enriquez
2. Whether or not the award of moral and exemplary damages as well as
attorneys fees and costs of suit is proper
Ruling:
1. Yes, Lim shall be vicariously liable with Mendoza.
In Filcar Transport Services v. Espinas, we held that the registered
owner is deemed the employer of the negligent driver, and is thus vicariously
liable under Article 2176, in relation to Article 2180, of the Civil Code. Citing
Equitable Leasing Corporation v. Suyom, the Court ruled that in so far as third
persons are concerned, the registered owner of the motor vehicle is the
employer of the negligent driver, and the actual employer is considered merely
as an agent of such owner. Thus, whether there is an employer-employee
relationship between the registered owner and the driver is irrelevant in
determining the liability of the registered owner who the law holds primarily
and directly responsible for any accident, injury or death caused by the operation
of the vehicle in the streets and highways.
As early as Erezo v. Jepte, the Court, speaking through Justice Alejo
Labrador summarized the justification for holding the registered owner directly
liable, to wit:
x x x The main aim of motor vehicle registration is to identify
the owner so that if any accident happens, or that any damage
or injury is caused by the vehicles on the public highways,
responsibility therefore can be fixed on a definite individual, the
registered owner. Instances are numerous where vehicle
running on public highways caused accidents or injuries to
pedestrians or other vehicles without positive identification of
the owner or drivers, or with very scant means of identification.
It is to forestall these circumstances, so inconvenient or
prejudicial to the public, that the motor vehicle registration is
primarily ordained, in the interest of the determination of
persons responsible for damages or injuries caused on public
highways. As such, there can be no other conclusion but to hold
Lim vicariously liable with Mendoza.
2. As to exemplary damages and costs of suit, yes but as to moral
damages and attorneys fees, no.
Moral Damages. Moral damages are awarded to enable the injured party
to obtain means, diversions or amusements that will serve to alleviate the moral
suffering he has undergone, by reason of the defendant's culpable action. In fine,
an award of moral damages calls for the presentation of 1) evidence of
besmirched reputation or physical, mental or psychological suffering sustained
by the claimant; 2)a culpable act or omission factually established; 3) proof that
the wrongful act or omission of the defendant is the proximate cause of the
damages sustained by the claimant; and 4) the proof that the act is predicated on
any of the instances expressed or envisioned by Article 2219 and Article 2220 of
the Civil Code.
A review of the complaint and the transcript of stenographic notes yields
the pronouncement that respondents neither alleged nor offered any evidence of
besmirched reputation or physical, mental or psychological suffering incurred by
them.
Spouses Gomez cannot rely on Article 2219 (2) of the Civil Code which
allows moral damages in quasi-delicts causing physical injuries because in
physical injuries, moral damages are recoverable only by the injured party, and
in the case at bar, herein respondents were not the ones who were actually
injured. In B.F. Metal (Corp.) v. Sps. Lomotan, et al., the Court, in a claim for
damages based on quasi-delict causing physical injuries, similarly disallowed an
award of moral damages to the owners of the damaged vehicle, when neither of
them figured in the accident and sustained injuries.
Neither can respondents rely on Article 21 of the Civil Code as the RTC
erroneously did. Article 21 deals with acts contra bonus mores, and has the
following elements: (1) There is an act which is legal; (2) but which is contrary to
morals, good custom, public order, or public policy; (3) and it is done with intent
to injure. In the present case, it can hardly be said that Mendozas negligent
driving and violation of traffic laws are legal acts. Moreover, it was not proven
that Mendoza intended to injure Perez, et al. Thus, Article 21 finds no application
to the case at bar. All in all, we find that the RTC and the CA erred in granting
moral damages to respondents.
Exemplary Damages. Article 2229 of the Civil Code provides that
exemplary or corrective damages are imposed, by way of example or correction
for the public good, in addition to moral, temperate, liquidated or compensatory
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damages. Article 2231 of the same Code further states that in quasi-delicts,
exemplary damages may be granted if the defendant acted with gross negligence.
In motor vehicle accident cases, exemplary damages may be awarded where the
defendants misconduct is so flagrant as to transcend simple negligence and be
tantamount to positive or affirmative misconduct rather than passive or negative
misconduct. In characterizing the requisite positive misconduct which will
support a claim for punitive damages, the courts have used such descriptive
terms as willful, wanton, grossly negligent, reckless, or malicious, either alone or
in combination.
Gross negligence is the absence of care or diligence as to amount to a
reckless disregard of the safety of persons or property. It evinces a thoughtless
disregard of consequences without exerting any effort to avoid them. In the case
at bar, having established respondents right to compensatory damages,
exemplary damages are also in order, given the fact that Mendoza was grossly
negligent in driving the Mayamy bus. His act of intruding or encroaching on the
lane rightfully occupied by the Isuzu truck shows his reckless disregard for
safety.
Attorneys Fees. Article 2208 of the Civil Code enumerates the instances
when attorneys fees may be recovered:
Art. 2208. In the absence of stipulation, attorneys fees and
expenses of litigation, other than judicial costs, cannot be
recovered, except:
(1) When exemplary damages are awarded;
(2) When the defendants act or omission has compelled the
plaintiff to litigate with third persons or to incur expenses
to protect his interest;
(3) In criminal cases of malicious prosecution against the
plaintiff;
(4) In case of a clearly unfounded civil action or proceeding
against the plaintiff;
(5) Where the defendant acted in gross and evident bad faith
in refusing to satisfy the plaintiffs valid and demandable
claim;
(6) In actions for legal support;
(7) In actions for the recovery of wages of household helpers,
laborers and skilled workers;
(8) In actions for indemnity under workmens compensation
and employers liability laws;
(9) In a separate civil action to recover civil liability arising
from a crime;
(10) When at least double judicial costs are awarded;
(11) In any other case where the court deems it just and
equitable that attorneys fees and expenses of litigation
should be recovered;
In all cases, the attorneys fees and expenses of litigation must be
reasonable.
In Spouses Agustin v. CA, we held that, the award of attorneys fees being
an exception rather than the general rule, it is necessary for the court to make
findings of facts and law that would bring the case within the exception and
justify the grant of such award. Thus, the reason for the award of attorneys fees
must be stated in the text of the courts decision; otherwise, if it is stated only in
the dispositive portion of the decision, the same must be disallowed on appeal.
In the case at bar, the RTC Decision had nil discussion on the propriety
of attorneys fees, and it merely awarded such in the dispositive
portion. Following established jurisprudence, however, the CA should have
disallowed on appeal said award of attorneys fees as the RTC failed to
substantiate said award.
Costs of suit. The Rules of Court provide that, generally, costs shall be
allowed to the prevailing party as a matter of course, thus:
Section 1. Costs ordinarily follow results of suit.- Unless
otherwise provided in these rules, costs shall be allowed to the
prevailing party as a matter of course, but the court shall have
power, for special reasons, to adjudge that either party shall pay
the costs of an action, or that the same be divided, as may be
equitable. No costs shall be allowed against the Republic of the
Philippines, unless otherwise provided by law.
In the present case, the award of costs of suit to respondents, as the
prevailing party, is in order.
STIPULATION FOR LIMITATION OF LIABILITY
PHILAM INSURANCE COMPANY, INC. (now CHARTIS PHILIPPINES
INSURANCE, INC.*) vs. HEUNG-A SHIPPING CORPORATION and WALLEM
PHILIPPINES SHIPPING, INC
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G.R. No. 1877l
HEUNG-A SHIPPING CORPORATION and W ALLEM PHILIPPINES SHIPPING,
INC. vs. PHILAM INSURANCE COMPANY, INC. (now CHARTIS PHILIPPINES
INSURANCE, INC.),
G.R. No. 187812,
July 23, 2014, J. Reyes
Common carriers, as a general rule, are presumed to have been at fault or
negligent if the goods they transported deteriorated or got lost or destroyed. That
is, unless they prove that they exercised extraordinary diligence in transporting the
goods. In order to avoid responsibility for any loss or damage, therefore, they have
the burden of proving that they observed such diligence. As the carrier of the
subject shipment, HEUNG-A was bound to exercise extraordinary diligence in
conveying the same and its slot charter agreement with DONGNAMA did not divest
it of such characterization nor relieve it of any accountability for the shipment.
However, the liability of HEUNG-A is limited to $500 per package or pallet because
in case of the shippers failure to declare the value of the goods in the bill of lading,
Section 4, paragraph 5 of the COGSA provides that neither the carrier nor the ship
shall in any event be or become liable for any loss or damage to or in connection
with the transportation of goods in an amount exceeding $500 per package
Facts:
On December 19, 2000, Novartis Consumer Health Philippines, Inc.
(NOVARTIS) imported from Jinsuk Trading Co. Ltd., (JINSUK) in South Korea, 19
pallets of 200 rolls of Ovaltine Power 18 G laminated plastic packaging material.
In order to ship the goods to the Philippines, JINSUK engaged the
services of Protop Shipping Corporation (PROTOP), a freight forwarder likewise
based in South Korea, to forward the goods to their consignee, NOVARTIS.
PROTOP shipped the cargo through Dongnama Shipping Co. Ltd. (DONGNAMA)
which in turn loaded the same on M/V Heung-A Bangkok V-019 owned and
operated by Heung-A Shipping Corporation, (HEUNG-A), a Korean corporation,
pursuant to a slot charter agreement whereby a space in the latters vessel was
reserved for the exclusive use of the former. Wallem Philippines Shipping, Inc.
(WALLEM) is the ship agent of HEUNG-A in the Philippines.
NOVARTIS insured the shipment with Philam Insurance Company, Inc.
(PHILAM, now Chartis Philippines Insurance, Inc.) under All Risk Marine Open
Insurance Policy No. MOP-0801011828 against all loss, damage, liability, or
expense before, during transit and even after the discharge of the shipment from
the carrying vessel until its complete delivery to the consignees premises.
The vessel arrived at the port of Manila, South Harbor, on December 27,
2000. The shipment reached NOVARTIS premises on January 5, 2001 and was
thereupon inspected by the companys Senior Laboratory Technician, Annie Rose
Caparoso (Caparoso). Upon initial inspection, Caparoso found the container van
locked with its load intact. After opening the same, she inspected its contents
and discovered that the boxes of the shipment were wet and damp. The boxes on
one side of the van were in disarray while others were opened or damaged due
to the dampness. Caparoso further observed that parts of the container van were
damaged and rusty. There were also water droplets on the walls and the floor
was wet. Since the damaged packaging materials might contaminate the product
they were meant to hold, Caparoso rejected the entire shipment.
Aggrieved, NOVARTIS demanded indemnification for the lost/damaged
shipment from PROTOP but was denied. Insurance claims were, thus, filed with
PHILAM which paid the insured value of the shipment in the adjusted amount of
One Million Nine Hundred Four Thousand Six Hundred Thirteen Pesos and
Twenty Centavos (1,904,613.20). Claiming that after such payment, it was
subrogated to all the rights and claims of NOVARTIS against the parties liable for
the lost/damaged shipment, PHILAM filed on June 4, 2001, a complaint for
damages against PROTOP. On December 11, 2001, PHILAM filed a Motion to
Admit Second Amended Complaint this time designating PROTOP as the
owner/operator of M/V Heung-A Bangkok V-019 and adding HEUNG-A as party
defendant for being the registered owner of the vessel. The motion was granted
and the second amended complaint was admitted by the trial court on December
14, 2001.
In a Decision dated February 26, 2007, the RTC rendered HEUNG-A,
PROTOP and WALLEM liable for the loss. PHILAM was declared to have been
validly subrogated in NOVARTIS stead and thus entitled to recover the insurance
claims it paid to the latter.
An appeal to the CA was interposed by PHILAM, WALLEM and HEUNG-A.
The CA ruled that proximate cause of the damage was the failure of HEUNG-A to
inspect and examine the actual condition of the sea van before loading it on the
vessel. However, the CA limited the liability of PROTOP, WALLEM and HEUNG-A
to US$8,500.00 pursuant to the liability limitation under the COGSA since the
shipper failed to declare the value of the subject cargo in the bill of lading and
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since they could not be made answerable for the two (2) unaccounted pallets
because the shipment was on a shippers load, count and seal basis.
Issues:
1. Whether HEUNG-A should be liable for the loss sustained.
2. Whether HEUNG-As liability can be limited to US$500 per package
pursuant to the COGSA.
Ruling:
1. As the carrier of the subject shipment, HEUNG-A was bound to
exercise extraordinary diligence in conveying the same and its slot charter
agreement with DONGNAMA did not divest it of such characterization nor relieve
it of any accountability for the shipment.
[C]ommon carriers, as a general rule, are presumed to have been at
fault or negligent if the goods they transported deteriorated or got lost or
destroyed. That is, unless they prove that they exercised extraordinary diligence
in transporting the goods. In order to avoid responsibility for any loss or
damage, therefore, they have the burden of proving that they observed such
diligence. Further, under Article 1742 of the Civil Code, even if the loss,
destruction, or deterioration of the goods should be caused by the faulty nature
of the containers, the common carrier must exercise due diligence to forestall or
lessen the loss.
Here, HEUNG-A failed to rebut this prima facie presumption when it
failed to give adequate explanation as to how the shipment inside the container
van was handled, stored and preserved to forestall or prevent any damage or
loss while the same was in its possession, custody and control.
2. Yes. Under Article 1753 of the Civil Code, the law of the country to
which the goods are to be transported shall govern the liability of the common
carrier for their loss, destruction or deterioration. Since the subject shipment
was being transported from South Korea to the Philippines, the Civil Code
provisions shall apply. In all matters not regulated by the Civil Code, the rights
and obligations of common carriers shall be governed by the Code of Commerce
and by special laws such as the COGSA. While the Civil Code contains provisions
making the common carrier liable for loss/damage to the goods transported, it
failed to outline the manner of determining the amount of such liability. Article
372 of the Code of Commerce fills in this gap, thus:
Article 372. The value of the goods which the carrier must pay
in cases if loss or misplacement shall be determined in accordance with
that declared in the bill of lading, the shipper not being allowed to
present proof that among the goods declared therein there were articles
of greater value and money.
In case, however, of the shippers failure to declare the value of the
goods in the bill of lading, Section 4, paragraph 5 of the COGSA provides:
Neither the carrier nor the ship shall in any event be or become
liable for any loss or damage to or in connection with the transportation
of goods in an amount exceeding $500 per package lawful money of the
United States, or in case of goods not shipped in packages, per
customary freight unit, or the equivalent of that sum in other currency,
unless the nature and value of such goods have been declared by the
shipper before shipment and inserted in the bill of lading. This
declaration, if embodied in the bill of lading shall be prima facie
evidence, but shall be conclusive on the carrier.
Hence, when there is a loss/damage to goods covered by contracts of
carriage from a foreign port to a Philippine port and in the absence a shippers
declaration of the value of the goods in the bill of lading, as in the present case,
the foregoing provisions of the COGSA shall apply. The CA, therefore, did not err
in ruling that HEUNG-A, WALLEM and PROTOPs liability is limited to $500 per
package or pallet.
DILIGENCE REQUIRED OF COMMON CARRIERS
NEDLLOYD LIJNEN B.V. ROTTERDAM AND THE EAST ASIATIC CO., LTD. vs.
GLOW LAKS ENTERPRISES, LTD.
G.R. No. 156330, November 19, 2014, J. Perez
There is no dispute that the custody of the goods was never turned over to
the consignee or his agents but was lost into the hands of unauthorized persons
who secured possession thereof on the strength of falsified documents. When the
goods shipped are either lost or arrived in damaged condition, a presumption
arises against the carrier of its failure to observe that diligence, and there need not
be an express finding of negligence to hold it liable. To overcome the presumption
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of negligence, the common carrier must establish by adequate proof that it
exercised extraordinary diligence over the goods. In the present case, Nedlloyd
failed to prove that they did exercise the degree of diligence required by law over
the goods they transported, it failed to adduce sufficient evidence they exercised
extraordinary care to prevent unauthorized withdrawal of the shipments.
Facts:
Nedlloyd Lijnen B.V. Rotterdam is a foreign corporation engaged in the
business of carrying goods by sea, whose vessels regularly call at the port of
Manila. It is doing business in the Philippines thru its local ship agent, co-
petitioner East Asiatic Co., Ltd. Glow Laks Enterprises, Ltd., is likewise a foreign
corporation organized and existing under the laws of Hong Kong. It is not
licensed to do, and it is not doing business in, the Philippines. On or about 14
September 1987, Glow loaded on board M/S Scandutch at the Port of Manila a
total 343 cartoons of garments, complete and in good order for pre-carriage to
the Port of Hong Kong. The goods covered by Bills of Lading Nos. MHONX-2 and
MHONX-34 arrived in good condition in Hong Kong and were transferred to M/S
Amethyst for final carriage to Colon, Free Zone, Panama. Both vessels, M/S
Scandutch and M/S Amethyst, are owned by Nedlloyd represented in the
Phlippines by its agent, East Asiatic. The goods which were valued at
US$53,640.00 was agreed to be released to the consignee, Pierre Kasem,
International, S.A., upon presentation of the original copies of the covering bills
of lading. Upon arrival of the vessel at the Port of Colon on 23 October 1987,
Nedlloyd purportedly notified the consignee of the arrival of the shipments, and
its custody was turned over to the National Ports Authority in accordance with
the laws, customs regulations and practice of trade in Panama. By an
unfortunate turn of events, however, unauthorized persons managed to forge the
covering bills of lading and on the basis of the falsified documents, the ports
authority released the goods.
On 16 July 1988, Glow filed a formal claim with Nedlloyd for the
recovery of the amount of US$53,640.00 representing the invoice value of the
shipment but to no avail. Claiming that Nedlloyd are liable for the misdelivery of
the goods, Glow initiated Civil Case before the RTC of Manila, seeking for the
recovery of the amount of US$53,640.00, including the legal interest from the
date of the first demand. After the Pre-Trial Conference, trial on the merits
ensued. The RTC rendered a Decision ordering the dismissal of the complaint
but granted Nedlloyd counterclaims. The Court of Appeals reversed the findings
of the RTC and held that foreign laws were not proven in the manner provided by
Section 24, Rule 132 of the Revised Rules of Court, and therefore, it cannot be
given full faith and credit.
Issue:
Whether or not Nedllyod are liable for the misdelivery of goods under
Philippine laws.
Ruling:
Yes, Nedlloyd is laible.
Explicit is the rule under Article 1736 of the Civil Code that the
extraordinary responsibility of the common carrier begins from the time the
goods are delivered to the carrier. This responsibility remains in full force and
effect even when they are temporarily unloaded or stored in transit, unless the
shipper or owner exercises the right of stoppage in transitu, and terminates only
after the lapse of a reasonable time for the acceptance, of the goods by the
consignee or such other person entitled to receive them. It was further provided
in the same statute that the carrier may be relieved from the responsibility for
loss or damage to the goods upon actual or constructive delivery of the same by
the carrier to the consignee or to the person who has the right to receive them.
In this case, there is no dispute that the custody of the goods was never
turned over to the consignee or his agents but was lost into the hands of
unauthorized persons who secured possession thereof on the strength of
falsified documents. The loss or the misdelivery of the goods in the instant case
gave rise to the presumption that the common carrier is at fault or negligent. A
common carrier is presumed to have been negligent if it fails to prove that it
exercised extraordinary vigilance over the goods it transported. When the goods
shipped are either lost or arrived in damaged condition, a presumption arises
against the carrier of its failure to observe that diligence, and there need not be
an express finding of negligence to hold it liable. To overcome the presumption
of negligence, the common carrier must establish by adequate proof that it
exercised extraordinary diligence over the goods. It must do more than merely
show that some other party could be responsible for the damage.
In the present case, Nedlloyd failed to prove that they did exercise the
degree of diligence required by law over the goods they transported. Indeed,
aside from their persistent disavowal of liability by conveniently posing an
excuse that their extraordinary responsibility is terminated upon release of the
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goods to the Panamanian Ports Authority, Nedlloyd failed to adduce sufficient
evidence they exercised extraordinary care to prevent unauthorized withdrawal
of the shipments. Nothing in the New Civil Code, however, suggests, even
remotely, that the common carriers responsibility over the goods ceased upon
delivery thereof to the custom authorities. The contract of carriage remains in
full force and effect even after the delivery of the goods to the port authorities;
the only delivery that releases it from their obligation to observe extraordinary
care is the delivery to the consignee or his agents. Even more telling of Nedlloyd
continuing liability for the goods transported to the fact that the original bills of
lading up to this time, remains in the possession of the notify party or consignee.
While surrender of the original bill of lading is not a condition precedent
for the common carrier to be discharged from its contractual obligation, there
must be, at the very least, an acknowledgement of the delivery by signing the
delivery receipt, if surrender of the original of the bill of lading is not possible.
There was neither surrender of the original copies of the bills of lading nor was
there acknowledgment of the delivery in the present case. This leads to the
conclusion that the contract of carriage still subsists and Nedlloyd could be held
liable for the breach thereof.
Petitioners could have offered evidence before the trial court to show that they
exercised the highest degree of care and caution even after the goods was turned
over to the custom authorities, by promptly notifying the consignee of its arrival
at the Port of Cristobal in order to afford them ample opportunity to remove the
cargoes from the port of discharge. This court have scoured the records and
found that neither the consignee nor the notify party was informed by Nedlloyd
of the arrival of the goods, a crucial fact indicative of Nedlloyds failure to
observe extraordinary diligence in handling the goods entrusted to their custody
for transport.
LIABILITIES OF COMMON CARRIERS
LOADSTAR SHIPPING COMPANY, INCORPORATED and LOADSTAR
INTERNATIONAL SHIPPING COMPANY, INCORPORATED vs. MALAYAN
INSURANCE COMPANY, INCORPORATED
G.R. No. 185565, November 26, 2014, J. Reyes
Under the Code of Commerce, if the goods are delivered but arrived at the
destination in damaged condition, the remedies to be pursued by the consignee
depend on the extent of damage on the goods. If the effect of damage on the goods
consisted merely of diminution in value, the carrier is bound to pay only the
difference between its price on that day and its depreciated value as provided
under Article 364. Malayan, as the insurer of PASAR, neither stated nor proved that
the goods are rendered useless or unfit for the purpose intended by PASAR due to
contamination with seawater. Hence, there is no basis for the goods rejection
under Article 365 of the Code of Commerce. Clearly, it is erroneous for Malayan to
reimburse PASAR as though the latter suffered from total loss of goods in the
absence of proof that PASAR sustained such kind of loss.
Facts:
Loadstar International Shipping (Loadstar Shipping) and PASAR entered
into a contract of affreightment of the latters copper concentrates. A shipment of
cooper concentrates were loaded in MV Bobcat, the vessel of Loadstar
International Shipping Co., Inc. (Loadstar International), with Philex as shipper
and PASAR as consignee. The cargo was insured by Malayan Insurance Company,
Inc. (Malayan). While out in the sea, the crew of the vessel found a crack on the
vessel which caused seawater to enter and wet the copper concentrates.
Immediately after the vessel arrived at port, PASAR and Philexs tested
the copper concentrates and found them to be contaminated. PASAR sent a
formal notice of claim to Loadstar Shipping, and surveyors recommended the
value of the claim at P 32,351,102.32. Malayan paid PASAR said amount.
Meanwhile, Malayan wrote Loadstar Shipping informing the latter of a
prospective buyer for the damaged copper concentrates and the opportunity to
nominate/refer other salvage buyers to PASAR. Malayan later wrote Loadstar
Shipping informing the latter of the acceptance of PASARs proposal to take the
damaged copper concentrates at a residual value of US$90,000.00. Loadstar
Shipping wrote Malayan requesting for the reversal of its decision to accept
PASARs proposal and the conduct of a public bidding to allow Loadstar Shipping
to match or top PASARs bid by 10%.
PASAR then signed a subrogation receipt in favor of Malaya. To recover
the amount Malaya paid to PASAR, it demanded reimbursement from Loadstar
Shipping, which refused to comply, prompting Malaya to file a case of damages
with the RTC, against Loadstar Shipping, and later including Loadstar
International. Malayan alleged that due to the unseaworthiness of the vessel,
PASAR suffered loss of the cargo. Petitioners maintain, among others, that
Malayans claim is excessive, grossly overstated, unreasonable and
unsubstantiated; that their liability, if any, should not exceed the CIF value of the
lost/damaged cargo as set forth in the bill of lading, charter party or customary
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rules of trade; and that the arbitration clause in the contract of affreightment
should be followed.
The RTC dismissed the complaint, finding that although contaminated by
seawater, the copper concentrates can still be used. It gave credence to the
testimony of Francisco Esguerra, petitioners expert witness, that despite high
chlorine content, the copper concentrates remain intact and will not lose their
value. The gold and silver remain with the grains/concentrates even if soaked
with seawater and does not melt. The RTC observed that the purchase agreement
between PASAR and Philex contains a penalty clause and has no rejection clause.
Despite this agreement, the parties failed to sit down and assess the penalty.
The CA reversed and set aside the RTC, holding that petitioners must
pay Malayan the amount of P33,934,948.74 as actual damages, less $90,000.00-
the residual value of the copper concentrates it sold to PASAR in 2000.
Issue:
Did PASAR not suffer total loss of the copper concentrates as to warrant
rejection of the goods and reimbursement from Malayan?
Ruling:
The petition is granted.
The contract between PASAR and the petitioners is a contract of carriage
of goods and not a contract of sale. Therefore, the petitioners and PASAR are
bound by the laws on transportation of goods and their contract of
affreightment. Since the Contract of Affreightment between the petitioners and
PASAR is silent as regards the computation of damages, whereas the bill of lading
presented before the trial court is undecipherable, the New Civil Code and the
Code of Commerce shall govern the contract between the parties.
Malayan paid PASAR the amount of P32,351,102.32 covering the latters
claim of damage to the cargo. This represents damages for the total loss of that
portion of the cargo which were contaminated with seawater and not merely the
depreciation in its value. Strangely though, after claiming damages for the total
loss of that portion, PASAR bought back the contaminated copper concentrates
from Malayan at the price of US$90,000.00. The fact of repurchase is enough to
conclude that the contamination of the copper concentrates cannot be
considered as total loss on the part of PASAR.
[Under the Code of Commerce], if the goods are delivered but arrived at
the destination in damaged condition, the remedies to be pursued by the
consignee depend on the extent of damage on the goods.
If the goods are rendered useless for sale, consumption or for the
intended purpose, the consignee may reject the goods and demand the payment
of such goods at their market price on that day pursuant to Article 365. In case
the damaged portion of the goods can be segregated from those delivered in
good condition, the consignee may reject those in damaged condition and accept
merely those which are in good condition. But if the consignee is able to prove
that it is impossible to use those goods which were delivered in good condition
without the others, then the entire shipment may be rejected. To reiterate, under
Article 365, the nature of damage must be such that the goods are rendered
useless for sale, consumption or intended purpose for the consignee to be able to
validly reject them.
If the effect of damage on the goods consisted merely of diminution in
value, the carrier is bound to pay only the difference between its price on that
day and its depreciated value as provided under Article 364.
Malayan, as the insurer of PASAR, neither stated nor proved that the
goods are rendered useless or unfit for the purpose intended by PASAR due to
contamination with seawater. Hence, there is no basis for the goods rejection
under Article 365 of the Code of Commerce. Clearly, it is erroneous for Malayan
to reimburse PASAR as though the latter suffered from total loss of goods in the
absence of proof that PASAR sustained such kind of loss. Otherwise, there will be
no difference in the indemnification of goods which were not delivered at all; or
delivered but rendered useless, compared against those which were delivered
albeit, there is diminution in value.
Malayan also failed to establish the legal basis of its decision to sell back
the rejected copper concentrates to PASAR. It cannot be ascertained how and
when Malayan deemed itself as the owner of the rejected copper concentrates to
have these validly disposed of. If the goods were rejected, it only means there
was no acceptance on the part of PASAR from the carrier. Furthermore, PASAR
and Malayan simply agreed on the purchase price of US$90,000.00 without any
allegation or proof that the said price was the depreciated value based on the
appraisal of experts as provided under Article 364 of the Code of Commerce.
BILL OF LADING
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EASTERN SHIPPING LINES, INC. vs. BPI/MS INSURANCE CORP., &MITSUI
SUMITOMO INSURANCE CO., LTD.,
G.R. No. 182864, January 12, 2015, J. Perez
Mere proof of delivery of the goods in good order to a common carrier and
of their arrival in bad order at their destination constitutes a prima facie case of
fault or negligence against the carrier. If no adequate explanation is given as to
how the deterioration, loss, or destruction of the goods happened, the transporter
shall be held responsible. In this case, the fault is attributable to ESLI.
Facts:
BPI/MS and Mitsui alleged that on 2 February 2004 at Yokohama, Japan,
Sumitomo Corporation shipped on board Eastern Shipping Lines vessel M/V
Eastern Venus 22 22 coils of various Steel Sheet weighing in good order and
condition for transportation to and delivery at the port of Manila in favor of
consignee Calamba Steel Center, Inc. The declared value of the shipment was
US$83,857.59. The shipment was insured with the BPI/MS and Mitsui against all
risks under Marine Policy No. 103-GG03448834. The complaint alleged that the
shipment arrived and upon withdrawal of the shipment by the Calamba Steels
representative, it was found out that part of the shipment was damaged and was
in bad order condition such that there was a Request for Bad Order Survey. It
was found out that the damage amounted to US$4,598.85 prompting Calamba
Steel to reject the damaged shipment for being unfit for the intended purpose.
On 12 May 2004, Sumitomo Corporation again shipped on board ESLIs vessel
M/V Eastern Venus 25 50 coils in various Steel Sheet weighing 383,532
kilograms in good order and condition for transportation to and delivery at the
port of Manila, Philippines in favor of the same consignee Calamba Steel. The
shipment was insured with the BPI/MS and Mitsui against all risks under Marine
Policy No. 104-GG04457785. ESLIs vessel with the second shipment arrived at
the port of Manila partly damaged and in bad order. The coils sustained further
damage during the discharge from vessel to shore until its turnover to ATIs
custody for safekeeping. Upon withdrawal from ATI and delivery to Calamba
Steel, it was found out that the damage amounted to US$12,961.63. As it did
before, Calamba Steel rejected the damaged shipment for being unfit for the
intended purpose.
Calamba Steel attributed the damages on both shipments to ESLI as the
carrier and ATI as the arrastre operator in charge of the handling and discharge
of the coils and filed a claim against them. When ESLI and ATI refused to pay,
Calamba Steel filed an insurance claim for the total amount of the cargo against
BPI/MS and Mitsui as cargo insurers. As a result, BPI/MS and Mitsui became
subrogated in place of and with all the rights and defenses accorded by law in
favor of Calamba Steel.
BPI/MS and Mitsui filed a Complaint before the RTC of Makati City
against ESLI and ATI to recover actual damages amounting to US$17,560.48 with
legal interest, attorneys fees and costs of suit. ATI, in its Answer, denied the
allegations and insisted that the coils in two shipments were already damaged
upon receipt from ESLIs vessels. It likewise insisted that it exercised due
diligence in the handling of the shipments and invoked that in case of adverse
decision. On its part, ESLI denied the allegations of the complainants and averred
that the damage to both shipments was incurred while the same were in the
possession and custody of ATI and/or of the consignee or its representatives.
BPI/MS and Mitsui, to substantiate their claims, submitted the Affidavits
of (1) Manuel, the Cargo Surveyor of Philippine Japan Marine Surveyors and
Sworn Measurers Corporation who personally examined and conducted the
surveys on the two shipments; (2) Richatto P. Almeda, the General Manager of
Calamba Steel who oversaw and examined the condition, quantity, and quality of
the shipped steel coils, and who thereafter filed formal notices and claims against
ESLI and ATI; and (3) Virgilio G. Tiangco, Jr., the Marine Claims Supervisor of
BPI/MS who processed the insurance claims of Calamba Steel. Along with the
Affidavits were the Bills of Lading covering the two shipments, Invoices, Notices
of Loss of Calamba Steel, Subrogation Form, Insurance Claims, Survey
Reports, Turn Over Survey of Bad Order Cargoes and Request for Bad Order
Survey.
ESLI, in turn, submitted the Affidavits of Captain Hermelo M. Eduarte,
who monitored in coordination with ATI the discharge of the two shipments, and
Rodrigo Victoria who personally surveyed the subject cargoes on board the
vessel as well as the manner the ATI employees discharged the coils. Lastly, ATI
submitted the Affidavits of its Bad Order Inspector Ramon Garcia and Claims
Officer Ramiro De Vera.
RTC Makati City rendered a decision finding both the ESLI and ATI liable
for the damages sustained by the two shipments. On appeal, ESLI argued that the
trial court erred when it found BPI/MS has the capacity to sue and when it
assumed jurisdiction over the case. It also questioned the ruling on its liability
since the Survey Reports indicated that the cause of loss and damage was due to
the rough handling of ATIs stevedores during discharge from vessel to shore and
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during loading operation onto the trucks. It invoked the limitation of liability of
US$500.00 per package as provided in Commonwealth Act No. 65 or the Carriage
of Goods by Sea Act (COGSA). The CA denied the appeal of ESLI while granted
that of ATI.
Issue:
Whether or not CA correctly ruled that ESLI is liable.
Ruling:
On the liability of ESLI
ESLI bases of its non-liability on the survey reports prepared by BPI/MS
and Mitsuis witness Manuel which found that the cause of damage was the
rough handling on the shipment by the stevedores of ATI during the discharging
operations. However, Manuel does not absolve ESLI of liability. The witness in
fact includes ESLI in the findings of negligence. As stated in the affidavit of
Manuel: During the aforesaid operations, the employees and forklift
operators of ESLI and ATI were very negligent in the handling of the subject
cargoes. ESLI cites the affidavit of its witness Rodrigo who stated that the cause
of the damage was the rough mishandling by ATIs stevedores. As Rodrigo
admits, it was also his duty to inspect and monitor the cargo on-board upon
arrival of the vessel. ESLI cannot invoke its non-liability solely on the manner the
cargo was discharged and unloaded. The actual condition of the cargoes upon
arrival prior to discharge is equally important and cannot be disregarded. Proof
is needed that the cargo arrived at the port of Manila in good order condition and
remained as such prior to its handling by ATI.
Based on the bills of lading issued, it is undisputed that ESLI received the
two shipments of coils from shipper Sumitomo Corporation in good condition at
the ports of Yokohama and Kashima, Japan. However, upon arrival at the port of
Manila, some coils from the two shipments were partly dented and crumpled as
evidenced turn over survey of bad cargoes signed by ESLIs representatives, a
certain Tabanao and Rodrigo together with ATIs representative Garcia.
According to the report, four coils and one skid were partly dented and crumpled
prior to turnover by ESLI to ATIs possession while a total of eleven coils were
partly dented and crumpled prior to turnover.
Mere proof of delivery of the goods in good order to a common carrier
and of their arrival in bad order at their destination constitutes a prima facie case
of fault or negligence against the carrier. If no adequate explanation is given as to
how the deterioration, loss, or destruction of the goods happened, the
transporter shall be held responsible. From the foregoing, the fault is attributable
to ESLI.
Limitation of Liability
ESLI assigns as error the appellate courts finding and reasoning that the
package limitation under the COGSA is inapplicable even if the bills of lading
covering the shipments only made reference to the corresponding invoices. ESLI
argues that the value of the cargoes was not incorporated in the bills of lading
and that there was no evidence that the shipper had presented to the carrier in
writing prior to the loading of the actual value of the cargo, and, that there was a
no payment of corresponding freight
The New Civil Code provides that a stipulation limiting a common
carriers liability to the value of the goods appearing in the bill of lading is
binding, unless the shipper or owner declares a greater value. In addition, a
contract fixing the sum that may be recovered by the owner or shipper for the
loss, destruction, or deterioration of the goods is valid, if it is reasonable and just
under the circumstances, and has been fairly and freely agreed upon. COGSA, on
the other hand, provides under Section 4, Subsection 5 that an amount
recoverable in case of loss or damage shall not exceed US$500.00 per package or
per customary freight unless the nature and value of such goods have been
declared by the shipper before shipment and inserted in the bill of lading.
The Code takes precedence as the primary law over the rights and obligations of
common carriers with the Code of Commerce and COGSA applying suppletorily.
ESLI contends that there must be an insertion of this declaration in the
bill of lading itself to fall outside the statutory limitation of liability.
The bills of lading represent the formal expression of the parties rights,
duties and obligations. It is the best evidence of the intention of the parties which
is to be deciphered from the language used in the contract, not from the
unilateral post facto assertions of one of the parties, or of third parties who are
strangers to the contract.
As to the non-declaration of the value of the goods on the second bill of
lading, there is no error on the part of the appellate court when it ruled that
there was a compliance of the requirement provided by COGSA. The declaration
requirement does not require that all the details must be written down on the
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very bill of lading itself. It must be emphasized that all the needed details are in
the invoice, which contains the itemized list of goods shipped to a buyer, stating
quantities, prices, shipping charges, and other details which may contain
numerous sheets. Compliance can be attained by incorporating the invoice, by
way of reference, to the bill of lading provided that the former containing the
description of the nature, value and/or payment of freight charges is as in this
case duly admitted as evidence. A review of the bill of ladings and invoice on the
second shipment indicates that the shipper declared the nature and value of the
goods with the corresponding payment of the freight on the bills of lading.
Further, under the caption description of packages and goods, it states that the
description of the goods to be transported as various steel sheet in coil with a
gross weight of 383,532 kilograms (89.510 M3). On the other hand, the amount
of the goods is referred in the invoice, the due execution and genuineness of
which has already been admitted by ESLI, is US$186,906.35 as freight on board
with payment of ocean freight of US$32,736.06 and insurance premium of
US$1,813.17. From the foregoing, the Court ruled that the non- limitation of
liability applies in the present case.
NEGOTIABLE INSTRUMENTS LAW
HOLDER IN DUE COURSE
ALVIN PATRIMONIO vs. NAPOLEON GUTIERREZ AND OCTAVIO MARASIGAN
III
G.R. No. 187769, June 4, 2014, J. Brion
Arguing that Gutierrez is not a holder in due course, Patrimonio filed the
instant petition praying that the ruling of the CA, ordering him to pay Gutierrez, be
reversed. Ruling in favor of the Patrimonio the SC ruled that Section 52(c) of the
NIL states that a holder in due course is one who takes the instrument "in good
faith and for value." Acquisition in good faith means taking without knowledge or
notice of equities of any sort which could be set up against a prior holder of the
instrument. It means that he does not have any knowledge of fact which would
render it dishonest for him to take a negotiable paper. The absence of the defense,
when the instrument was taken, is the essential element of good faith. In this case,
after having been found out that the blanks were not filled up in accordance with
the authority the Patrimonio gave, Gutierrez has no right to enforce payment
against Patrimonio, thus, the latter cannot be obliged to pay the face value of the
check.
Facts:
Patrimonio and Gutierrez entered in a business venture under the name
of Slam Dunk Corporation, a corporation which produces mini-concerts and
shows related to basketball. In the course of their business, Patrimonio pre-
signed several checks to answer for the expenses of their business. Although
signed, these checks had no payees name, date or amount. The blank checks
were entrusted to Gutierrez with the specific instruction not to fill them out
without previous notification to and approval by Patrimonio. However, in the
middle of 1993, without Patrimonios knowledge and consent, Gutierrez went to
Marasigan (Patrimonios former teammate), to secure a loan in the amount
of P200,000.00 alleging that Patrimonio needed the money for the construction
of his house. Marasigan agreed to the request and gave him P 200, 000.
Consequently, Guitierrez delivered to Marasigan one of the pre-signed blank
checks with the blank portions filled out with the words "Cash" "Two Hundred
Thousand Pesos Only", and the amount of "P200,000.00". The portion of the
check corresponding to the date was also filled out with the words "May 23,
1994".
When Marasigan deposited the check, the same was dishonored for the
reason of Account Closed. Thereafter, Marasigan sought recovery from Gutierrez
but to no avail. He then sent several demand letters to Patrimonio asking for
payment but his demands likewise went unheeded. Consequently, he filed a
criminal case for violation of B.P. 22 against Patrimonio. Thereafter, Patrimonio
filed before the RTC a complaint for the declaration of nullity of the loan and
recovery of damages against herein Gutierrez and Marasigan. Patrmonio
completely denied authorizing the loan or the checks negotiation, and asserted
that he was not privy to the parties loan agreement.
The RTC ruled in favor of Marasigan. It declared Marasigan as a holder in
due course and dismissed Patrimonios complaint. It further ordered Patrimonio
to pay Marasigan the face value of the check with a right to claim reimbursement
from Gutierrez. On appeal, the CA affirmed the ruling of the RTC but agreed with
Patrimonio that Marasigan is not a holder in due course. However, since the loan
is grounded on an obligation arising from law, it held that it cannot be nullified
and that Patrimonio is still liable to pay Marasigan the sum of P 200, 000. Hence,
this petition.
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Issues:
1. Whether Marasigan is a holder in due course.
2. Whether respondent Gutierrez has completely filled out the subject check
strictly under the authority given by Patrimonio.
Ruling:
1. No. Marasigan is Not a Holder in Due Course
The Negotiable Instruments Law (NIL) defines a holder in due course,
thus:
Sec. 52 A holder in due course is a holder who has taken the instrument under
the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating
it.
Acquisition in good faith means taking without knowledge or notice of
equities of any sort which could be set up against a prior holder of the
instrument. It means that he does not have any knowledge of fact which would
render it dishonest for him to take a negotiable paper. The absence of the
defense, when the instrument was taken, is the essential element of good faith.
Since he (Marasigan) knew that the underlying obligation was not
actually for Patrimonio, the rule that a possessor of the instrument is prima facie
a holder in due course is inapplicable. As correctly noted by the CA, his inaction
and failure to verify, despite knowledge that Patrimonio was not a party to the
loan, may be construed as gross negligence amounting to bad faith.
2. No, the Check Was Not Completed Strictly Under The Authority Given
by Patrimonio.
The answer is supplied by the applicable statutory provision found in
Section 14 of the Negotiable Instruments Law (NIL) which states:
Sec. 14. Blanks; when may be filled.- Where the instrument is wanting in
any material particular, the person in possession thereof has a prima
facie authority to complete it by filling up the blanks therein. And a
signature on a blank paper delivered by the person making the signature
in order that the paper may be converted into a negotiable instrument
operates as a prima facie authority to fill it up as such for any amount. In
order, however, that any such instrument when completed may be
enforced against any person who became a party thereto prior to its
completion, it must be filled up strictly in accordance with the authority
given and within a reasonable time. But if any such instrument, after
completion, is negotiated to a holder in due course, it is valid and
effectual for all purposes in his hands, and he may enforce it as if it had
been filled up strictly in accordance with the authority given and within a
reasonable time.
This provision applies to an incomplete but delivered instrument. Under
this rule, if the maker or drawer delivers a pre-signed blank paper to another
person for the purpose of converting it into a negotiable instrument, that person
is deemed to have prima facie authority to fill it up. It merely requires that the
instrument be in the possession of a person other than the drawer or maker and
from such possession, together with the fact that the instrument is wanting in a
material particular, the law presumes agency to fill up the blanks.
In order however that one who is not a holder in due course can enforce
the instrument against a party prior to the instruments completion, two
requisites must exist: (1) that the blank must be filled strictly in accordance with
the authority given; and (2) it must be filled up within a reasonable time. If it was
proven that the instrument had not been filled up strictly in accordance with the
authority given and within a reasonable time, the maker can set this up as a
personal defense and avoid liability. However, if the holder is a holder in due
course, there is a conclusive presumption that authority to fill it up had been
given and that the same was not in excess of authority.
While under the law, Gutierrez had a prima facie authority to complete
the check, such prima facie authority does not extend to its use (i.e., subsequent
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transfer or negotiation) once the check is completed. In other words, only the
authority to complete the check is presumed. Further, the law used the term
"prima facie" to underscore the fact that the authority which the law accords to a
holder is a presumption juris tantum only; hence, subject to subject to contrary
proof. Thus, evidence that there was no authority or that the authority granted
has been exceeded may be presented by the maker in order to avoid liability
under the instrument.
Notably, Gutierrez was only authorized to use the check for business
expenses; thus, he exceeded the authority when he used the check to pay the
loan he supposedly contracted for the construction of Patrimonio's house. This is
a clear violation of Patrimonio 's instruction to use the checks for the expenses of
Slam Dunk. It cannot therefore be validly concluded that the check was
completed strictly in accordance with the authority given by Patrimonio.
Considering that Marasigan is not a holder in due course, Patrimonio can
validly set up the personal defense that the blanks were not filled up in
accordance with the authority he gave. Consequently, Marasigan has no right to
enforce payment against Patrimonio and the latter cannot be obliged to pay the
face value of the check.
MATERIAL ALTERATION
CESAR V. AREZA and LOLITA B. AREZA vs. EXPRESS SAVINGS BANK, INC. and
MICHAEL POTENCIANO
G.R. No. 176697, September 10, 2014, J. PEREZ
When the drawee bank pays a materially altered check, it violates the
terms of the check, as well as its duty to charge its clients account only for bona
fide disbursements he had made. If the drawee did not pay according to the original
tenor of the instrument, as directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the right to deduct the erroneous
payment it made from the drawers account which it was expected to treat with
utmost fidelity. The drawee, however, still has recourse to recover its loss. The
collecting banks are ultimately liable for the amount of the materially altered
check. It cannot further pass the liability back to Cesar and Lolita absent any
showing in the negligence on the part of Cesar and Lolita which substantially
contributed to the loss from alteration.
Facts:
Cesar V. Areza and Lolita B. Areza maintained two bank deposits with
Express Savings Banks Bian branch (the Bank).
They were engaged in the business of "buy and sell" of brand new and
second-hand motor vehicles. On 2 May 2000, they received an order from a
certain Gerry Mambuay (Mambuay) for the purchase of a second-hand
Mitsubishi Pajero and a brand-new Honda CRV.
The buyer, Mambuay, paid Cesar and Lolita with nine (9) Philippine
Veterans Affairs Office (PVAO) checks payable to different payees and drawn
against the Philippine Veterans Bank (drawee), each valued at Two Hundred
Thousand Pesos (P200,000.00) for a total of One Million Eight Hundred
Thousand Pesos (P1,800,000.00).
About this occasion, Cesar and Lolita claimed that Michael Potenciano
(Potenciano), the branch manager of the Bank was present during the
transaction and immediately offered the services of the Bank for the processing
and eventual crediting of the said checks to Cesar and Lolita account. On the
other hand, Potenciano countered that he was prevailed upon to accept the
checks by way of accommodation of Cesar and Lolita who were valued clients of
the Bank.
On 3 May 2000, Cesar and Lolita deposited the said checks in their
savings account with the Bank. The Bank, in turn, deposited the checks with its
depositary bank, Equitable-PCI Bank, in Bian, Laguna. Equitable-PCI Bank
presented the checks to the drawee, the Philippine Veterans Bank, which
honored the checks.
On 6 May 2000, Potenciano informed Cesar and Lolita that the checks
they deposited with the Bank were honored. He allegedly warned Cesar and
Lolita that the clearing of the checks pertained only to the availability of funds
and did not mean that the checks were not infirmed. Thus, the entire amount
of P1,800,000.00 was credited to Cesar and Lolita savings account. Based on this
information, Cesar and Lolita released the two cars to the buyer.
Sometime in July 2000, the subject checks were returned by PVAO to the
drawee on the ground that the amount on the face of the checks was altered from
the original amount of P4,000.00 to P200,000.00. The drawee returned the
checks to Equitable-PCI Bank by way of Special Clearing Receipts. In August
2000, the Bank was informed by Equitable-PCI Bank that the drawee dishonored
the checks on the ground of material alterations. Equitable-PCI Bank initially
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filed a protest with the Philippine Clearing House. In February 2001, the latter
ruled in favor of the drawee Philippine Veterans Bank. Equitable-PCI Bank, in
turn, debited the deposit account of the Bank in the amount of P1,800,000.00.
The Bank insisted that they informed Cesar and Lolita of said
development in August 2000 by furnishing them copies of the documents given
by its depositary bank. On the other hand, Cesar and Lolita maintained that the
Bank never informed them of these developments.
On 9 March 2001, Cesar and Lolita issued a check in the amount
of P500,000.00. Said check was dishonored by the Bank for the reason "Deposit
Under Hold." According to Cesar and Lolita, the Bank unilaterally and unlawfully
put their account with the Bank on hold. On 22 March 2001, Cesar and Lolita
counsel sent a demand letter asking the Bank to honor their check. The Bank
refused to heed their request and instead, closed the Special Savings Account of
the Cesar and Lolita with a balance of P1,179,659.69 and transferred said
amount to their savings account. The Bank then withdrew the amount
of P1,800,000.00 representing the returned checks from Cesar and Lolita
savings account.
Acting on the alleged arbitrary and groundless dishonoring of their
checks and the unlawful and unilateral withdrawal from their savings account,
Cesar and Lolita filed a Complaint for Sum of Money with Damages against the
Bank and Potenciano with the RTC of Calamba. The RTC ruled in favor of Cesar
and Lolita.
Express Savings Bank and Potenciano filed a motion for reconsideration
while Cesar and Lolita filed a motion for execution from the Decision of the RTC.
On appeal, the Court of Appeals affirmed the ruling of the trial court but deleted
the award of damages. Hence, Cesar and Lolita filed the present petition for
review on certiorari.
Issues:
1. Whether or not the Bank had the right to debit P1,800,000.00 from
Cesar and Lolita accounts.
2. What are the liabilities of the drawee, the intermediary banks, and the
Cesar and Lolita for the altered checks?
Ruling:
The Bank cannot debit the savings account of Cesar and Lolita.
When the drawee bank pays a materially altered check, it violates the
terms of the check, as well as its duty to charge its clients account only for bona
fide disbursements he had made. If the drawee did not pay according to the
original tenor of the instrument, as directed by the drawer, then it has no right to
claim reimbursement from the drawer, much less, the right to deduct the
erroneous payment it made from the drawers account which it was expected to
treat with utmost fidelity. The drawee, however, still has recourse to recover its
loss. It may pass the liability back to the collecting bank which is what the
drawee bank exactly did in this case. It debited the account of Equitable-PCI Bank
for the altered amount of the checks.
When Cesar and Lolita deposited the check with the Bank, they were
designating the latter as the collecting bank. This is in consonance with the rule
that a negotiable instrument, such as a check, whether a manager's check or
ordinary check, is not legal tender. As such, after receiving the deposit, under its
own rules, the Bank shall credit the amount in Cesar and Lolita account or infuse
value thereon only after the drawee bank shall have paid the amount of the check
or the check has been cleared for deposit.
As collecting banks, the Bank and Equitable-PCI Bank are both liable for
the amount of the materially altered checks. Since Equitable-PCI Bank is not a
party to this case and the Bank allowed its account with Equitable PCI Bank to be
debited, it has the option to seek recourse against the latter in another forum.
As the rule now stands, the 24-hour rule is still in force, that is, any
check which should be refused by the drawee bank in accordance with long
standing and accepted banking practices shall be returned through the
PCHC/local clearing office, as the case may be, not later than the next regular
clearing (24-hour). The modification, however, is that items which have been the
subject of material alteration or bearing forged endorsement may be returned
even beyond 24 hours so long that the same is returned within the prescriptive
period fixed by law. The consensus among lawyers is that the prescriptive period
is ten (10) years because a check or the endorsement thereon is a written
contract. Moreover, the item need not be returned through the clearing house
but by direct presentation to the presenting bank. In short, the 24-hour clearing
rule does not apply to altered checks.
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The Bank cannot debit the savings account of Cesar and Lolita. A
depositary/collecting bank may resist or defend against a claim for breach of
warranty if the drawer, the payee, or either the drawee bank or depositary bank
was negligent and such negligence substantially contributed to the loss from
alteration. In the instant case, no negligence can be attributed to Cesar and Lolita.
The drawee bank, Philippine Veterans Bank in this case, is only liable to
the extent of the check prior to alteration. Since Philippine Veterans Bank paid
the altered amount of the check, it may pass the liability back as it did, to
Equitable-PCI Bank, the collecting bank. The collecting banks, Equitable-PCI Bank
and the Bank, are ultimately liable for the amount of the materially altered check.
It cannot further pass the liability back to the Cesar and Lolita absent any
showing in the negligence on the part of the Cesar and Lolita which substantially
contributed to the loss from alteration.
CHECKS
METROPOLITAN BANK AND TRUST COMPANY vs. WILFRED N. CHIOK
BANK OF THE PHILIPPINE ISLANDS vs. WILFRED N. CHIOK
GLOBAL BUSINESS BANK, INC. vs. WILFRED N. CHIOK
G.R. No. 172652, G.R. No. 175302, G.R. No. 175394, November 26, 2014, J.
LEONARDO-DE CASTRO
Clearing should not be confused with acceptance. Managers and cashiers
checks are still the subject of clearing to ensure that the same have not been
materially altered or otherwise completely counterfeited. However, managers and
cashiers checks are pre-accepted by the mere issuance thereof by the bank, which
is both its drawer and drawee. Thus, while managers and cashiers checks are still
subject to clearing, they cannot be countermanded for being drawn against a
closed account, for being drawn against insufficient funds, or for similar reasons
such as a condition not appearing on the face of the check. Long standing and
accepted banking practices do not countenance the countermanding of managers
and cashiers checks on the basis of a mere allegation of failure of the payee to
comply with its obligations towards the purchaser. On the contrary, the accepted
banking practice is that such checks are as good as cash. However, in view of the
peculiar circumstances of the case at bench, We are constrained to set aside the
foregoing concepts and principles in favor of the exercise of the right to rescind a
contract upon the failure of consideration thereof.
Facts:
Wilfred N. Chiok (Chiok) had been engaged in dollar trading for several
years. He usually buys dollars from Gonzalo B. Nuguid (Nuguid) at the exchange
rate prevailing on the date of the sale. Chiok pays Nuguid either in cash or
managers check, to be picked up by the latter or deposited in the latters bank
account. Nuguid delivers the dollars either on the same day or on a later date as
may be agreed upon between them, up to a week later. Chiok and Nuguid had
been dealing in this manner for about six to eight years, with their transactions
running into millions of pesos. For this purpose, Chiok maintained accounts with
Metropolitan Bank and Trust Company (Metrobank) and Global Business Bank,
Inc. (Global Bank), the latter being then referred to as the Asian Banking
Corporation (Asian Bank). Chiok likewise entered into a Bills Purchase Line
Agreement (BPLA) with Asian Bank. Under the BPLA, checks drawn in favor of,
or negotiated to, Chiok may be purchased by Asian Bank. Upon such purchase,
Chiok receives a discounted cash equivalent of the amount of the check earlier
than the normal clearing period.
On July 5, 1995, pursuant to the BPLA, Asian Bank bills purchased
Security Bank & Trust Company (SBTC) Managers Check (MC) No. 037364 in the
amount of P25,500,000.00 issued in the name of Chiok, and credited the same
amount to the latters Savings Account No. 2-007-03-00201-3.
On the same day, July 5, 1995, Asian Bank issued MC No. 025935 in the
amount of P7,550,000.00 and MC No. 025939 in the amount of P10,905,350.00 to
Gonzalo Bernardo, who is the same person as Gonzalo B. Nuguid. The two Asian
Bank managers checks, with a total value of P18,455,350.00 were issued
pursuant to Chioks instruction and was debited from his account. Likewise upon
Chioks application, Metrobank issued Cashiers Check (CC) No. 003380 in the
amount of P7,613,000.00 in the name of Gonzalo Bernardo. The same was
debited from Chioks Savings Account No. 154-42504955.
Chiok then deposited the three checks (Asian Bank MC Nos. 025935 and
025939, and Metrobank CC No. 003380), with an aggregate value of
P26,068,350.00 in Nuguids account with Far East Bank & Trust Company
(FEBTC), the predecessor-in-interest of
Bank of the Philippine Islands (BPI). Nuguid was supposed to deliver
US$1,022,288.50, the dollar equivalent of the three checks as agreed upon, in the
afternoon of the same day. Nuguid, however, failed to do so, prompting Chiok to
request that payment on the three checks be stopped. Chiok was allegedly
advised to secure a court order within the 24-hour clearing period.
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On the following day, July 6, 1995, Chiok filed a Complaint for damages
with application for ex parterestraining order and/or preliminary injunction
with the Regional Trial Court (RTC) of Quezon City against the spouses Gonzalo
and Marinella Nuguid, and the depositary banks, Asian Bank and Metrobank,
represented by their respective managers, Julius de la Fuente and Alice Rivera.
The complaint was docketed as Civil Case No. Q-95-24299 and was raffled to
Branch 96. The complaint was later amended to include the prayer of Chiok to be
declared the legal owner of the proceeds of the subject checks and to be allowed
to withdraw the entire proceeds thereof.
On the same day, July 6, 1995, the RTC issued a temporary restraining
order (TRO) directing the spouses Nuguid to refrain from presenting the said
checks for payment and the depositary banks from honoring the same until
further orders from the court.
Asian Bank refused to honor MC Nos. 025935 and 025939 in deference
to the TRO. Metrobank claimed that when it received the TRO on July 6, 1995, it
refused to honor CC No. 003380 and stopped payment thereon. However, in a
letter also dated July 6, 1995, Ms. Jocelyn T. Paz of FEBTC, Cubao-Araneta Branch
informed Metrobank that the TRO was issued a day after the check was
presented for payment. Thus, according to Paz, the transaction was already
consummated and FEBTC had already validly accepted the same. In another
letter, FEBTC informed Metrobank that the restraining order indicates the name
of the payee of the check as GONZALO NUGUID, but the check is in fact payable to
GONZALO BERNARDO. We believe there is a defect in the restraining order and
as such should not bind your bank. Alice Rivera of Metrobank replied to said
letters, reiterating Metrobanks position to comply with the TRO lest it be cited
for contempt by the trial court. However, as would later be alleged in
Metrobanks Answer before the trial court, Metrobank eventually acknowledged
the check when it became clear that nothing more can be done to retrieve the
proceeds of the check. Metrobank furthermore claimed that since it is the issuer
of CC No. 003380, the check is its primary obligation and should not be affected
by any prior transaction between the purchaser (Chiok) and the payee (Nuguid).
In the meantime, FEBTC, as the collecting bank, filed a complaint against
Asian Bank before the Philippine Clearing House Corporation (PCHC) Arbitration
Committee for the collection of the value of Asian Bank MC No. 025935 and
025939, which FEBTC had allegedly allowed Nuguid to withdraw on July 5, 1995,
the same day the checks were deposited. The case was docketed as Arbicom Case
No. 95-082. The PCHC Arbitration Committee later relayed, in a letter dated
August 4, 1995, its refusal to assume jurisdiction over the case on the ground
that any step it may take might be misinterpreted as undermining the
jurisdiction of the RTC over the case or a violation of the July 6, 1995 TRO.
On July 25, 1995, the RTC issued an Order directing the issuance of a writ of
preliminary prohibitory injunction. On May 5, 2006, the Court of Appeals
rendered the assailed Decision affirming the RTC Decision with modifications.
Global Bank and BPI filed separate Motions for Reconsideration of the
May 5, 2006 Court of Appeals Decision. On November 6, 2006, the Court of
Appeals denied the Motions for Reconsideration.
Metrobank (G.R. No. 172652), BPI (G.R. No. 175302), and Global Bank
(G.R. No. 175394) filed with this Court separate Petitions for Review
on Certiorari. In Resolutions dated February 21, 2007 and March 12, 2007, this
Court resolved to consolidate the three petitions.
Issues:
1. Whether or not payment of managers and cashiers checks are subject
to the condition that the payee thereof should comply with his
obligations to the purchaser of the checks.
2. Whether or not the purchaser of managers and cashiers checks has the
right to have the checks cancelled by filing an action for rescission of its
contract with the payee.
3. Whether or not the peculiar circumstances of this case justify the
deviation from the general principles on causes and effects of managers
and cashiers checks.
Ruling:
1.
The legal effects of a managers check and a cashiers check are the same.
A managers check, like a cashiers check, is an order of the bank to pay, drawn
upon itself, committing in effect its total resources, integrity, and honor behind
its issuance. By its peculiar character and general use in commerce, a managers
check or a cashiers check is regarded substantially to be as good as the money it
represents.
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The RTC effectively ruled that payment of managers and cashiers
checks are subject to the condition that the payee thereof complies with his
obligations to the purchaser of the checks.
The dedication of such
checks pursuant to specific reciprocal undertakings between their purchasers and
payees authorizes rescission by the former to prevent substantial and material
damage to themselves, which authority includes stopping the payment of the
checks.
Moreover, it seems to be fallacious to hold that the unconditional
payment of managers and cashiers checks is the rule. To begin with, both
managers and cashiers checks are still subject to regular clearing under the
regulations of the Bangko Sentral ng Pilipinas, a fact borne out by the BSP
manual for banks and intermediaries, which provides, among others, in its
Section 1603.1, c.
It goes without saying that under the aforecited clearing rule, the
enumeration of causes to return checks is not exclusive but may include other
causes which are consistent with long standing and accepted banking practices.
The reason of plaintiffs can well constitute such a justifiable cause to enjoin
payment.
The RTC made an error at this point. While indeed, it cannot be said that
managers and cashiers checks are pre-cleared, clearing should not be confused
with acceptance. Managers and cashiers checks are still the subject of clearing
to ensure that the same have not been materially altered or otherwise
completely counterfeited. However, managers and cashiers checks are pre-
accepted by the mere issuance thereof by the bank, which is both its drawer and
drawee. Thus, while managers and cashiers checks are still subject to clearing,
they cannot be countermanded for being drawn against a closed account, for
being drawn against insufficient funds, or for similar reasons such as a condition
not appearing on the face of the check. Long standing and accepted banking
practices do not countenance the countermanding of managers and cashiers
checks on the basis of a mere allegation of failure of the payee to comply with its
obligations towards the purchaser. On the contrary, the accepted banking
practice is that such checks are as good as cash.
2.
The right to rescind invoked by the Court of Appeals is provided by
Article 1191 of the Civil Code.
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.
The cause of action supplied by the above article, however, is clearly
predicated upon the reciprocity of the obligations of the injured party and the
guilty party. Reciprocal obligations are those which arise from the same cause,
and in which each party is a debtor and a creditor of the other, such that the
obligation of one is dependent upon the obligation of the other. They are to be
performed simultaneously such that the performance of one is conditioned upon
the simultaneous fulfillment of the other. When Nuguid failed to deliver the
agreed amount to Chiok, the latter had a cause of action against Nuguid to ask for
the rescission of their contract. On the other hand, Chiok did not have a cause of
action against Metrobank and Global Bank that would allow him to rescind the
contracts of sale of the managers or cashiers checks, which would have resulted
in the crediting of the amounts thereof back to his accounts.
Otherwise stated, the right of rescission under Article 1191 of the Civil
Code can only be exercised in accordance with the principle of relativity of
contracts under Article 1131 of the same code.
3.
In view of the peculiar circumstances of this case, and in the interest of
substantial justice, the Court is constrained to rule in the affirmative.
The Court does not detract from well-settled concepts and principles in
commercial law regarding the nature, causes and effects of a managers check
and cashiers check. Such checks are primary obligations of the issuing bank and
accepted in advance by the mere issuance thereof. They are a banks order to pay
drawn upon itself, committing in effect its total resources, integrity, and honor.
By their peculiar character and general use in the commercial world, they are
regarded substantially as good as the money they represent. However, in view of
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the peculiar circumstances of the case at bench, the Court is constrained to set
aside the foregoing concepts and principles in favor of the exercise of the right to
rescind a contract upon the failure of consideration thereof.
In deviating from general banking principles and disposing the case on
the basis of equity, the courtsa quo should have at least ensured that their
dispositions were indeed equitable. This Court observes that equity was not
served in the dispositions below wherein Nuguid, the very person found to have
violated his contract by not delivering his dollar obligation, was absolved from
his liability, leaving the banks who are not parties to the contract to suffer the
losses of millions of pesos.
Asian Bank, which is now Global Bank, obeyed the TRO and denied the
clearing of the managers checks. As such, Global Bank may not be held liable on
account of the knowledge of whatever else Chiok told them when he asked for
the procedure to secure a Stop Payment Order. On the other hand, there was no
mention that Metrobank was ever notified of the alleged failure of consideration.
Only Asian Bank was notified of such fact. Furthermore, the mere allegation of
breach on the part of the payee of his personal contract with the purchaser
should not be considered a sufficient cause to immediately nullify such checks,
thereby eroding their integrity and honor as being as good as cash.
INSURANCE LAW
PRESCRIPTION OF ACTION
H.H. HOLLERO CONSTRUCTION, INC. vs. GOVERNMENT SERVICE INSURANCE
SYSTEM and POOL OF MACHINERY INSURERS
G.R. No. 152334, September 24, 2014, J. Perlas-Bernabe
The prescriptive period for the insureds action for indemnity should be
reckoned from the "final rejection" of the claim. "Final rejection" simply means
denial by the insurer of the claims of the insured and not the rejection or denial by
the insurer of the insureds motion or request for reconsideration. A perusal of the
letter dated April 26, 1990 shows that the GSIS denied Hollero Constructions
indemnity claims. The same conclusion obtains for the letter dated June 21, 1990
denying Hollero Constructions indemnity claim. Holler's causes of action for
indemnity respectively accrued from its receipt of the letters dated April 26, 1990
and June 21, 1990, or the date the GSIS rejected its claims in the first instance.
Consequently, given that it allowed more than twelve (12) months to lapse before
filing the necessary complaint before the RTC on September 27, 1991, its causes of
action had already prescribed.
Facts:
The GSIS and Hollero Construction entered into a Project Agreement
whereby the latter undertook the development of a GSIS housing project known
as Modesta Village Section B. Hollero obligated itself to insure the Project,
including all the improvements, upon the execution of the Agreement under a
Contractors All Risks (CAR) Insurance with the GSIS General Insurance
Department for an amount equal to its cost or sound value, which shall not be
subject to any automatic annual reduction.
Pursuant to its undertaking, Holler secured a CAR Policy for land
development and for the construction of twenty (20) housing units. In turn, the
GSIS reinsured the CAR Policy with Pool of Machinery Insurers. Under both
policies, it was provided that: (a) there must be prior notice of claim for loss,
damage or liability within fourteen (14) days from the occurrence of the loss or
damage; (b) all benefits thereunder shall be forfeited if no action is instituted
within twelve(12) months after the rejection of the claim for loss, damage or
liability; and (c) if the sum insured is found to be less than the amount required
to be insured, the amount recoverable shall be reduced to such proportion
before taking into account the deductibles stated in the schedule (average clause
provision).
During the construction, three (3) typhoons hit the country, namely,
Typhoon, Typhoon Huaning, and Typhoon, which caused considerable damage to
the Project. Accordingly, Hollero Construction filed several claims for indemnity
with the GSIS. In a letter dated April 26, 1990, the GSIS rejected Hollero
Constructions indemnity claims for the damages wrought by Typhoons Biring
and Huaning, finding that no amount is recoverable pursuant to the average
clause provision under the policies. In a letter dated June 21, 1990, the GSIS
similarly rejected Hollero Constructions indemnity claim for damages wrought
by Typhoon Saling on a "no loss" basis, it appearing from its records that the
policies were not renewed before the onset of the said typhoon.
Hollero filed a Complaint for Sum of Money and Damages before the RTC
which was opposed by the GSIS through a Motion to Dismiss on the ground that
the causes of action stated therein are barred by the twelve-month limitation
provided under the policies, i.e., the complaint was filed more than one (1) year
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 Recent Jurisprudence (April 2014 March 2015) Mercantile Law

from the rejection of the indemnity claims. The RTC granted Hollero
Constructions indemnity claims. The CA set aside and reversed the RTC
Judgment.
Issue:
Whether or not the CA committed reversible error in dismissing the complaint
on the ground of prescription.
Ruling:
No. Contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms which the parties themselves
have used. If such terms are clear and unambiguous, they must be taken and
understood in their plain, ordinary, and popular sense.
Section 10 of the General Conditions of the subject CAR Policies commonly read:
be a mere "tentative resolution." In fact, despite its disavowals, Hollero
Construction admitted in its pleadings that the GSIS indeed denied its claim
through the aforementioned letter, but tarried in commencing the necessary
action in court.
The same conclusion obtains for the letter dated June 21, 1990 denying
Hollero Construction s indemnity claim caused by Typhoon Saling on a "no loss"
basis due to the non-renewal of the policies therefor before the onset of the said
typhoon. The fact that Hollero Construction filed a letter of reconsideration
therefrom dated April 18, 1991, considering too the inaction of the GSIS on the
same similarly shows that the June 21, 1990 letter was also a final rejection of
Hollero Constructions indemnity claim.
As correctly observed by the CA, "final rejection" simply means denial by
the insurer of the claims of the insured and not the rejection or denial by the
insurer of the insureds motion or request for reconsideration. The rejection
referred to should be construed as the rejection in the first instance, as in the two
instances above-discussed.

10. If a claim is in any respect fraudulent, or if any false declaration is made or
used in support thereof, or if any fraudulent means or devices are used by the
Insured or anyone acting on his behalf to obtain any benefit under this Policy, or
if a claim is made and rejected and no action or suit is commenced within twelve
months after such rejection or, in case of arbitration taking place as provided
herein, within twelve months after the Arbitrator or Arbitrators or Umpire have
made their award, all benefit under this Policy shall be forfeited.
Holler's causes of action for indemnity respectively accrued from its
receipt of the letters dated April 26, 1990 and June 21, 1990, or the date the GSIS
rejected its claims in the first instance. Consequently, given that it allowed more
than twelve (12) months to lapse before filing the necessary complaint before
the RTC on September 27, 1991, its causes of action had already prescribed.

In this relation, case law illumines that the prescriptive period for the
insureds action for indemnity should be reckoned from the "final rejection" of
the claim.

A perusal of the letter dated April 26, 1990 shows that the GSIS denied
Hollero Constructions indemnity claims wrought by Typhoons Biring and
Huaning, it appearing that no amount was recoverable under the policies. While
the GSIS gave Hollero Construction the opportunity to dispute its findings,
neither of the parties pursued any further action on the matter; this logically
shows that they deemed the said letter as a rejection of the claims. Lest it cause
any confusion, the statement in that letter pertaining to any queries Hollero
Construction may have on the denial should be construed, at best, as a form of
notice to the former that it had the opportunity to seek reconsideration of the
GSISs rejection. Surely, Hollero Construction cannot construe the said letter to
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