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C. NATIONALITY OF CORPORATION A.

Self-dealing on the part of DBP which was acting both as a


controlling stockholder/director and as secured creditor of the Pioneer
Glass, all to its advantage and to that of Union Glass, and to the gross
G.R. No. L-64013 November 28, 1983 prejudice of the Pioneer Glass,

UNION GLASS & CONTAINER CORPORATION and CARLOS B. That the dacion en pago is void because there was gross
PALANCA, JR., in his capacity as President of Union Glass & undervaluation of the assets included in the so-called dacion en pago
Container Corporation, petitioners, by more than 100% to the prejudice of Pioneer Glass and to the undue
vs. advantage of DBP and Union Glass;
THE SECURITIES AND EXCHANGE COMMISSION and CAROLINA C. That the DBP unduly favored Union Glass over another buyer, San
HOFILEA, respondents. Miguel Corporation, notwithstanding the clearly advantageous terms
ESCOLIN, This petition for certiorari and prohibition seeks to annul offered by the latter to the prejudice of Pioneer Glass, its other
and set aside the Order of the Securities and Exchange Commission, creditors and so-called 'Minority stockholders.'
dated September 25, 1981, upholding its jurisdiction in SEC Case No. 2. Holding that the assets of the Pioneer Glass taken over by DBP and
2035, entitled "Carolina Hofilea, Complainant, versus Development part of which was delivered to Union Glass particularly the glass plant
Bank of the Philippines, et al., Respondents." to be returned accordingly.
Private respondent Carolina Hofilea, complainant in SEC Case No. 3. That the DBP be ordered to accept and recognize the appraisal
2035, is a stockholder of Pioneer Glass Manufacturing Corporation, conducted by the Asian Appraisal Inc. in 1975 and again in t978 of the
Pioneer Glass for short, a domestic corporation engaged in the asset of Pioneer Glass. 1
operation of silica mines and the manufacture of glass and glassware.
Since 1967, Pioneer Glass had obtained various loan In her common prayer, Hofilea asked that DBP be sentenced to pay
accommodations from the Development Bank of the Philippines Pioneer Glass actual, consequential, moral and exemplary damages,
[DBP], and also from other local and foreign sources which DBP for its alleged illegal acts and gross bad faith; and for DBP and Union
guaranteed. Glass to pay her a reasonable amount as attorney's fees. 2

As security for said loan accommodations, Pioneer Glass mortgaged On April 21, 1981, Pioneer Glass filed its answer. On May 8, 1981,
and/or assigned its assets, real and personal, to the DBP, in addition petitioners moved for dismissal of the case on the ground that the SEC
to the mortgages executed by some of its corporate officers over their had no jurisdiction over the subject matter or nature of the suit.
personal assets. The proceeds of said financial exposure of the DBP Respondent Hofilea filed her opposition to said motion, to which
were used in the construction of a glass plant in Rosario, Cavite, and herein petitioners filed a rejoinder.
the operation of seven silica mining claims owned by the corporation.
On July 23, 1981, SEC Hearing Officer Eugenio E. Reyes, to whom
It appears that through the conversion into equity of the accumulated the case was assigned, granted the motion to dismiss for lack of
unpaid interests on the various loans amounting to P5.4 million as of jurisdiction. However, on September 25, 1981, upon motion for
January 1975, and subsequently increased by another P2.2 million in reconsideration filed by respondent Hofilea, Hearing Officer Reyes
1976, the DBP was able to gain control of the outstanding shares of reversed his original order by upholding the SEC's jurisdiction over the
common stocks of Pioneer Glass, and to get two, later three, regular subject matter and over the persons of petitioners. Unable to secure a
seats in the corporation's board of directors. reconsideration of the Order as well as to have the same reviewed by
the Commission En Banc, petitioners filed the instant petition for
Sometime in March, 1978, when Pioneer Glass suffered serious certiorari and prohibition to set aside the order of September 25, 1981,
liquidity problems such that it could no longer meet its financial and to prevent respondent SEC from taking cognizance of SEC Case
obligations with DBP, it entered into a dacion en pago agreement with No. 2035.
the latter, whereby all its assets mortgaged to DBP were ceded to the
latter in full satisfaction of the corporation's obligations in the total The issue raised in the petition may be propounded thus: Is it the
amount of P59,000,000.00. Part of the assets transferred to the DBP regular court or the SEC that has jurisdiction over the case?
was the glass plant in Rosario, Cavite, which DBP leased and
subsequently sold to herein petitioner Union Glass and Container In upholding the SEC's jurisdiction over the case Hearing Officer
Corporation, hereinafter referred to as Union Glass. Reyes rationalized his conclusion thus:t.hqw

On April 1, 1981, Carolina Hofilea filed a complaint before the As correctly pointed out by the complainant, the present action is in
respondent Securities and Exchange Commission against the DBP, the form of a derivative suit instituted by a stockholder for the benefit
Union Glass and Pioneer Glass, docketed as SEC Case No. 2035. Of of the corporation, respondent Pioneer Glass and Manufacturing
the five causes of action pleaded therein, only the first cause of action Corporation, principally against another stockholder, respondent
concerned petitioner Union Glass as transferee and possessor of the Development Bank of the Philippines, for alleged illegal acts and gross
glass plant. Said first cause of action was based on the alleged bad faith which resulted in the dacion en pago arrangement now being
illegality of the aforesaid dacion en pago resulting from: [1] the questioned by complainant. These alleged illegal acts and gross bad
supposed unilateral and unsupported undervaluation of the assets of faith came about precisely by virtue of respondent Development Bank
Pioneer Glass covered by the agreement; [2] the self-dealing indulged of the Philippine's status as a stockholder of co-respondent Pioneer
in by DBP, having acted both as stockholder/director and secured Glass Manufacturing Corporation although its status as such
creditor of Pioneer Glass; and [3] the wrongful inclusion by DBP in its stockholder, was gained as a result of its being a creditor of the latter.
statement of account of P26M as due from Pioneer Glass when the The derivative nature of this instant action can also be gleaned from
same had already been converted into equity. the common prayer of the complainant which seeks for an order
directing respondent Development Bank of the Philippines to pay co-
Thus, with respect to said first cause of action, respondent Hofilea respondent Pioneer Glass Manufacturing Corporation damages for the
prayed that the SEC issue an order: alleged illegal acts and gross bad faith as above-mentioned.

1. Holding that the so called dacion en pago conveying all the assets As far as respondent Union Glass and Container Corporation is
of Pioneer Glass and the Hofilea personal properties to Union Glass concerned, its inclusion as a party-respondent by virtue of its being an
be declared null and void on the ground that the said conveyance was indispensable party to the present action, it being in possession of the
tainted with.t.hqw
assets subject of the dacion en pago and, therefore, situated in such of general jurisdiction, the Regional Trial Court. This view is in accord
a way that it will be affected by any judgment thereon, 3 with the rudimentary principle that administrative agencies, like the
SEC, are tribunals of limited jurisdiction 6 and, as such, could wield
In the ordinary course of things, petitioner Union Glass, as transferee only such powers as are specifically granted to them by their enabling
and possessor of the glass plant covered by the dacion en statutes. 7 As We held in Sunset View Condominium Corp. vs.
pago agreement, should be joined as party-defendant under the Campos, Jr.: 8
general rule which requires the joinder of every party who has an
interest in or lien on the property subject matter of the dispute. 4 Such Inasmuch as the private respondents are not shareholders of the
joinder of parties avoids multiplicity of suits as well as ensures the petitioner condominium corporation, the instant cases for collection
convenient, speedy and orderly administration of justice. cannot be a 'controversy arising out of intra-corporate or partnership
relations between and among stockholders, members or associates;
But since petitioner Union Glass has no intra-corporate relation with between any or all of them and the corporation, partnership or
either the complainant or the DBP, its joinder as party-defendant in association of which they are stockholders, members or associates,
SEC Case No. 2035 brings the cause of action asserted against it respectively,' which controversies are under the original and exclusive
outside the jurisdiction of the respondent SEC. jurisdiction of the Securities & Exchange Commission, pursuant to
The jurisdiction of the SEC is delineated by Section 5 of PD No. 902- Section 5 [b] of P.D. No. 902-A. ...
A as follows:t.hqw As heretofore pointed out, petitioner Union Glass is involved only in
Sec. 5. In addition to the regulatory and adjudicative function of the the first cause of action of Hofileas complaint in SEC Case No, 2035.
Securities and Exchange Commission over corporations, partnerships While the Rules of Court, which applies suppletorily to proceedings
and other forms of associations registered with it as expressly granted before the SEC, allows the joinder of causes of action in one
under existing laws and devices, it shall have original and exclusive complaint, such procedure however is subject to the rules regarding
jurisdiction to hear and decide cases involving: jurisdiction, venue and joinder of parties. 9 Since petitioner has no
intra-corporate relationship with the complainant, it cannot be joined
a] Devices and schemes employed by or any acts, of the board of as party-defendant in said case as to do so would violate the rule or
directors, business associates, its officers or partners, amounting to jurisdiction. Hofileas complaint against petitioner for cancellation of
fraud and misrepresentation which may be detrimental to the interest the sale of the glass plant should therefore be brought separately
of the public and/or the stockholders, partners, members of before the regular court But such action, if instituted, shall be
associations or organizations registered with the Commission suspended to await the final outcome of SEC Case No. 2035, for the
issue of the validity of the dacion en pago posed in the last mentioned
b] Controversies arising out of intra-corporate or partnership relations,
case is a prejudicial question, the resolution of which is a logical
between and among stockholders, members or associates; between
antecedent of the issue involved in the action against petitioner Union
any or all of them and the corporation, partnership, or association of
Glass. Thus, Hofileas complaint against the latter can only prosper if
which they are stockholders, members or associates, respectively;
final judgment is rendered in SEC Case No. 2035, annulling the dacion
and between such corporation, partnership or association and the en pago executed in favor of the DBP.
state insofar as it concerns their individual franchise or right to exist as
such entity; WHEREFORE, the instant petition is hereby granted, and the
questioned Orders of respondent SEC, dated September 25, 1981,
c] Controversies in the election or appointments of directors, trustees,
March 25, 1982 and May 28, 1982, are hereby set aside. Respondent
officers or managers of such corporations, partnerships or
Commission is ordered to drop petitioner Union Glass from SEC Case
associations.
No. 2035, without prejudice to the filing of a separate suit before the
This grant of jurisdiction must be viewed in the light of the nature and regular court of justice. No pronouncement as to costs.
function of the SEC under the law. Section 3 of PD No. 902-A confers
SO ORDERED.1wph1.t
upon the latter "absolute jurisdiction, supervision, and control over all
corporations, partnerships or associations, who are grantees of Concepcion, Jr., Guerrero, Abad Santos, De Castro, Melencio-
primary franchise and/or license or permit issued by the government Herrera, Plana, Relova and Gutierrez, Jr., JJ., concur.
to operate in the Philippines ... " The principal function of the SEC is
the supervision and control over corporations, partnerships and
associations with the end in view that investment in these entities may
be encouraged and protected, and their activities pursued for the G.R. No. L-63558 May 19, 1987
promotion of economic development. 5
SPOUSES JOSE ABEJO AND AURORA ABEJO, TELEC.
It is in aid of this office that the adjudicative power of the SEC must be TRONIC SYSTEMS, INC., petitioners,
exercised. Thus the law explicitly specified and delimited its jurisdiction vs.
to matters intrinsically connected with the regulation of corporations, HON. RAFAEL DE LA CRUZ, JUDGE OF THE REGIONAL TRIAL
partnerships and associations and those dealing with the internal COURT (NATIONAL CAPITAL JUDICIAL REGION, BRANCH
affairs of such corporations, partnerships or associations. CLX-PASIG), SPOUSES AGAPITO BRAGA AND VIRGINIA
BRAGA, VIRGILIO BRAGA AND NORBERTO
Otherwise stated, in order that the SEC can take cognizance of a case,
BRAGA, respondents.
the controversy must pertain to any of the following relationships: [a]
between the corporation, partnership or association and the public; [b]
between the corporation, partnership or association and its No. L-68450-51 May 19, 1987
stockholders, partners, members, or officers; [c] between the
corporation, partnership or association and the state in so far as its POCKET BELL PHILIPPINES, INC., AGAPITO T. BRAGA,
franchise, permit or license to operate is concerned; and [d] among the VIRGILIO T. BRAGA, NORBERTO BRAGA, and VIRGINIA
stockholders, partners or associates themselves. BRAGA, petitioners,
vs.
The fact that the controversy at bar involves the rights of petitioner THE HONORABLE SECURITIES AND EXCHANGE
Union Glass who has no intra-corporate relation either with COMMISSION, TELECTRONIC SYSTEMS, INC., JOSE ABEJO,
complainant or the DBP, places the suit beyond the jurisdiction of the JOSE LUIS SANTIAGO, SIMEON A. MIRAVITE, SR., ANDRES
respondent SEC. The case should be tried and decided by the court T. VELARDE AND L. QUIDATO BANDOLINO, respondents.
stockholders, the principal petitioners therein, Telectronics, not
being a stockholder of record of Pocket Bell.
TEEHANKEE, C.J.:
5. On January 8, 1983, SEC Hearing Officer Joaquin Garaygay
These two cases, jointly heard, are jointly herein decided. They denied the motion. On January 14, 1983, the corporate secretary
involve the question of who, between the Regional Trial Court and filed a Motion for Reconsideration. On March 21, 1983, SEC
the Securities and Exchange Commission (SEC), has original and Hearing Officer Joaquin Garaygay issued an order granting Braga's
exclusive jurisdiction over the dispute between the principal motion for reconsideration and dismissed SEC Case No. 02379.
stockholders of the corporation Pocket Bell Philippines,
Inc. (Pocket Bell), a "tone and voice paging corporation," namely, 6. On February 11, 1983, the Bragas filed their Motion to Dismiss
the spouses Jose Abejo and Aurora Abejo (hereinafter referred to the injunction case, SEC Case No. 02395. On April 8, 1985, the
as the Abejos) and the purchaser, Telectronic Systems, Inc. SEC Director, Eugenio Reyes, acting upon the Abejos'ex-parte
(hereinafter referred to as Telectronics) of their 133,000 minority motion, created a three-man committee composed of Atty.
shareholdings (for P5 million) and of 63,000 shares registered in Emmanuel Sison as Chairman and Attys. Alfredo Oca and Joaquin
the name of Virginia Braga and covered by five stock certificates Garaygay as members, to hear and decide the two SEC cases
endorsed in blank by her (for P1,674,450.00), and the spouses (Nos. 02379 and 02395).
Agapito Braga and Virginia Braga (hereinafter referred to as the
Bragas), erstwhile majority stockholders. With the said purchases, 7. On April 13, 1983, the SEC three-man committee issued an
Telectronics would become the majority stockholder, holding 56% order reconsidering the aforesaid order of March 21, 1983 of the
of the outstanding stock and voting power of the corporation Pocket SEC Hearing Officer Garaygay (dismissing the mandamus petition
Bell. SEC Case No. 02379) and directing corporate secretary Norberto
Braga to file his answer to the petitioner therein.
With the said purchases in 1982, Telectronics requested the
corporate secretary of the corporation, Norberto Braga, to register B. BRAGAS' ACTION IN SEC
and transfer to its name, and those of its nominees the total
196,000 Pocket Bell shares in the corporation's transfer book, 8. On December 12, 1983, the Bragas filed a petition for certiorari,
cancel the surrendered certificates of stock and issue the prohibition and mandamus with the SEC en banc, SEC Case No.
corresponding new certificates of stock in its name and those of its EB #049, seeking the dismissal of SEC Cases Nos.' 02379 and
nominees. 02395 for lack of jurisdiction of the Comn-iission and the setting
aside of the various orders issued by the SEC three-man
Norberto Braga, the corporate secretary and son of the Bragas, committee in the course of the proceedings in the two SEC cases.
refused to register the aforesaid transfer of shares in t e corporate
oo s, asserting that the Bragas claim preemptive rights over the 9. On May 15, 1984, the SEC en banc issued an order dismissing
133,000 Abejo shares and that Virginia Braga never transferred her the Bragas' petition in SEC Case No. EB#049 for lack of merit and
63,000 shares to Telectronics but had lost the five stock certificates at the same time ordering the SEC Hearing Committee to continue
representing those shares. with the hearings of the Abejos and Telectronics SEC Cases Nos.
02379 and 02395, ruhng that the "issue is not the ownership of
This triggered off the series of intertwined actions between the shares but rather the nonperformance by the Corporate Secretary
protagonists, all centered on the question of jurisdiction over the of the ministerial duty of recording transfers of shares of stock of
dispute, which were to culminate in the filing of the two cases at the corporation of which he is secretary."
bar.
10. On May 15, 1984 the Bragas filed a motion for reconsideration
The Bragas assert that the regular civil court has original and but the SEC en banc denied the same on August 9, 1984.
exclusive jurisdiction as against the Securities and Exchange
Commission, while the Abejos claim the contrary. A summary of C. BRAGAS' ACTION IN CFI (NOWRTC)
the actions resorted to by the parties follows:
11. On November 25, 1982, following the corporate secretary's
A. ABEJOS ACTIONS IN SEC refusal to register the transfer of the shares in question, the Bragas
filed a complaint against the Abejos and Telectronics in the Court
1. The Abejos and Telectronics and the latter's nominees, as new of First Instance of Pasig, Branch 21 (now the Regional Trial Court,
majority shareholders, filed SEC Cases Nos. 02379 and 02395 Branch 160) docketed as Civil Case No. 48746 for: (a) rescission
against the Bragas on December 17, 1982 and February 14, 1983, and annulment of the sale of the shares of stock in Pocket Bell
respectively. made by the Abejos in favor of Telectronics on the ground that it
violated the Bragas' alleged pre-emptive right over the Abej os'
2. In SEC Case No. 02379, they prayed for mandamus from the shareholdings and an alleged perfected contract with the Abejos to
SEC ordering Norberto Braga, as corporate secretary of Pocket sell the same shares in their (Bragas) favor, (Ist cause of
Bell to register in their names the transfer and sale of the aforesaid action); plus damages for bad faith; and (b) declaration ofnullity of
196,000 Pocket Bell shares (of the Abejos 1 and Virginia Braga 2, cancel the any transfer, assignment or endorsement of Virginia Bragas' stock
surrendered certificates as duly endorsed and to issue new certificates in their names. certificates for 63,000 shares in Pocket Ben to Telectronics for want
of consent and consideration, alleging that said stock certificates,
3. In SEC Case No.02395, they prayed for injunction and a which were intended as security for a loan application and were
temporary restraining order that the SEC enjoin the Bragas from thus endorsed by her in blank, had been lost (2nd cause of action).
disbursing or disposing funds and assets of Pocket Bell and from
performing such other acts pertaining to the functions of corporate 12. On January 4, 1983, the Abejos filed a Motion to Dismiss the
officers. complaint on the ground that it is the SEC that is vested under PD
902-A with original and exclusive jurisdiction to hear and decide
4. Pocket Bell's corporate secretary, Norberto Braga, filed a Motion cases involving, among others, controversies "between and among
to Dismiss the mandamus case (SEC Case No. 02379) contending stockholders" and that the Bragas' suit is such a controversy as the
that the SEC has no jurisdiction over the nature of the action since issues involved therein are the stockholders' alleged pre-emptive
it does not involve an intracorporate controversy between rights, the validity of the transfer and endorsement of certificates of
stock, the election of corporate officers and the management and Corporate Secretary of the ministerial duty of recording transfers of
control of the corporation's operations. The dismissal motion was shares of stock of the Corporation of which he is secretary."
granted by Presiding Judge G. Pineda on January 14, 1983.
1. The SEC ruling upholding its primary and exclusive jurisdiction
13. On January 24, 1983, the Bragas filed a motion for over the dispute is correctly premised on, and fully supported by,
reconsideration. The Abejos opposed. Meanwhile, respondent the applicable provisions of P.D. No. 902-A which reorganized the
Judge Rafael de la Cruz was appointed presiding judge of the court SEC with additional powers "in line with the government's policy of
(renamed Regional Trial Court) in place of Judge G. Pineda. encouraging investments, both domestic and foreign, and more
active publicParticipation in the affairs of private corporations and
14. On February 14, 1983, respondent Judge de la Cruz issued an enterprises through which desirable activities may be pursued for
order rescinding the January 14, 1983 order and reviving the the promotion of economic development; and, to promote a wider
temporary restraining order previously issued on December 23, and more meaningful equitable distribution of wealth," and
1982 restraining Telectronics' agents or representatives from accordingly provided that:
enforcing their resolution constituting themselves as the new set of
officers of Pocket Bell and from assuming control of the corporation SEC. 3. The Commission shall have absolute
and discharging their functions. jurisdiction, supervision and control ouer all
corporations, partnerships or associations, who
15. On March 2, 1983, the Abejos filed a motion for reconsideration, are the grantees of primary franchise and/or a
which motion was duly opposed by the Bragas. On March 11, 1983, license or permit issued by the government to
respondent Judge denied the motion for reconsideration. operate in the Philippines; ...

D. ABEJOS' PETITION AT BAR SEC. 5. In addition to the regulatory and


adjudicative functions of the Securities and
16. On March 26, 1983, the Abejos, alleging that the acts of Exchange Commission over corporations,
respondent Judge in refusing to dismiss the complaint despite clear partnerships and other forms of associations
lack of jurisdiction over the action and in refusing to reconsider his registered with it as expressly granted under
erroneous position were performed without jurisdiction and with existing laws and decrees, it shall have original
grave abuse of discretion, filed their herein Petition for certiorari and exclusive jurisdiction to hear and decide
and Prohibition with Preliminary Injunction. They prayed that the cases involving:
challenged orders of respondent Judge dated February 14, 1983
and March 11, 1983 be set aside for lack of jurisdiction and that he a) Devices or schemes employed by or any acts, of the board of
be ordered to permanently desist from further proceedings in Civil directors, business associations, its officers or partners, amounting
Case No. 48746. Respondent judge desisted from further to fruud and misrepresentation which may be detrimental to the
proceedings in the case, dispensing with the need of issuing any interest of the public andlor of the stockholder, partners, members
restraining order. of associations or organizations registered with the Commission.

E. BRAGAS' PETITION AT BAR b) Controversies arising out of intracorporate or partnership


relations, between and among stockholders, members, or
17. On August 29, 1984, the Bragas, alleging in turn that the SEC associates; between any andlor all of them and the
has no jurisdiction over SEC Cases Nos. 02379 and 02395 and corporation, partnership or association of which they are
that it acted arbitrarily, whimsically and capriciously in dismissing stockholders, members or assmiates, respectively; and between
their petition (in SEC Case No. EB #049) for dismissal of the said such corporation, partnership or assmiation and the state insofar
cases, filed their herein Petition for certiorari and Prohibition with as it concems their individual franchise or right to exist as such
Preliminary Injunction or TRO. The petitioner seeks the reversal entity;
and/or setting aside of the SEC Order dated May 15, 1984
dismissing their petition in said SEC Case No. EB #049 and c) Controversies in the election or appointments of
sustaining its jurisdiction over SEC Cases Nos. 02379 and 02395, directors, trustees, officers or managers of such corporations,
filed by the Abejos. On September 24, 1984, this Court issued a partnerships or associations. 3
temporary restraining order to maintain the status quo and
restrained the SEC and/or any of its officers or hearing committees Section 6 further grants the SEC "in order to effectively exercise
from further proceeding with the hearings in SEC Cases Nos. such jurisdiction," the power, inter alia, "to issue preliminary or
02379 and 02395 and from enforcing any and all orders and/or permanent injunctions, whether prohibitory or mandatory, in all
resolutions issued in connection with the said cases. cases in which it has jurisdiction, and in which cases the pertinent
provisions of the Rules of Court shall apply."
The cases, having been given due course, were jointly heard by
the Court on March 27, 1985 and the parties thereafter filed on April 2. Basically and indubitably, the dispute at bar, as held by the SEC,
16, 1985 their respective memoranda in amplification of oral is an intracorporate dispute that has arisen between and among
argument on the points of law that were crystalled during the the principal stockholders of the corporation Pocket Bell due to the
hearing, refusal of the corporate secretary, backed up by his parents as
erstwhile majority shareholders, to perform his "ministerial duty" to
The Court rules that the SEC has original and exclusive jurisdiction record the transfers of the corporation's controlling (56%) shares of
over the dispute between the principal stockholders of the stock, covered by duly endorsed certificates of stock, in favor of
corporation Pocket Bell, namely, the Abejos and Telectronics as the purchaser thereof. mandamus in the SEC to
compel the corporate secretary to register the transfers and issue
Telectronics, the purchasers of the 56% majority stock (supra, at new certificates in favor of Telectronics and its nominees was
page 2) on the one hand, and the Bragas, erstwhile majority properly resorted to under Rule XXI, Section 1 of the SEC's New
stockholders, on the other, and that the SEC, through its en banc Rules of Procedure, 4 which provides for the filing of such petitions
Resolution of May 15, 1984 co"ectly ruled in dismissing the Bragas' with the SEC. Section 3 of said Rules further authorizes the SEC
Petition questioning its jurisdiction, that "the issue is not the to "issue orders expediting the proceedings ... and also [to] grant a
ownership of shares but rather the nonperformance by the
preliminary injunction for the preservation of the rights of the parties 5. Most of the cases that have come to this Court involve those
pending such proceedings, " under paragraph (b), i.e. whether the controversy is an intra-
corporate one, arising "between and among stockholders" or
The claims of the Bragas, which they assert in their complaint in "between any or allof them and the corporation." The parties have
the Regional Trial Court, praying for rescission and annulment of focused their arguments on this question. The Bragas' contention
the sale made by the Abejos in favor of Telectronics on the ground in his field must likewise fail. In Philex Mining Corp. v. Reyes, 8 the
that they had an alleged perfected preemptive right over the Court spelled out that"'an intra-corporate controversy is one which
Abejos' shares as well as for annulment of sale to Telectronics of arises between a stockholder and the corporation. There is no
Virginia Braga's shares covered by street certificates duly endorsed distinction, qualification, nor any exemption whatsoever. The
by her in blank, may in no way deprive the SEC of its primary and provision is broad and covers all kinds of controversies between
exclusive jurisdiction to grant or not the writ of mandamus ordering stockholders and corporations. The issue of whether or not a
the registration of the shares so transferred. The Bragas' corporation is bound to replace a stockholder's lost certificate of
contention that the question of ordering the recording of the stock is a matter purely between a stockholder and the corporation.
transfers ultimately hinges on the question of ownership or right It is a typical intra-corporate dispute. The quqsjion of damage's
thereto over the shares notwithstanding, the jurisdiction over the raised is merely incidental to that main issue. The Court rejected
dispute is clearly vested in the SEC. the stockholders' theory of excluding his complaint (for replacement
of a lost stock [dividend] certificate which he claimed to have never
3. The very complaint of the Bragas for annulment of the sales and received) from the classification of intra-corporate controversies as
transfers as filed by them in the regular court questions the validity one that "does not square with the intent of the law, which is to
of the transfer and endorsement of the certificates of stock, segregate from the general jurisdiction of regular Courts
claiming alleged pre-emptive rights in the case of the Abejos' controversies involving corporations and their stockholders and to
shares and alleged loss of thio certificates and lack of consent and bring them to the SEC for exclusive resolution, in much the same
consideration in the case of Virginia Braga's shares. Such dispute way that labor disputes are now brought to the Ministry-of Labor
c learly involve's controversies "between and among stockholders, and Employment (MOLE) and the National Labor Relations
" as to the Abej os' right to sell and dispose of their shares to Commission (NLRC), and not to the Courts."
Telectronics, the validity of the latter's acquisition of Virginia
Braga's shares, who between the Bragas and the Abejos' (a) The Bragas contend that Telectronics, as
transferee should be recognized as the controlling shareholders of buyertransferee of the 56% majority shares is
the corporation, with the right to elect the corporate officers and the not a registered stockholder, because they,
management and control of its operations. Such a dispute and case through their son the corporate secretary,
clearly fag within the original and exclusive jurisdiction of the SEC appear to have refused to perform "the
to decide, under Section 5 of P.D. 902-A, above-quoted. The ministerial duty of recording transfers of shares
restraining order issued by the Regional Trial Court restraining of stock of the corporation of which he is the
Telectronics agents and representatives from enforcing their secretary," and that the dispute is therefore, not
resolution constituting themselves as the new set of officers of an intracorporate one. This contention begs the
Pocket Bell and from assuming control of the corporation and question which must properly be resolved by
discharging their functions patently encroached upon the SEC's the SEC, but which they would prevent by their
exclusive jurisdiction over such specialized corporate controversies own act, through their son, of blocking the due
calling for its special competence. As stressed by the Solicitor recording of the transfer and cannot be
General on behalf of the SEC, the Court has held that "Nowhere sanctioned. It can be seen from their very
does the law [PD 902-A] empower any Court of First Instance [now complaint in the regular courts that they with
Regional Trial Court] to interfere with the orders of the their two sons constituting the plaintiffs are all
Commission," 5 and consequently "any ruling by the trial court on stockholders while the defendants are the
the issue of ownership of the shares of stock is not binding on the Abejos who are also stockholders whose sale of
Commission 6 for want of jurisdiction. the shares to Telectronics they would annul.

4. The dispute therefore clearly falls within the general (b) There can be no question that the dispute
classification of cases within the SEC's original and exclusive between the Abejos and the Bragas as to the
jurisdiction to hear and decide, under the aforequoted governing sale and transfer of the former's shares to
section 5 of the law. Insofar as the Bragas and their corporate Telectronics for P5 million is an intracorporate
secretary's refusal on behalf of the corporation Pocket Bell to one under section 5 (b), prescinding from the
record the transfer of the 56% majority shares to Telectronics may applicability of section 5 (a) and (c), (supra, par.
be deemed a device or scheme amounting to fraud and 4) lt is the SEC which must resolve the Bragas'
misrepresentation emplolyed by them to keep themselves in claim in their own complaint in the court case
control of the corporation to the detriment of Telectronics (as buyer filed by them of an alleged pre-emptive right to
and substantial investor in the corporate stock) and the Abejos (as buy the Abejos' shares by virtue of "on-going
substantial stockholders-sellers), the case falls under paragraph negotiations," which they may submit as their
(a). The dispute is likewise an intra-corporate controversy between defense to the mandamus petition to register
and among the majority and minority stockholders as to the transfer the sale of the shares to Telectronics. But
and disposition of the controlling shares of the corporation, failing asserting such preemptive rights and asking
under paragraph (b). As stressed by the Court in DMRC that the same be enforced is a far cry from the
Enterprises v. Este del Sol Mountain Reserve, Inc, 7 Considering Bragas' claim that "the case relates to questions
the announced policy of PD 902-A, the expanded jurisdiction of the of ownership" over the shares in question. 9 (Not
respondent Securities and Exchange Commission under said to mention, as pointed out by the Abejos, that
decree extends exclusively to matters arising from contracts the corporation is not a close corporation, and
involving investments in private corporations, partnerships and no restriction over the free transferability of the
associations." The dispute also concerns the fundamental issue shares appears in the Articles of Incorporation,
ofwhether the Bragas or Telectronics have the right to elect the as well as in the by-laws 10 and the certificates of stock
themselves, as required by law for the enforcement of such
corporate directors and officers and manage its business and restriction. See Go Soc & Sons, etc. v. IAC, G.R. No. 72342,
operations, which falls under paragraph (c). Resolution of February 19, 1987.)
(c) The dispute between the Bragas and SEC. 143. Rule-making power of the Securities
Telectronics as to the sale and transfer for and Exchange Commission. The Securities
P1,674,450.00 of Virginia Braga's 63.000 and Exchange Commission shall have the
shares covered by Street certificates duly power and authority to implement the provisions
endorsed in blank by her is within the special of this Code, and to promulgate rules and
competence and jurisdiction of the SEC, dealing regulations reasonably necessary to enable it to
as it does with the free transferability of perform its duties hereunder, particularly in the
corporate shares, particularly street prevention of fraud and abuses on the part of
certificates," as guaranteed by the Corporation the controlling stockholders, members,
Code and its proclaimed policy of encouraging directors, trustees or officers. (Emphasis
foreign and domestic investments in Philippine supplied)
private corpora. tions and more active public
participation therein for the Promotion of The dispute between the contending parties for control of
economic development. Here again, Virginia thecorporation manifestly fans within the primary and exclusive
Braga's claim of loss of her street jurisdiction of the SEC in whom the law has reserved such
certificates 11 or theft thereof (denounced by Telectronics as jurisdiction as an administrative agency of special competence to
11 perjurious" 12 ) must be pleaded by her as a defense against
Telectronics'petition for mandamus and recognition now as the
deal promptly and expeditiously therewith.
controlling stockholder of the corporation in the light of the joint
affidavit of Geneml Cerefino S. Carreon of the National
Telecommunications Commission and private respondent Jose As the Court stressed in Union Glass & Container Corp. v.
Luis Santiago of Telectronics narrating the facts and circumstances SEC, 19 "This grant of jurisdiction [in Section 51 must be viewed in the light of the nature
of how the former sold and delivered to Telectronics on behalf of and functions of the SEC under the law. Section 3 of PD No. 902-A confers upon the latter
his compadres, the Bragas, Virginia Braga's street certificates for 'absolute jurisdiction, supervision, and control over all corporations, partnerships or
63,000 shares equivalent to 18% of the corporation's outstanding associations, who are grantees of primary franchise and/or license or permit issued by the
stock and received the cash price thereof. 13 But as to the sale and government to operate in the Philippines ... The principal function of the SEC is the supervision
transfer of the Abejos' shares, the Bragas cannot oust the SEC of and control over corporations, partnerships and associations with the end in view that
its original and exclusive jurisdiction to hear and decide the case, investment in these entities may be encouraged and protected, and their activities pursued for
by blocking through the corporate secretary, their son, the due the promotion of economic development.
recording of the transfer and sale of the shares in question and
claiming that Telectronics is not a stockholder of the corporation
which is the very issue that the SEC is called upon to resolve. As "It is in aid of this office that the adjudicative power of the SEC must
the SEC maintains, "There is no requirement that a stockholder of be exercised. Thus the law explicitly specified and delin-dted its
a corporation must be a registered one in order that,the Securities
and Exchange Commission may take cognizance of a suit seeking jurisdiction to matters intrinsically connected with the regulation of
to enforce his rights as such stockholder." 14 This is because the corporations, partnerships and associations and those dealing with
SEC by express mandate has "absolute jurisdiction, supervision
and control over all corporations" and is called upon to enforce the the internal affairs of such corporations, partnerships or
provisions of the Corporation Code, among which is the stock associations.
purchaser's right to secure the corresponding certificate in his
name under the provisions of Section 63 of the Code. Needless to
say, any problem encountered in securing the certificates of stock "Otherwise stated, in order that the SEC can take cognizance of a
representing the investment made by the buyer must be case, the controversy must pertain to any of the following
expeditiously dealt with through administrative mandamus
proceedings with the SEC, rather than through the usual tedious relationships: [al between the corporation, partnership or
regular court procedure. Furthermore, as stated in the SEC order association and the public; [b] between the corporation, partnership
of April 13, 1983, notice given to the corporation of the sale of the
shares and presentation of the certificates for transfer is ,equivalent or association and its stockholders, partners, members, or officers;
to registration: "Whether the refusal of the (corporation) to effect [c] between the corporation, partnership or association and the
the same is ivalid or not is still subject to the outcome of the hearing state in so far as its franchise, permit or license to operate is
on the merits of the case. 15
concerned; and Id] among the stockholders, partners or associates
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in administrative themselves." 20
commissions and boards the power to resolve specialized disputes in the field of labor (as in
corporations, public transportation and public utilities) ruled that Congress in requiring the
Industrial Court's intervention in the resolution of labor-management controversies likely to Parenthetically, the cited case of Union Glass illustrates by way of
cause strikes or lockouts meant such jurisdiction to be exclusive, although it did not so contrast what disputes do not fall within the special jurisdiction of
expressly state in the law. The Court held that under the "sense-making and expeditious the SEC. In this case, the SEC had properly assumed jurisdiction
doctrine of primary jurisdiction ... the courts cannot or will n6t determine a controversy
involving a question which is within the jurisdiction of an administrative tribunal, where the over the dissenting stockholders' com. Plaint against the
question demands the exercise of sound administrative discretion requiring the special corporation Pioneer Glass questioning its dacion en pago of its
knowledge, experience, and seruices of the administratiue tribunal to determine technical and
intricate matters of fact, and a uniformity of ruling is essential to comply uith the purposes of glass plant and all its assets in favor of the DBP which was clearly
the regulatory statute administered " 16 an intra-corporate controversy dealing with its internal affairs. But
the Court held that the SEC had no jurisdiction over petitioner
In this era of clogged court dockets, the need for specialized administrative boards or Union Glass Corp., imPle,aded as third party purchaser of the plant
commissions with the special knowledge, experience and capability to hear and determine
promptly disputes on technical matters or essentially factual matters, subject to judicial review from DBP in the action to annul the dacion en pago. The Court held
in case of grave abuse of discretion, has become well nigh indispensable. Thus, in 1984, the that such action for recovery of the glass plant could be brought by
Court noted that "between the power lodged in an administrative body and a court, the the dissenting stockholder to the regular courts only if and when
unmistakable trend has been to refer it to the former. 'Increasingly, this Court has been
committed to the view that unless the law speaks clearly and unequivocably, the choice should the SE C rendered final judgment annulling the dacion en pago and
fall on [an administrative agency.]' " 17 The Court in the earlier case of Ebon vs. De furthermore subject to Union Glass' defenses as a third party buyer
Guzman 18 noted that the lawmaking authority, in restoring to the labor arbiters and the NLRC
their jurisdiction to award all kinds of damages in labor cases, as against the previous P.D. in good faith. Similarly, in the DMRC case, therein
amendment splitting their jurisdiction with the regular courts, "evidently ... had second petitioner's,tomplaint for collection of the amounts due to it as
thoughts about depriving the Labor Arbiters and the NLRC of the jurisdiction to award payment of rentals for the lease of its heavy equipment in the form
damages in labor cases because that setup would mean duplicity of suits, splitting the cause
of action and possible conflicting findings and conclusions by two tribunals on one and the mainly of cash and part in shares of stock of the debtor-defendant
same claim." corporation was held to be not covered by the SEC's exclusive
jurisdiction over intracorporate disputes, since "to pass upon a
7. Thus, the Corporation Code (B.P. No. 178) enacted on May 1, money claim under a lease contract would be beyond the
1980 specifically vests the SEC with the Rule-making power in the competence Of the Securities and Exchange Commission and to
discharge of its task of implementing the provisions of the Code separate the claim for money from the claim for shares of stock
and particularly charges it with the duty of preventing fraud and would be splitting a single cause of action resulting in a multiplicity
abuses on the part of controlling stockholders, directors and of suitS." 21 Such an action for collection of a debt does not involve
officers, as follows: enforcement Of rights and obligations under the Corporation Code
nor the in. temal or intracorporate affairs of the debtor corporation.
But in aR disputes affecting and dealing With the interests of the in his Court other than to dismiss the same for
corporation and its stockholders, following the trend and clear lack or jurisdiction over the subject-matter;
legislative intent of entmsting all disputes of a specialized nature to
administrative agencies possessing. the requisite competence, (b) Dismissing the petition in G.R. Nos. 68450-
special knowledge, experience and services and facilities to 51 and lifting the temporary restraining order
expeditiously resolve them and determine the essential facts issued on September 24, 1984, effective
including technical and intricate matters, as in labor and public immediately upon promulgation hereof,
utilities rates disputes, the SEC has been given "the original and
exclusive jurisdiction to hear anddecide" them (under section 5 of (c) Directing the SEC through its Hearing
P.D. 902-A) "in addition to [its] regulatory and adjudicative Committee to proceed immediately with hearing
functions" (under Section 3, vesting in it "absolute jurisdiction, and resolving the pending mandamus petition
supervision and control over all corporations" and the Rule-making for recording in the corporate books the transfer
power granted it in Section 143 of the Corporation Code, supra). As to Telectronics and its nominees of the majority
stressed by the Court in the Philex case, supra, "(T)here is no (56%) shares of stock of the corporation Pocket
distinction, qualification, nor any exemption whatsoever. The Bell pertaining to the Abejos and Virginia Braga
provision is broad and covers all kinds of controversies between and all related issues, taking into consideration,
stockholders and corporations." without need of resubmittal to it, the pleadings,
annexes and exhibits filed by the contending
It only remains now to deal with the Order dated April 15, 1983 parties in the cases at bar; and
(Annex H, Petition) 22 of the SEC's three-member Hearing
Conunittee granting Telectronics' motion for creation of a (d) Likewise directing the SEC through its
receivership or management committee with the ample powers Hearing Committee to proceed immediately
therein enumerated for the preservation pendente lite of the with the implementation of its receivership or
corporation's assets and in discharge of its "power and duty to management committee Order of April 15, 1983
preserve the rights of the parties, the stockholders, the public in SEC Case No. 2379 and for the purpose, the
availing of the corporation's services and the rights of creditors," as contending parties are ordered to submit to said
well as "for reasons of equity and justice ... (and) to prevent Hearing Committee the name of their
possible paralization of corporate business." The said Order has designated representatives in the
not been implemented notwithstanding its having been upheld per receivership/management committee within
the SEC en banc's Order of May 15, 1984 (Annex "V", Petition) three (3) days from receipt of this decision, on
dismissing for lack of merit the petition for certiorari, prohibition and pain of forfeiture of such right in case of failure
mandamus with prayer for restraining order or injunction filed by to comply herewith, as provided in the said
the Bragas seeking the disbandment of the Hearing Committee and Order; and ordering theBragas to perform only
the setting aside of its Orders, and its Resolution of August 9, 1984, caretaker acts in the corporation pending the
denying reconsideration (Annex "X", Petition), due to the Bragas' organization of such receivership/management
filing of the petition at bar. committee and assumption of its functions.

Prescinding from the great concern of damage and prejudice This decision shall be immediately executory upon its
expressed by Telectronics due to the Bragas having remained in promulgation.
control of the corporation and having allegedly committed acts of
gross mismanagement and misapplication of funds, the Court finds
SO ORDERED.
that under the facts and circumstances of record, it is but fair and
just that the SEC's order creating a receivership committee be
implemented forthwith, in accordance with its terms, as follows: G.R. No. 87135 May 22, 1992

The three-man receivership committee shall be ALMA MAGALAD, petitioner,


composed of a representative from the vs.
commission, in the person of the Director, PREMIERE FINANCING CORP., respondent.
Examiners and Appraisers Department or his
designated representative, and a representative
from the petitioners and a representative of the
respondent. PARAS, J.:

The petitioners and respondent are therefore This is an appeal originally filed with the Court of Appeals but
directed to sub. mit to the Commission the name certified to this court for disposition since it involves purely
of their designated representative within three questions of law from the decision of the Regional Trial Court
(3) days from receipt of this order. The (RTC), Branch LXXXV, Quezon City, dated May 22, 1984, in Civil
Conunission shall appoint the other Case No. Q-40392, ordering the defendant-appellant Premiere
representatives if either or both parties fafl to Financing Corporation (Premiere for short) to pay to the plaintiff-
comply with the requirement within the stated appellee Alma Magalad (Magalad for short) the sum of:
time. (a) P50,000.00, the principal obligation, plus interest at the legal
rate from September 12, 1983, until the full amount is paid; (b)
ACCORDINGLY, judgment is hereby rendered: P10,000.00, both for moral and exemplary damages; (c)
P5,000.00, for and as attorney's fees and (d) the costs of suit.
(a) Granting the petition in G.R. No. 63558,
annulling the challenged Orders of respondent The antecedent facts of the case are as follows:
Judge clated February 14, 1983 and March i 1,
1983 (Annexes "L" and "P" of the Abejos' Premiere is a financing company engaged in soliciting and
petition) and prohibiting respondent Judge from accepting money market placements or deposits (Original Record,
further proceeding in Civil Case No. 48746 filed p. 29).
On September 12, 1983 with expired permit to issue commercial On June 11, 1986 Premiere filed his notice of appeal which led to
papers (Ibid., p. 8) and with intention not to pay or defraud its the issuance of the order of the lower court dated July 29, 1986
creditors, Premiere induced and misled Magalad into making a elevating the case to the Court of Appeals (CA) (Ibid., pp. 62-63).
money market placement of P50,000.00 at 22% interest per
annum for which it issued a receipt (Ibid., Exh. "B", p. 8). Aside from The Court of Appeals in its resolution dated September 8, 1987
the receipt, Premier likewise issued two (2) post-dated checks in dismissed the case for failure of Premiere to file its brief despite the
the total sum of P51,079.00 (Ibid., Exh. "C", p. 9) and assigned to ninety-day extension granted to it, which expired on June 10, 1987
Magalad its receivable from a certain David Saman for the same (Rollo, p. 16).
amount (Ibid., Exh. "C", p. 10).
An omnibus motion for reconsideration and admission of late filing
When the said checks were presented for payment on their due of Premiere's brief was filed on September 22, 1987 (Rollo, pp. 17-
dates, the drawee bank dishonored the checks for lack of sufficient 19; 32).
funds to cover the amount (Ibid., Exhs. "D-1", "E-1", pp. 11-12).
Despite demands by Magalad for the replacement of said checks On September 30, 1987 the Court of Appeals issued a resolution
with cash, Premiere, for no valid reason, failed and refused to honor which reconsidered its previous resolution dated September 5,
such demands and due to fraudulent acts of Premiere, Magalad 1987 and admitted the Premiere's brief (Rollo, p. 26).
suffered sleepless nights, mental anguish, fright, serious anxiety,
considering the fact that the money she invested is blood money
On January 31, 1989 the Court of Appeals issued a resolution
and is the only source of support for her family (Ibid., p. 4).
certifying the instant case to this Court on the ground that the case
involves a question of law, the dispositive part of which stating:
Magalad in order to seek redress and retrieve her blood money,
availed of the service of counsel for which she agreed to pay twenty
ACCORDINGLY, pursuant to Rule 50, Sec. 3, in relation to the
percent (20%) of the amount due as and for attorney's fees (Ibid.)
Judiciary Act of 1948, Sec. 17, par. 4(3) (4), the Appeal in this case
is hereby certified to the Supreme Court on the ground that the only
On January 10, 1984, Magalad filed a complaint for damages with issue raised concerns the jurisdiction of the trial court and only a
prayer for writ of preliminary attachment with the RTC, Branch question of law. (Rollo, p. 33)
LXXXV, Quezon City, docketed as Civil Case No. Q-40392 against
herein Premiere (Ibid., p. 3-6).
Hence, this appeal.
Premiere having failed to file an answer and acting on Magalad's
The pivotal issue in this case is whether or not the court a quo had
motion, the lower court declared Premiere in default by virtue of an
jurisdiction to try the instant case.
order dated April 5, 1984 allowing Magalad to present evidence ex-
parte (Ibid., pp. 21; 22)
At the very core of this appeal assailing the aforesaid
pronouncement of the lower court, and around which revolve the
On May 22, 1984 the lower court rendered a default judgment
arguments of the parties, is the applicability of Presidential Decree
against Premiere, the dispositive portion of which reads:
No. 902-A (Reorganization of the SEC with Additional Powers), as
amended by Presidential Decrees Nos. 1653, 1758 and 1799.
From the foregoing evidence, the court finds that plaintiff has fully Magalad submits that the legal suit which she has brought against
established her claim that defendant had indeed acted fraudulently Premiere is an ordinary action for damages with the preliminary
in incurring the obligation and considering that no evidence has attachment cognizable solely by the RTC. Premiere, on the other
been adduced by the defendant to contradict the same, judgment hand, espouses the original and exclusive jurisdiction of the
is hereby rendered ordering the defendant to pay plaintiff as Securities and Exchange Commission.
follows:
Presidential Decree No. 902-A, Section 3, provides:
(a) P50,000.00, the principal obligation, plus interest at the legal
rate from September 12, 1983 until the full amount is paid;
Sec. 3. The Commission shall have absolute jurisdiction,
supervision and control over all corporations, partnerships or
(b) P10,000.00 both for moral and exemplary damages; associations, who are the grantees of primary franchises and/or a
license or permit issued by the government to operate in the
(c) P5,000.00 for and as attorney's fees; and Philippines; and in the exercise of its authority, it shall have the
power to enlist the aid and support of and to deputize any and all
(d) the costs of suit. enforcement agencies of the government, civil or military as well as
any private institution, corporation, firm, association or person. (As
SO ORDERED. (Ibid., p. 30) amended by Presidential Decree No. 1758).

Premiere filed a motion for reconsideration of the foregoing Sec. 3 of Pres. Decree No. 902-A should also be read in
decision, based principally on a question of law alleging that the conjunction with Sec. 5 of the same law, providing:
Securities and Exchange Commission (SEC) has exclusive and
original jurisdiction over a corporation under a state of suspension Sec. 5. In addition to the regulatory and adjudicative functions of
of payments (Ibid., pp. 32-41). the Securities and Exchange Commission over corporations,
partnerships and other forms of associations registered with it as
Magalad filed an opposition to the motion for reconsideration on expressly granted under the existing laws and decrees, it shall
January 8, 1985 alleging among others that the regular court has have original and exclusive jurisdiction to hear and decide cases
jurisdiction over the case to the exclusion of the SEC. (Ibid., pp. 51- involving:
53).
a) Devises or schemes employed by or any acts of the Board of
On May 28, 1986 the lower court issued an order denying the Directors, business associates, its officers or partners, amounting
motion for reconsideration (Ibid., p. 61). to fraud and misrepresentation which may be detrimental to the
public and/or to the stockholders, partners, members of
associations or organizations registered with the Commission. Management Committee created pursuant to this Decree. (Section
(Emphasis supplied) 5(d) of Pres. Decree No. 902-A as added by Pres. Decree 1758).

Considering that Magalad's complaint sufficiently alleges acts In fine, the adjudicative powers of the SEC being clearly defined by
amounting to fraud and misrepresentation committed by Premiere, law, its jurisdiction over this case has to be upheld.
the SEC must be held to retain its original and exclusive jurisdiction
over the case, despite the fact that the suit involves collection of PREMISES CONSIDERED, the instant appeal is GRANTED, and
sums of money paid to said corporation, the recovery of which the order of the Presiding Judge of the Regional Trial Court,
would ordinarily fall within the jurisdiction of regular courts. The Quezon City, Branch LXXXV dated May 22, 1984, in Civil Case No.
fraud committed is detrimental to the interest of the public and, Q-40392 is REVERSED and SET ASIDE, without prejudice to the
therefore, encompasses a category of relationship within the SEC filing by Alma Magalad of the appropriate complaint against
jurisdiction. Premiere Financing Corporation with the Securities and Exchange
Commission.
Otherwise stated, in order that the SEC can take cognizance of a
case, the controversy must pertain to any of the following SO ORDERED.
relationships: (a) between the corporation, partnership or
association and the public; (b) between the corporation, G.R. No. L-12719 May 31, 1962
partnership or association and its stockholders, partners, members
or officers; (c) between the corporation, partnership or association
THE COLLECTOR OF INTERNAL REVENUE, petitioner,
and the state so far as its franchise, permit or license to operate is
vs.
concerned; and (d) among the stockholders, partners or associates
THE CLUB FILIPINO, INC. DE CEBU, respondent.
themselves (Union Glass & Container Corp. v. SEC, 126 SCRA 31;
38; 1983; Abejo v. De la Cruz, 149 SCRA 654, 1987).
Office of the Solicitor General for petitioner.
V. Jaime and L. E. Petilla for respondent.
In this case, the recitals of the complaint sufficiently allege that
devices or schemes amounting to fraud and misrepresentation
detrimental to the interest of the public have been resorted to by PAREDES, J.:
Premiere Corporation. It can not but be conceded, therefore, that
the SEC may exercise its adjudicative powers pursuant to Sec. 5(a) This is a petition to review the decision of the Court of Tax Appeals,
of Pres. Decree No. 902-A (Supra). reversing the decision of the Collector of Internal Revenue,
assessing against and demanding from the "Club Filipino, Inc. de
The fact that Premiere's authority to engage in financing already Cebu", the sum of P12,068.84 as fixed and percentage taxes,
expired will not have the effect of divesting the SEC of its original surcharge and compromise penalty, allegedly due from it as a
and exclusive jurisdiction. The expanded jurisdiction of the SEC keeper of bar and restaurant.
was conceived primarily to protect the interest of the investing
public. That Magalad's money placements were in the nature of As found by the Court of Tax Appeals, the "Club Filipino, Inc. de
investments in Premiere can not be gainsaid. Magalad had Cebu," (Club, for short), is a civic corporation organized under the
reasonably expected to receive returns from moneys she had paid laws of the Philippines with an original authorized capital stock of
to Premiere. Unfortunately, however, she was the victim of alleged P22,000.00, which was subsequently increased to P200,000.00,
fraud and misrepresentation. among others, to it "proporcionar, operar, y mantener un campo de
golf, tenis, gimnesio (gymnasiums), juego de bolos (bowling
Reliance by Magalad on the cases of DMRC v. Este del Sol, (132 alleys), mesas de billar y pool, y toda clase de juegos no prohibidos
SCRA 293) and Union Glass & Container Corp. v. SEC (126 SCRA por leyes generales y ordenanzas generales; y desarollar y cultivar
31), where the jurisdiction of the ordinary Courts was upheld, is deportes de toda clase y denominacion cualquiera para el recreo y
misplaced for, as explicitly stated in those cases, nowhere in the entrenamiento saludable de sus miembros y accionistas" (sec. 2,
complaints therein is found any averment of fraud or Escritura de Incorporacion del Club Filipino, Inc. Exh. A). Neither in
misrepresentation committed by the respective corporations the articles or by-laws is there a provision relative to dividends and
involved. The causes of action, therefore, were nothing more than their distribution, although it is covenanted that upon its dissolution,
simple money claims. the Club's remaining assets, after paying debts, shall be donated
to a charitable Philippine Institution in Cebu (Art. 27, Estatutos del
Club, Exh. A-a.).
Further bolstering the jurisdiction of the SEC in this case is the fact
that said agency had already appointed a Rehabilitation Receiver
for Premiere and has directed all proceedings or claims against it The Club owns and operates a club house, a bowling alley, a golf
be suspended. This, pursuant to Sec. 6(c) of Pres. Decree No. 902- course (on a lot leased from the government), and a bar-restaurant
A providing that "upon appointment of a . . . rehabilitation receiver where it sells wines and liquors, soft drinks, meals and short orders
. . . all actions for claims against corporations . . . under receivership to its members and their guests. The bar-restaurant was a
pending before any court, tribunal, board or body shall be necessary incident to the operation of the club and its golf-course.
suspended accordingly." The club is operated mainly with funds derived from membership
fees and dues. Whatever profits it had, were used to defray its
overhead expenses and to improve its golf-course. In 1951. as a
By so doing, SEC has exercised its original and exclusive
result of a capital surplus, arising from the re-valuation of its real
jurisdiction to hear and decide cases involving:
properties, the value or price of which increased, the Club declared
stock dividends; but no actual cash dividends were distributed to
a) Petitions of corporations, partnerships or associations to be the stockholders. In 1952, a BIR agent discovered that the Club
declared in the state of suspension of payments in cases where the has never paid percentage tax on the gross receipts of its bar and
corporation, partnership or association possesses sufficient restaurant, although it secured B-4, B-9(a) and B-7 licenses. In a
property to cover all its debts but foresees the impossibility of letter dated December 22, 1852, the Collector of Internal Revenue
meeting them when they respectively fall due or in cases where the assessed against and demanded from the Club, the following
corporation, partnership or association has no sufficient assets to sums:
cover its liabilities but is under the management of a Rehabilitation
Receiver or Management of a Rehabilitation Receiver or
As percentage tax on its gross receipts necessary adjuncts of the Club to foster its purposes and the profits
during the tax years 1946 to 1951 P9,599.07 derived therefrom are necessarily incidental to the primary object
of developing and cultivating sports for the healthful recreation and
Surcharge therein 2,399.77 entertainment of the stockholders and members. That a Club
makes some profit, does not make it a profit-making Club. As has
As fixed tax for the years 1946 to 1952 70.00 been remarked a club should always strive, whenever possible, to
have surplus (Jesus Sacred Heart College v. Collector of Int. Rev.,
Compromise penalty 500.00 G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco
Educational Corp., G.R. No. L-9276, Oct. 23, 1956).1wph1.t
The Club wrote the Collector, requesting for the cancellation of the
assessment. The request having been denied, the Club filed the It is claimed that unlike the two cases just cited (supra), which are
instant petition for review. non-stock, the appellee Club is a stock corporation. This is
unmeritorious. The facts that the capital stock of the respondent
The dominant issues involved in this case are twofold: Club is divided into shares, does not detract from the finding of the
trial court that it is not engaged in the business of operator of bar
and restaurant. What is determinative of whether or not the Club is
1. Whether the respondent Club is liable for the payment of the sum
engaged in such business is its object or purpose, as stated in its
of 12,068.84, as fixed and percentage taxes and surcharges
articles and by-laws. It is a familiar rule that the actual purpose is
prescribed in sections 182, 183 and 191 of the Tax Code, under
which the assessment was made, in connection with the operation not controlled by the corporate form or by the commercial aspect
of the business prosecuted, but may be shown by extrinsic
of its bar and restaurant, during the periods mentioned above; and
evidence, including the by-laws and the method of operation. From
the extrinsic evidence adduced, the Tax Court concluded that the
2. Whether it is liable for the payment of the sum of P500.00 as Club is not engaged in the business as a barkeeper and
compromise penalty. restaurateur.

Section 182, of the Tax Code states, "Unless otherwise provided, Moreover, for a stock corporation to exist, two requisites must be
every person engaging in a business on which the percentage tax complied with, to wit: (1) a capital stock divided into shares and (2)
is imposed shall pay in full a fixed annual tax of ten pesos for each an authority to distribute to the holders of such shares, dividends
calendar year or fraction thereof in which such person shall engage or allotments of the surplus profits on the basis of the shares held
in said business." Section 183 provides in general that "the (sec. 3, Act No. 1459). In the case at bar, nowhere in its articles of
percentage taxes on business shall be payable at the end of each incorporation or by-laws could be found an authority for the
calendar quarter in the amount lawfully due on the business distribution of its dividends or surplus profits. Strictly speaking, it
transacted during each quarter; etc." And section 191, same Tax cannot, therefore, be considered a stock corporation, within the
Code, provides "Percentage tax . . . Keepers of restaurants, contemplation of the corporation law.
refreshment parlors and other eating places shall pay a tax
three per centum, and keepers of bar and cafes where wines or
A tax is a burden, and, as such, it should not be deemed imposed
liquors are served five per centum of their gross receipts . . .". It has
upon fraternal, civic, non-profit, nonstock organizations, unless the
been held that the liability for fixed and percentage taxes, as
intent to the contrary is manifest and patent" (Collector v. BPOE
provided by these sections, does not ipso facto attach by mere
Elks Club, et al., supra), which is not the case in the present appeal.
reason of the operation of a bar and restaurant. For the liability to
attach, the operator thereof must be engaged in the business as a
barkeeper and restaurateur. The plain and ordinary meaning Having arrived at the conclusion that respondent Club is not
of business is restricted to activities or affairs where profit is the engaged in the business as an operator of a bar and restaurant,
purpose or livelihood is the motive, and the term business when and therefore, not liable for fixed and percentage taxes, it follows
used without qualification, should be construed in its plain and that it is not liable for any penalty, much less of a compromise
ordinary meaning, restricted to activities for profit or livelihood (The penalty.
Coll. of Int. Rev. v. Manila Lodge No. 761 of the BPOE [Manila Elks
Club] & Court of Tax Appeals, G.R. No. L-11176, June 29, 1959, WHEREFORE, the decision appealed from is affirmed without
giving full definitions of the word "business"; Coll. of Int. Rev. v. costs.
Sweeney, et al. [International Club of Iloilo, Inc.], G.R. No. L-12178,
Aug. 21, 1959, the facts of which are similar to the ones at bar; Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L.,
Manila Polo Club v. B. L. Meer, etc., No. L-10854, Jan. 27, 1960). Barrera and Dizon, JJ., concur.
Bengzon, C.J., is on leave.
Having found as a fact that the Club was organized to develop and
cultivate sports of all class and denomination, for the healthful G.R. No. 91889 August 27, 1993
recreation and entertainment of its stockholders and members; that
upon its dissolution, its remaining assets, after paying debts, shall MANUEL R. DULAY ENTERPRISES, INC., VIRGILIO E. DULAY
be donated to a charitable Philippine Institution in Cebu; that it is AND NEPOMUCENO REDOVAN, petitioners,
operated mainly with funds derived from membership fees and vs.
dues; that the Club's bar and restaurant catered only to its THE HONORABLE COURT OF APPEALS, EDGARDO D.
members and their guests; that there was in fact no cash dividend PABALAN, MANUEL A. TORRES, JR., MARIA THERESA V.
distribution to its stockholders and that whatever was derived on VELOSO AND CASTRENSE C. VELOSO, respondents.
retail from its bar and restaurant was used to defray its overall
overhead expenses and to improve its golf-course (cost-plus- Virgilio E. Dulay for petitioners.
expenses-basis), it stands to reason that the Club is not engaged
in the business of an operator of bar and restaurant (same
Torres, Tobias, Azura & Jocson for private respondents.
authorities, cited above).

It is conceded that the Club derived profit from the operation of its
bar and restaurant, but such fact does not necessarily convert it
into a profit-making enterprise. The bar and restaurant are NOCON, J.:
This is a petition for review on certiorari to annul and set aside the Veloso. 8 Subsequently, Manuel Dulay and private respondents
decision 1 of the Court of Appeals affirming the decision2 of the spouses Veloso executed a Memorandum to the Deed of Absolute
Regional Trial Court of Pasay, Branch 114 Civil Cases Nos. 8198- Sale of December 23, 1976 9 dated December 9, 1977 giving
P, and 2880-P, the dispositive portion of which reads, as follows: Manuel Dulay within (2) years or until December 9, 1979 to
repurchase the subject property for P200,000.00 which was,
Wherefore, in view of all the foregoing considerations, in this Court however, not annotated either in TCT No. 17880 or TCT No. 23225.
hereby renders judgment, as follows:
On December 24, 1976, private respondent Maria Veloso, without
In Civil Case No. 2880-P, the petition filed by Manuel R. Dulay the knowledge of Manuel Dulay, mortgaged the subject property to
Enterprises, Inc. and Virgilio E. Dulay for annulment or declaration private respondent Manuel A. Torres for a loan of P250,000.00
of nullity of the decision of the Metropolitan Trial Court, Branch 46, which was duly annotated as Entry No. 68139 in TCT No. 23225. 10
Pasay City, in its Civil Case No. 38-81 entitled "Edgardo D.
Pabalan, et al., vs. Spouses Florentino Manalastas, et al.," is Upon the failure of private respondent Maria Veloso to pay private
dismissed for lack of merits; respondent Torres, the subject property was sold on April 5, 1978
to private respondent Torres as the highest bidder in an
In Civil Case No. 8278-P, the complaint filed by Manuel R. Dulay extrajudicial foreclosure sale as evidenced by the Certificate of
Enterprises, Inc. for cancellation of title of Manuel A. Torres, Jr. Sheriff's Sale 11 issued on April 20, 1978.
(TCT No. 24799 of the Register of Deeds of Pasay City) and
reconveyance, is dismissed for lack or merit, and, On July 20, 1978, private respondent Maria Veloso executed a
Deed of Absolute Assignment of the Right to Redeem 12 in favor of
In Civil Case No. 8198-P, defendants Manuel R. Dulay Enterprises, Manuel Dulay assigning her right to repurchase the subject
Inc. and Virgilio E. Dulay are ordered to surrender and deliver property from private respondent Torres as a result of the extra sale
possession of the parcel of land, together with all the improvements held on April 25, 1978.
thereon, described in Transfer Certificate of Title No. 24799 of the
Register of Deeds of Pasay City, in favor of therein plaintiffs Manuel As neither private respondent Maria Veloso nor her assignee
A. Torres, Jr. as owner and Edgardo D. Pabalan as real estate Manuel Dulay was able to redeem the subject property within the
administrator of said Manuel A. Torres, Jr.; to account for and one year statutory period for redemption, private respondent Torres
return to said plaintiffs the rentals from dwelling unit No. 8-A of the filed an Affidavit of Consolidation of Ownership 13 with the Registry
apartment building (Dulay Apartment) from June 1980 up to the of Deeds of Pasay City and TCT No. 24799 14 was subsequently
present, to indemnify plaintiffs, jointly and severally, expenses of issued to private respondent Manuel Torres on April 23, 1979.
litigation in the amount of P4,000.00 and attorney's fees in the sum
of P6,000.00, for all the three (3) cases. Co-defendant On October 1, 1979, private respondent Torres filed a petition for
Nepomuceno Redovan is ordered to pay the current and the issuance of a writ of possession against private respondents
subsequent rentals on the premises leased by him to plaintiffs. spouses Veloso and Manuel Dulay in LRC Case No. 1742-P.
However, when petitioner Virgilio Dulay was never authorized by
The counterclaim of defendants Virgilio E. Dulay and Manuel R. the petitioner corporation to sell or mortgage the subject property,
Dulay Enterprises, Inc. and N. Redovan, dismissed for lack of merit. the trial court ordered private respondent Torres to implead
With costs against the three (3) aforenamed defendants. 3 petitioner corporation as an indispensable party but the latter
moved for the dismissal of his petition which was granted in an
The facts as found by the trial court are as follows: Order dated April 8, 1980.

Petitioner Manuel R. Dulay Enterprises, Inc, a domestic corporation On June 20, 1980, private respondent Torres and Edgardo
with the following as members of its Board of Directors: Manuel R. Pabalan, real estate administrator of Torres, filed an action against
Dulay with 19,960 shares and designated as president, treasurer petitioner corporation, Virgilio Dulay and Nepomuceno Redovan, a
and general manager, Atty. Virgilio E. Dulay with 10 shares and tenant of Dulay Apartment Unit No. 8-A for the recovery of
designated as vice-president; Linda E. Dulay with 10 shares; Celia possession, sum of money and damages with preliminary
Dulay-Mendoza with 10 shares; and Atty. Plaridel C. Jose with 10 injunction in Civil Case, No. 8198-P with the then Court of First
shares and designated as secretary, owned a property covered by Instance of Rizal.
TCT No. 17880 4 and known as Dulay Apartment consisting of
sixteen (16) apartment units on a six hundred eighty-nine (689) On July 21, 1980, petitioner corporation filed an action against
square meters lot, more or less, located at Seventh Street (now private respondents spouses Veloso and Torres for the
Buendia Extension) and F.B. Harrison Street, Pasay City. cancellation of the Certificate of Sheriff's Sale and TCT No. 24799
in Civil Case No. 8278-P with the then Court of First Instance of
Petitioner corporation through its president, Manuel Dulay, Rizal.
obtained various loans for the construction of its hotel project,
Dulay Continental Hotel (now Frederick Hotel). It even had to On January 29, 1981, private respondents Pabalan and Torres filed
borrow money from petitioner Virgilio Dulay to be able to continue an action against spouses Florentino and Elvira Manalastas, a
the hotel project. As a result of said loan, petitioner Virgilio Dulay tenant of Dulay Apartment Unit No. 7-B, with petitioner corporation
occupied one of the unit apartments of the subject property since as intervenor for ejectment in Civil Case No. 38-81 with the
property since 1973 while at the same time managing the Dulay Metropolitan Trial Court of Pasay City which rendered a decision
Apartment at his shareholdings in the corporation was on April 25, 1985, dispositive portion of which reads, as follows:
subsequently increased by his father. 5
Wherefore, judgment is hereby rendered in favor of the plaintiff
On December 23, 1976, Manuel Dulay by virtue of Board (herein private respondents) and against the defendants:
Resolution
No 186 of petitioner corporation sold the subject property to private 1. Ordering the defendants and all persons claiming possession
respondents spouses Maria Theresa and Castrense Veloso in the under them to vacate the premises.
amount of P300,000.00 as evidenced by the Deed of Absolute
Sale.7 Thereafter, TCT No. 17880 was cancelled and TCT No.
23225 was issued to private respondent Maria Theresa
2. Ordering the defendants to pay the rents in the sum of P500.000 who failed to attend, unless he promptly files his written objection
a month from May, 1979 until they shall have vacated the premises with the secretary of the corporation after having knowledge
with interest at the legal rate; thereof.

3. Ordering the defendants to pay attorney's fees in the sum of In the instant case, petitioner corporation is classified as a close
P2,000.00 and P1,000.00 as other expenses of litigation and for corporation and consequently a board resolution authorizing the
them to pay the costs of the suit.15 sale or mortgage of the subject property is not necessary to bind
the corporation for the action of its president. At any rate, corporate
Thereafter or on May 17, 1985, petitioner corporation and Virgilio action taken at a board meeting without proper call or notice in a
Dulay filed an action against the presiding judge of the Metropolitan close corporation is deemed ratified by the absent director unless
Trial Court of Pasay City, private respondents Pabalan and Torres the latter promptly files his written objection with the secretary of
for the annulment of said decision with the Regional Trial Court of the corporation after having knowledge of the meeting which, in his
Pasay in Civil Case No. 2880-P. case, petitioner Virgilio Dulay failed to do.

Thereafter, the three (3) cases were jointly tried and the trial court It is relevant to note that although a corporation is an entity which
rendered a decision in favor of private respondents. has a personality distinct and separate from its individual
stockholders or members, 19 the veil of corporate fiction may be
Not satisfied with said decision, petitioners appealed to the Court pierced when it is used to defeat public convenience justify wrong,
of Appeals which rendered a decision on October 23, 1989, the protect fraud or defend crime. 20 The privilege of being treated as
dispositive portion of which reads, as follows: an entity distinct and separate from its stockholder or members is
therefore confined to its legitimate uses and is subject to certain
limitations to prevent the commission of fraud or other illegal or
PREMISES CONSIDERED, the decision being appealed should be
unfair act. When the corporation is used merely as an alter ego or
as it is hereby AFFIRMED in full. 16
business conduit of a person, the law will regard the corporation as
the act of that person. 21 The Supreme Court had repeatedly
On November 8, 1989, petitioners filed a Motion for disregarded the separate personality of the corporation where the
Reconsideration which was denied on January 26, 1990. corporate entity was used to annul a valid contract executed by one
of its members.
Hence, this petition.
Petitioners' claim that the sale of the subject property by its
During the pendency of this petition, private respondent Torres died president, Manuel Dulay, to private respondents spouses Veloso is
on April 3, 1991 as shown in his death certificate 17 and named null and void as the alleged Board Resolution No. 18 was passed
Torres-Pabalan Realty & Development Corporation as his heir in without the knowledge and consent of the other members of the
his holographic will 18dated October 31, 1986. board of directors cannot be sustained. As correctly pointed out by
the respondent Court of Appeals:
Petitioners contend that the respondent court had acted with grave
abuse of discretion when it applied the doctrine of piercing the veil Appellant Virgilio E. Dulay's protestations of complete innocence to
of corporate entity in the instant case considering that the sale of the effect that he never participated nor was even aware of any
the subject property between private respondents spouses Veloso meeting or resolution authorizing the mortgage or sale of the
and Manuel Dulay has no binding effect on petitioner corporation subject premises (see par. 8, affidavit of Virgilio E. Dulay, dated
as Board Resolution No. 18 which authorized the sale of the subject May 31, 1984, p. 14, Exh. "21") is difficult to believe. On the
property was resolved without the approval of all the members of contrary, he is very much privy to the transactions involved. To
the board of directors and said Board Resolution was prepared by begin with, he is a incorporator and one of the board of directors
a person not designated by the corporation to be its secretary. designated at the time of the organization of Manuel R. Dulay
Enterprise, Inc. In ordinary parlance, the said entity is loosely
We do not agree. referred to as a "family corporation". The nomenclature, if
imprecise, however, fairly reflects the cohesiveness of a group and
Section 101 of the Corporation Code of the Philippines provides: the parochial instincts of the individual members of such an
aggrupation of which Manuel R. Dulay Enterprises, Inc. is typical:
Sec. 101. When board meeting is unnecessary or improperly held. four-fifths of its incorporators being close relatives namely, three
Unless the by-laws provide otherwise, any action by the directors (3) children and their father whose name identifies their corporation
of a close corporation without a meeting shall nevertheless be (Articles of Incorporation of Manuel R. Dulay Enterprises, Inc. Exh.
deemed valid if: "31-A"). 22

1. Before or after such action is taken, written consent thereto is Besides, the fact that petitioner Virgilio Dulay on June 24, 1975
signed by all the directors, or executed an affidavit 23 that he was a signatory witness to the
execution of the post-dated Deed of Absolute Sale of the subject
property in favor of private respondent Torres indicates that he was
2. All the stockholders have actual or implied knowledge of the
aware of the transaction executed between his father and private
action and make no prompt objection thereto in writing; or
respondents and had, therefore, adequate knowledge about the
sale of the subject property to private respondents.
3. The directors are accustomed to take informal action with the
express or implied acquiese of all the stockholders, or
Consequently, petitioner corporation is liable for the act of Manuel
Dulay and the sale of the subject property to private respondents
4. All the directors have express or implied knowledge of the action by Manuel Dulay is valid and binding. As stated by the trial court:
in question and none of them makes prompt objection thereto in
writing.
. . . the sale between Manuel R. Dulay Enterprises, Inc. and the
spouses Maria Theresa V. Veloso and Castrense C. Veloso, was
If a directors' meeting is held without call or notice, an action taken a corporate act of the former and not a personal transaction of
therein within the corporate powers is deemed ratified by a director Manuel R. Dulay. This is so because Manuel R. Dulay was not only
president and treasurer but also the general manager of the EN BANC
corporation. The corporation was a closed family corporation and [G.R. Nos. 84132-33 : December 10, 1990.]
the only non-relative in the board of directors was Atty. Plaridel C.
Jose who appeared on paper as the secretary. There is no denying 192 SCRA 257
the fact, however, that Maria Socorro R. Dulay at times acted as NATIONAL DEVELOPMENT COMPANY AND NEW AGRIX, INC.,
secretary. . . ., the Court can not lose sight of the fact that the Petitioners, vs. PHILIPPINE VETERANS BANK, THE EX-OFFICIO
Manuel R. Dulay Enterprises, Inc. is a closed family corporation SHERIFF and GODOFREDO QUILING, in his capacity as Deputy
where the incorporators and directors belong to one single family. Sheriff of Calamba, Laguna, Respondents.
It cannot be concealed that Manuel R. Dulay as president,
treasurer and general manager almost had absolute control over
the business and affairs of the corporation. 24 DECISION

Moreover, the appellate courts will not disturb the findings of the
trial judge unless he has plainly overlooked certain facts of CRUZ, J.:
substance and value that, if considered, might affect the result of
the case, 25 which is not present in the instant case.
This case involves the constitutionality of a presidential decree which,
like all other issuances of President Marcos during his regime, was at
Petitioners' contention that private respondent Torres never
that time regarded as sacrosanct. It is only now, in a freer atmosphere,
acquired ownership over the subject property since the latter was that his acts are being tested by the touchstone of the fundamental law
never in actual possession of the subject property nor was the that even then was supposed to limit presidential action.
property ever delivered to him is also without merit.
: rd

The particular enactment in question is Pres. Decree No. 1717, which


Paragraph 1, Article 1498 of the New Civil Code provides: ordered the rehabilitation of the Agrix Group of Companies to be
administered mainly by the National Development Company. The law
outlined the procedure for filing claims against the Agrix companies
When the sale is made through a public instrument, the execution and created a Claims Committee to process these claims. Especially
thereof shall be equivalent to the delivery of the thing which is the relevant to this case, and noted at the outset, is Sec. 4(1) thereof
object of the contract, if from the deed the contrary do not appear providing that "all mortgages and other liens presently attaching to any
or cannot clearly be inferred. of the assets of the dissolved corporations are hereby extinguished."
Earlier, the Agrix Marketing, Inc. (AGRIX) had executed in favor of
Under the aforementioned article, the mere execution of the deed private respondent Philippine Veterans Bank a real estate mortgage
of sale in a public document is equivalent to the delivery of the dated July 7, 1978, over three (3) parcels of land situated in Los
property. Likewise, this Court had held that: Baos, Laguna. During the existence of the mortgage, AGRIX went
bankrupt. It was for the expressed purpose of salvaging this and the
It is settled that the buyer in a foreclosure sale becomes the other Agrix companies that the aforementioned decree was issued by
absolute owner of the property purchased if it is not redeemed President Marcos.
during the period of one year after the registration of the sale. As Pursuant thereto, the private respondent filed a claim with the AGRIX
such, he is entitled to the possession of the said property and can Claims Committee for the payment of its loan credit. In the meantime,
demand it at any time following the consolidation of ownership in the New Agrix, Inc. and the National Development Company,
his name and the issuance to him of a new transfer certificate of petitioners herein, invoking Sec. 4 (1) of the decree, filed a petition with
title. The buyer can in fact demand possession of the land even the Regional Trial Court of Calamba, Laguna, for the cancellation of
during the redemption period except that he has to post a bond in the mortgage lien in favor of the private respondent. For its part, the
accordance with Section 7 of Act No. 3133 as amended. No such private respondent took steps to extrajudicially foreclose the
bond is required after the redemption period if the property is not mortgage, prompting the petitioners to file a second case with the
redeemed. Possession of the land then becomes an absolute right same court to stop the foreclosure. The two cases were consolidated.
of the purchaser as confirmed owner. 26
After the submission by the parties of their respective pleadings, the
trial court rendered the impugned decision. Judge Francisco Ma.
Therefore, prior physical delivery or possession is not legally Guerrero annulled not only the challenged provision, viz., Sec. 4 (1),
required since the execution of the Deed of Sale in deemed but the entire Pres. Decree No. 1717 on the grounds that: (1) the
equivalent to delivery. presidential exercise of legislative power was a violation of the
principle of separation of powers; (2) the law impaired the obligation of
Finally, we hold that the respondent appellate court did not err in contracts; and (3) the decree violated the equal protection clause. The
denying petitioner's motion for reconsideration despite the fact that motion for reconsideration of this decision having been denied, the
private respondents failed to submit their comment to said motion present petition was filed.: rd

as required by the respondent appellate court from resolving The petition was originally assigned to the Third Division of this Court
petitioners' motion for reconsideration without the comment of the but because of the constitutional questions involved it was transferred
private respondent which was required merely to aid the court in to the Court en banc. On August 30, 1988, the Court granted the
the disposition of the motion. The courts are as much interested as petitioner's prayer for a temporary restraining order and instructed the
the parties in the early disposition of cases before them. To require respondents to cease and desist from conducting a public auction sale
otherwise would unnecessarily clog the courts' dockets. of the lands in question. After the Solicitor General and the private
respondent had filed their comments and the petitioners their reply, the
WHEREFORE, the petition is DENIED and the decision appealed Court gave due course to the petition and ordered the parties to file
from is hereby AFFIRMED. simultaneous memoranda. Upon compliance by the parties, the case
was deemed submitted.
SO ORDERED. The petitioners contend that the private respondent is now estopped
from contesting the validity of the decree. In support of this contention,
it cites the recent case of Mendoza v. Agrix Marketing, Inc., 1 where
the constitutionality of Pres. Decree No. 1717 was also raised but not
resolved. The Court, after noting that the petitioners had already filed
their claims with the AGRIX Claims Committee created by the decree,
had simply dismissed the petition on the ground of estoppel.
The petitioners stress that in the case at bar the private respondent means employed are reasonably necessary for the accomplishment of
also invoked the provisions of Pres. Decree No. 1717 by filing a claim the purpose and not unduly oppressive upon individuals. 2
with the AGRIX Claims Committee. Failing to get results, it sought to
Applying these criteria to the case at bar, the Court finds first of all that
foreclose the real estate mortgage executed by AGRIX in its favor,
the interests of the public are not sufficiently involved to warrant the
which had been extinguished by the decree. It was only when the
interference of the government with the private contracts of AGRIX.
petitioners challenged the foreclosure on the basis of Sec. 4 (1) of the
The decree speaks vaguely of the "public, particularly the small
decree, that the private respondent attacked the validity of the
investors," who would be prejudiced if the corporation were not to be
provision. At that stage, however, consistent with Mendoza, the private
assisted. However, the record does not state how many there are of
respondent was already estopped from questioning the
such investors, and who they are, and why they are being preferred to
constitutionality of the decree.
the private respondent and other creditors of AGRIX with vested
The Court does not agree that the principle of estoppel is applicable. property rights.:-cralaw

It is not denied that the private respondent did file a claim with the The public interest supposedly involved is not identified or explained.
AGRIX Claims Committee pursuant to this decree. It must be noted, It has not been shown that by the creation of the New Agrix, Inc. and
however, that this was done in 1980, when President Marcos was the the extinction of the property rights of the creditors of AGRIX, the
absolute ruler of this country and his decrees were the absolute law. interests of the public as a whole, as distinguished from those of a
Any judicial challenge to them would have been futile, not to say particular class, would be promoted or protected. The indispensable
foolhardy. The private respondent, no less than the rest of the nation, link to the welfare of the greater number has not been established. On
was aware of that reality and knew it had no choice under the the contrary, it would appear that the decree was issued only to favor
circumstances but to conform. : nad a special group of investors who, for reasons not given, have been
preferred to the legitimate creditors of AGRIX.
It is true that there were a few venturesome souls who dared to
question the dictator's decisions before the courts of justice then. The Assuming there is a valid public interest involved, the Court still finds
record will show, however, that not a single act or issuance of that the means employed to rehabilitate AGRIX fall far short of the
President Marcos was ever declared unconstitutional, not even by the requirement that they shall not be unduly oppressive. The
highest court, as long as he was in power. To rule now that the private oppressiveness is patent on the face of the decree. The right to
respondent is estopped for having abided with the decree instead of property in all mortgages, liens, interests, penalties and charges owing
boldly assailing it is to close our eyes to a cynical fact of life during that to the creditors of AGRIX is arbitrarily destroyed. No consideration is
repressive time. paid for the extinction of the mortgage rights. The accrued interests
and other charges are simply rejected by the decree. The right to
This case must be distinguished from Mendoza, where the petitioners,
property is dissolved by legislative fiat without regard to the private
after filing their claims with the AGRIX Claims Committee, received in
interest violated and, worse, in favor of another private interest.
settlement thereof shares of stock valued at P40,000.00 without
protest or reservation. The herein private respondent has not been A mortgage lien is a property right derived from contract and so comes
paid a single centavo on its claim, which was kept pending for more under the protection of the Bill of Rights. So do interests on loans, as
than seven years for alleged lack of supporting papers. Significantly, well as penalties and charges, which are also vested rights once they
the validity of that claim was not questioned by the petitioner when it accrue. Private property cannot simply be taken by law from one
sought to restrain the extrajudicial foreclosure of the mortgage by the person and given to another without compensation and any known
private respondent. The petitioner limited itself to the argument that public purpose. This is plain arbitrariness and is not permitted under
the private respondent was estopped from questioning the decree the Constitution.
because of its earlier compliance with its provisions.
And not only is there arbitrary taking, there is discrimination as well. In
Independently of these observations, there is the consideration that an extinguishing the mortgage and other liens, the decree lumps the
affront to the Constitution cannot be allowed to continue existing secured creditors with the unsecured creditors and places them on the
simply because of procedural inhibitions that exalt form over same level in the prosecution of their respective claims. In this respect,
substance. all of them are considered unsecured creditors. The only concession
given to the secured creditors is that their loans are allowed to earn
The Court is especially disturbed by Section 4(1) of the decree, quoted
interest from the date of the decree, but that still does not justify the
above, extinguishing all mortgages and other liens attaching to the
cancellation of the interests earned before that date. Such interests,
assets of AGRIX. It also notes, with equal concern, the restriction in
whether due to the secured or the unsecured creditors, are all
Subsection (ii) thereof that all "unsecured obligations shall not bear
extinguished by the decree. Even assuming such cancellation to be
interest" and in Subsection (iii) that "all accrued interests, penalties or
valid, we still cannot see why all kinds of creditors, regardless of
charges as of date hereof pertaining to the obligations, whether
security, are treated alike.
secured or unsecured, shall not be recognized."
Under the equal protection clause, all persons or things similarly
These provisions must be read with the Bill of Rights, where it is clearly
situated must be treated alike, both in the privileges conferred and the
provided in Section 1 that "no person shall be deprived of life, liberty
obligations imposed. Conversely, all persons or things differently
or property without due course of law nor shall any person be denied
situated should be treated differently. In the case at bar, persons
the equal protection of the law" and in Section 10 that "no law impairing
differently situated are similarly treated, in disregard of the principle
the obligation of contracts shall be passed."
that there should be equality only among equals. - nad

In defending the decree, the petitioners argue that property rights, like
One may also well wonder why AGRIX was singled out for government
all rights, are subject to regulation under the police power for the
help, among other corporations where the stockholders or investors
promotion of the common welfare. The contention is that this inherent
were also swindled. It is not clear why other companies entitled to
power of the state may be exercised at any time for this purpose so
similar concern were not similarly treated. And surely, the stockholders
long as the taking of the property right, even if based on contract, is
of the private respondent, whose mortgage lien had been cancelled
done with due process of law.
and legitimate claims to accrued interests rejected, were no less
This argument is an over-simplification of the problem before us. The deserving of protection, which they did not get. The decree operated,
police power is not a panacea for all constitutional maladies. Neither to use the words of a celebrated case, 3 "with an evil eye and an
does its mere invocation conjure an instant and automatic justification uneven hand."
for every act of the government depriving a person of his life, liberty or
On top of all this, New Agrix, Inc. was created by special decree
property.
notwithstanding the provision of Article XIV, Section 4 of the 1973
A legislative act based on the police power requires the concurrence Constitution, then in force, that:
of a lawful subject and a lawful method. In more familiar words, a) the
SEC. 4. The Batasang Pambansa shall not, except by general law,
interests of the public generally, as distinguished from those of a
provide for the formation, organization, or regulation of private
particular class, should justify the interference of the state; and b) the
corporations, unless such corporations are owned or controlled by the G.R. No. 84197 July 28, 1989
Government or any subdivision or instrumentality thereof. 4
The new corporation is neither owned nor controlled by the PIONEER INSURANCE & SURETY CORPORATION, petitioner,
government. The National Development Corporation was merely vs.
required to extend a loan of not more than P10,000,000.00 to New THE HON. COURT OF APPEALS, BORDER MACHINERY &
Agrix, Inc. Pending payment thereof, NDC would undertake the HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M.
management of the corporation, but with the obligation of making MAGLANA and JACOB S. LIM, respondents.
periodic reports to the Agrix board of directors. After payment of the
loan, the said board can then appoint its own management. The stocks G.R. No. 84157 July 28, 1989
of the new corporation are to be issued to the old investors and
stockholders of AGRIX upon proof of their claims against the abolished
JACOB S. LIM, petitioner,
corporation. They shall then be the owners of the new corporation.
New Agrix, Inc. is entirely private and so should have been organized vs.
under the Corporation Law in accordance with the above-cited COURT OF APPEALS, PIONEER INSURANCE AND SURETY
constitutional provision. CORPORATION, BORDER MACHINERY and HEAVY
EQUIPMENT CO., INC,, FRANCISCO and MODESTO
The Court also feels that the decree impairs the obligation of the CERVANTES and CONSTANCIO MAGLANA, respondents.
contract between AGRIX and the private respondent without
justification. While it is true that the police power is superior to the
GUTIERREZ, JR., J.:
impairment clause, the principle will apply only where the contract is
so related to the public welfare that it will be considered congenitally
susceptible to change by the legislature in the interest of the greater The subject matter of these consolidated petitions is the decision
number. 5 Most present-day contracts are of that nature. But as of the Court of Appeals in CA-G.R. CV No. 66195 which modified
already observed, the contracts of loan and mortgage executed by the decision of the then Court of First Instance of Manila in Civil
AGRIX are purely private transactions and have not been shown to be Case No. 66135. The plaintiffs complaint (petitioner in G.R. No.
affected with public interest. There was therefore no warrant to amend 84197) against all defendants (respondents in G.R. No. 84197)
their provisions and deprive the private respondent of its vested was dismissed but in all other respects the trial court's decision was
property rights. affirmed.
It is worth noting that only recently in the case of the Development
Bank of the Philippines v. NLRC, 6 we sustained the preference in The dispositive portion of the trial court's decision reads as follows:
payment of a mortgage creditor as against the argument that the
claims of laborers should take precedence over all other claims, WHEREFORE, judgment is rendered against defendant Jacob S.
including those of the government. In arriving at this ruling, the Court Lim requiring Lim to pay plaintiff the amount of P311,056.02, with
recognized the mortgage lien as a property right protected by the due interest at the rate of 12% per annum compounded monthly; plus
process and contract clauses notwithstanding the argument that the 15% of the amount awarded to plaintiff as attorney's fees from July
amendment in Section 110 of the Labor Code was a proper exercise 2,1966, until full payment is made; plus P70,000.00 moral and
of the police power.: nad

exemplary damages.
The Court reaffirms and applies that ruling in the case at bar.
Our finding, in sum, is that Pres. Decree No. 1717 is an invalid exercise It is found in the records that the cross party plaintiffs incurred
of the police power, not being in conformity with the traditional additional miscellaneous expenses aside from
requirements of a lawful subject and a lawful method. The extinction Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S.
of the mortgage and other liens and of the interest and other charges Lim is further required to pay cross party plaintiff, Bormaheco, the
pertaining to the legitimate creditors of AGRIX constitutes taking Cervanteses one-half and Maglana the other half, the amount of
without due process of law, and this is compounded by the reduction Pl84,878.74 with interest from the filing of the cross-complaints
of the secured creditors to the category of unsecured creditors in until the amount is fully paid; plus moral and exemplary damages
violation of the equal protection clause. Moreover, the new in the amount of P184,878.84 with interest from the filing of the
corporation, being neither owned nor controlled by the Government, cross-complaints until the amount is fully paid; plus moral and
should have been created only by general and not special law. And exemplary damages in the amount of P50,000.00 for each of the
insofar as the decree also interferes with purely private agreements two Cervanteses.
without any demonstrated connection with the public interest, there is
likewise an impairment of the obligation of the contract. Furthermore, he is required to pay P20,000.00 to Bormaheco and
With the above pronouncements, we feel there is no more need to rule the Cervanteses, and another P20,000.00 to Constancio B.
on the authority of President Marcos to promulgate Pres. Decree No. Maglana as attorney's fees.
1717 under Amendment No. 6 of the 1973 Constitution. Even if he had
such authority, the decree must fall just the same because of its xxx xxx xxx
violation of the Bill of Rights.
WHEREFORE, the petition is DISMISSED. Pres. Decree No. 1717 is WHEREFORE, in view of all above, the complaint of plaintiff
declared UNCONSTITUTIONAL. The temporary restraining order Pioneer against defendants Bormaheco, the Cervanteses and
dated August 30, 1988, is LIFTED. Costs against the petitioners. - nad
Constancio B. Maglana, is dismissed. Instead, plaintiff is required
SO ORDERED. to indemnify the defendants Bormaheco and the Cervanteses the
amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up to the
time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana


the amount of P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this


action was filed in good faith. The fact that the properties of the
Bormaheco and the Cervanteses were attached and that they were
required to file a counterbond in order to dissolve the attachment,
is not an act of bad faith. When a man tries to protect his rights, he Cervanteses and Maglana, however, filed a third party claim
should not be saddled with moral or exemplary damages. alleging that they are co-owners of the aircrafts,
Furthermore, the rights exercised were provided for in the Rules of
Court, and it was the court that ordered it, in the exercise of its On July 19, 1966, Pioneer filed an action for judicial foreclosure
discretion. with an application for a writ of preliminary attachment against Lim
and respondents, the Cervanteses, Bormaheco and Maglana.
No damage is decided against Malayan Insurance Company, Inc.,
the third-party defendant, for it only secured the attachment prayed In their Answers, Maglana, Bormaheco and the Cervanteses filed
for by the plaintiff Pioneer. If an insurance company would be liable cross-claims against Lim alleging that they were not privies to the
for damages in performing an act which is clearly within its power contracts signed by Lim and, by way of counterclaim, sought for
and which is the reason for its being, then nobody would engage in damages for being exposed to litigation and for recovery of the
the insurance business. No further claim or counter-claim for or sums of money they advanced to Lim for the purchase of the
against anybody is declared by this Court. (Rollo - G.R. No. 24197, aircrafts in question.
pp. 15-16)
After trial on the merits, a decision was rendered holding Lim liable
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged to pay Pioneer but dismissed Pioneer's complaint against all other
in the airline business as owner-operator of Southern Air Lines defendants.
(SAL) a single proprietorship.
As stated earlier, the appellate court modified the trial court's
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) decision in that the plaintiffs complaint against all the defendants
and Lim entered into and executed a sales contract (Exhibit A) for was dismissed. In all other respects the trial court's decision was
the sale and purchase of two (2) DC-3A Type aircrafts and one (1) affirmed.
set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments. One DC-3 Aircraft with We first resolve G.R. No. 84197.
Registry No. PIC-718, arrived in Manila on June 7,1965 while the
other aircraft, arrived in Manila on July 18,1965.
Petitioner Pioneer Insurance and Surety Corporation avers that:
On May 22, 1965, Pioneer Insurance and Surety Corporation
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED
(Pioneer, petitioner in G.R. No. 84197) as surety executed and
WHEN IT DISMISSED THE APPEAL OF PETITIONER ON THE
issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in
SOLE GROUND THAT PETITIONER HAD ALREADY
behalf of its principal, Lim, for the balance price of the aircrafts and
COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS
spare parts.
BOND IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT
It appears that Border Machinery and Heavy Equipment Company, FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN
Inc. (Bormaheco), Francisco and Modesto Cervantes THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)
(Cervanteses) and Constancio Maglana (respondents in both
petitions) contributed some funds used in the purchase of the
The petitioner questions the following findings of the appellate
above aircrafts and spare parts. The funds were supposed to be
court:
their contributions to a new corporation proposed by Lim to expand
his airline business. They executed two (2) separate indemnity
agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed We find no merit in plaintiffs appeal. It is undisputed that plaintiff
by Maglana and the other jointly signed by Lim for SAL, Bormaheco Pioneer had reinsured its risk of liability under the surety bond in
and the Cervanteses. The indemnity agreements stipulated that the favor of JDA and subsequently collected the proceeds of such
indemnitors principally agree and bind themselves jointly and reinsurance in the sum of P295,000.00. Defendants' alleged
severally to indemnify and hold and save harmless Pioneer from obligation to Pioneer amounts to P295,000.00, hence, plaintiffs
and against any/all damages, losses, costs, damages, taxes, instant action for the recovery of the amount of P298,666.28 from
penalties, charges and expenses of whatever kind and nature defendants will no longer prosper. Plaintiff Pioneer is not the real
which Pioneer may incur in consequence of having become surety party in interest to institute the instant action as it does not stand to
upon the bond/note and to pay, reimburse and make good to be benefited or injured by the judgment.
Pioneer, its successors and assigns, all sums and amounts of
money which it or its representatives should or may pay or cause Plaintiff Pioneer's contention that it is representing the reinsurer to
to be paid or become liable to pay on them of whatever kind and recover the amount from defendants, hence, it instituted the action
nature. is utterly devoid of merit. Plaintiff did not even present any evidence
that it is the attorney-in-fact of the reinsurance company,
On June 10, 1965, Lim doing business under the name and style authorized to institute an action for and in behalf of the latter. To
of SAL executed in favor of Pioneer as deed of chattel mortgage qualify a person to be a real party in interest in whose name an
as security for the latter's suretyship in favor of the former. It was action must be prosecuted, he must appear to be the present real
stipulated therein that Lim transfer and convey to the surety the two owner of the right sought to be enforced (Moran, Vol. I, Comments
aircrafts. The deed (Exhibit D) was duly registered with the Office on the Rules of Court, 1979 ed., p. 155). It has been held that the
of the Register of Deeds of the City of Manila and with the Civil real party in interest is the party who would be benefited or injured
Aeronautics Administration pursuant to the Chattel Mortgage Law by the judgment or the party entitled to the avails of the suit
and the Civil Aeronautics Law (Republic Act No. 776), respectively. (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real
party in interest is meant a present substantial interest as
distinguished from a mere expectancy or a future, contingent,
Lim defaulted on his subsequent installment payments prompting
subordinate or consequential interest (Garcia v. David, 67 Phil. 27;
JDA to request payments from the surety. Pioneer paid a total sum
Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414;
of P298,626.12.
Flowers v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P.
2d 667, 669, quoting 47 C.V. 35).
Pioneer then filed a petition for the extrajudicial foreclosure of the
said chattel mortgage before the Sheriff of Davao City. The
Based on the foregoing premises, plaintiff Pioneer cannot be amount paid to it by the reinsurers Pioneer is suing defendants as
considered as the real party in interest as it has already been paid their attorney-in-fact.
by the reinsurer the sum of P295,000.00 the bulk of defendants'
alleged obligation to Pioneer. But in the first place, there is not the slightest indication in the
complaint that Pioneer is suing as attorney-in- fact of the reinsurers
In addition to the said proceeds of the reinsurance received by for any amount. Lastly, and most important of all, Pioneer has no
plaintiff Pioneer from its reinsurer, the former was able to foreclose right to institute and maintain in its own name an action for the
extra-judicially one of the subject airplanes and its spare engine, benefit of the reinsurers. It is well-settled that an action brought by
realizing the total amount of P37,050.00 from the sale of the an attorney-in-fact in his own name instead of that of the principal
mortgaged chattels. Adding the sum of P37,050.00, to the will not prosper, and this is so even where the name of the principal
proceeds of the reinsurance amounting to P295,000.00, it is patent is disclosed in the complaint.
that plaintiff has been overpaid in the amount of P33,383.72
considering that the total amount it had paid to JDA totals to only Section 2 of Rule 3 of the Old Rules of Court provides that 'Every
P298,666.28. To allow plaintiff Pioneer to recover from defendants action must be prosecuted in the name of the real party in interest.'
the amount in excess of P298,666.28 would be tantamount to This provision is mandatory. The real party in interest is the party
unjust enrichment as it has already been paid by the reinsurance who would be benefitted or injured by the judgment or is the party
company of the amount plaintiff has paid to JDA as surety of entitled to the avails of the suit.
defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled
is the rule that no person should unjustly enrich himself at the This Court has held in various cases that an attorney-in-fact is not
expense of another (Article 22, New Civil Code). (Rollo-84197, pp. a real party in interest, that there is no law permitting an action to
24-25). be brought by an attorney-in-fact. Arroyo v. Granada and Gentero,
18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep.
The petitioner contends that-(1) it is at a loss where respondent 12; Filipinos Industrial Corporation v. San Diego G.R. No. L-
court based its finding that petitioner was paid by its reinsurer in the 22347,1968, 23 SCRA 706, 710-714.
aforesaid amount, as this matter has never been raised by any of
the parties herein both in their answers in the court below and in The total amount paid by Pioneer to JDA is P299,666.29. Since
their respective briefs with respondent court; (Rollo, p. 11) (2) even Pioneer has collected P295,000.00 from the reinsurers, the
assuming hypothetically that it was paid by its reinsurer, still none uninsured portion of what it paid to JDA is the difference between
of the respondents had any interest in the matter since the the two amounts, or P3,666.28. This is the amount for which
reinsurance is strictly between the petitioner and the re-insurer Pioneer may sue defendants, assuming that the indemnity
pursuant to section 91 of the Insurance Code; (3) pursuant to the agreement is still valid and effective. But since the amount realized
indemnity agreements, the petitioner is entitled to recover from from the sale of the mortgaged chattels are P35,000.00 for one of
respondents Bormaheco and Maglana; and (4) the principle of the airplanes and P2,050.00 for a spare engine, or a total of
unjust enrichment is not applicable considering that whatever P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore,
amount he would recover from the co-indemnitor will be paid to the Pioneer has no more claim against defendants. (Record on Appeal,
reinsurer. pp. 360-363).

The records belie the petitioner's contention that the issue on the The payment to the petitioner made by the reinsurers was not
reinsurance money was never raised by the parties. disputed in the appellate court. Considering this admitted payment,
the only issue that cropped up was the effect of payment made by
A cursory reading of the trial court's lengthy decision shows that the reinsurers to the petitioner. Therefore, the petitioner's argument
two of the issues threshed out were: that the respondents had no interest in the reinsurance contract as
this is strictly between the petitioner as insured and the reinsuring
xxx xxx xxx company pursuant to Section 91 (should be Section 98) of the
Insurance Code has no basis.
1. Has Pioneer a cause of action against defendants with respect
to so much of its obligations to JDA as has been paid with In general a reinsurer, on payment of a loss acquires the same
reinsurance money? rights by subrogation as are acquired in similar cases where the
original insurer pays a loss (Universal Ins. Co. v. Old Time
2. If the answer to the preceding question is in the negative, has Molasses Co. C.C.A. La., 46 F 2nd 925).
Pioneer still any claim against defendants, considering the amount
it has realized from the sale of the mortgaged properties? (Record The rules of practice in actions on original insurance policies are in
on Appeal, p. 359, Annex B of G.R. No. 84157). general applicable to actions or contracts of reinsurance.
(Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126
In resolving these issues, the trial court made the following findings: GA. 380, 7 Ann. Con. 1134).

It appearing that Pioneer reinsured its risk of liability under the Hence the applicable law is Article 2207 of the new Civil Code, to
surety bond it had executed in favor of JDA, collected the proceeds wit:
of such reinsurance in the sum of P295,000, and paid with the said
amount the bulk of its alleged liability to JDA under the said surety Art. 2207. If the plaintiffs property has been insured, and he has
bond, it is plain that on this score it no longer has any right to collect received indemnity from the insurance company for the injury or
to the extent of the said amount. loss arising out of the wrong or breach of contract complained of,
the insurance company shall be subrogated to the rights of the
On the question of why it is Pioneer, instead of the reinsurance insured against the wrongdoer or the person who has violated the
(sic), that is suing defendants for the amount paid to it by the contract. If the amount paid by the insurance company does not
reinsurers, notwithstanding that the cause of action pertains to the fully cover the injury or loss, the aggrieved party shall be entitled to
latter, Pioneer says: The reinsurers opted instead that the Pioneer recover the deficiency from the person causing the loss or injury.
Insurance & Surety Corporation shall pursue alone the case.. . . .
Pioneer Insurance & Surety Corporation is representing the Interpreting the aforesaid provision, we ruled in the case of Phil. Air
reinsurers to recover the amount.' In other words, insofar as the Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which we
subsequently applied in Manila Mahogany Manufacturing the latter. Articles 2067 and 2080 of the New Civil Code of the
Corporation v. Court of Appeals (154 SCRA 650 [1987]): Philippines.

Note that if a property is insured and the owner receives the Independently of the preceding proposition Pioneer's election of
indemnity from the insurer, it is provided in said article that the the remedy of foreclosure precludes any further action to recover
insurer is deemed subrogated to the rights of the insured against any unpaid balance of the price.
the wrongdoer and if the amount paid by the insurer does not fully
cover the loss, then the aggrieved party is the one entitled to SAL or Lim, having failed to pay the second to the eight and last
recover the deficiency. Evidently, under this legal provision, the installments to JDA and Pioneer as surety having made of the
real party in interest with regard to the portion of the indemnity paid payments to JDA, the alternative remedies open to Pioneer were
is the insurer and not the insured. (Emphasis supplied). as provided in Article 1484 of the New Civil Code, known as the
Recto Law.
It is clear from the records that Pioneer sued in its own name and
not as an attorney-in-fact of the reinsurer. Pioneer exercised the remedy of foreclosure of the chattel
mortgage both by extrajudicial foreclosure and the instant suit.
Accordingly, the appellate court did not commit a reversible error in Such being the case, as provided by the aforementioned
dismissing the petitioner's complaint as against the respondents for provisions, Pioneer shall have no further action against the
the reason that the petitioner was not the real party in interest in purchaser to recover any unpaid balance and any agreement to the
the complaint and, therefore, has no cause of action against the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance Corp.
respondents. No. L- 24772, May 27,1968, 23 SCRA 791, 795-6.

Nevertheless, the petitioner argues that the appeal as regards the The operation of the foregoing provision cannot be escaped from
counter indemnitors should not have been dismissed on the through the contention that Pioneer is not the vendor but JDA. The
premise that the evidence on record shows that it is entitled to reason is that Pioneer is actually exercising the rights of JDA as
recover from the counter indemnitors. It does not, however, cite any vendor, having subrogated it in such rights. Nor may the application
grounds except its allegation that respondent "Maglanas defense of the provision be validly opposed on the ground that these
and evidence are certainly incredible" (p. 12, Rollo) to back up its defendants and defendant Maglana are not the vendee but
contention. indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R.
No. L- 27862, Nov. 20,1974, 61 SCRA 124.
On the other hand, we find the trial court's findings on the matter
replete with evidence to substantiate its finding that the counter- The restructuring of the obligations of SAL or Lim, thru the change
indemnitors are not liable to the petitioner. The trial court stated: of their maturity dates discharged these defendants from any
liability as alleged indemnitors. The change of the maturity dates of
Apart from the foregoing proposition, the indemnity agreement the obligations of Lim, or SAL extinguish the original obligations
ceased to be valid and effective after the execution of the chattel thru novations thus discharging the indemnitors.
mortgage.
The principal hereof shall be paid in eight equal successive three
Testimonies of defendants Francisco Cervantes and Modesto months interval installments, the first of which shall be due and
Cervantes. payable 25 August 1965, the remainder of which ... shall be due
and payable on the 26th day x x x of each succeeding three months
Pioneer Insurance, knowing the value of the aircrafts and the spare and the last of which shall be due and payable 26th May 1967.
parts involved, agreed to issue the bond provided that the same
would be mortgaged to it, but this was not possible because the However, at the trial of this case, Pioneer produced a memorandum
planes were still in Japan and could not be mortgaged here in the executed by SAL or Lim and JDA, modifying the maturity dates of
Philippines. As soon as the aircrafts were brought to the the obligations, as follows:
Philippines, they would be mortgaged to Pioneer Insurance to
cover the bond, and this indemnity agreement would be cancelled. The principal hereof shall be paid in eight equal successive three
month interval installments the first of which shall be due and
The following is averred under oath by Pioneer in the original payable 4 September 1965, the remainder of which ... shall be due
complaint: and payable on the 4th day ... of each succeeding months and the
last of which shall be due and payable 4th June 1967.
The various conflicting claims over the mortgaged properties have
impaired and rendered insufficient the security under the chattel Not only that, Pioneer also produced eight purported promissory
mortgage and there is thus no other sufficient security for the claim notes bearing maturity dates different from that fixed in the
sought to be enforced by this action. aforesaid memorandum; the due date of the first installment
appears as October 15, 1965, and those of the rest of the
This is judicial admission and aside from the chattel mortgage there installments, the 15th of each succeeding three months, that of the
is no other security for the claim sought to be enforced by this last installment being July 15, 1967.
action, which necessarily means that the indemnity agreement had
ceased to have any force and effect at the time this action was These restructuring of the obligations with regard to their maturity
instituted. Sec 2, Rule 129, Revised Rules of Court. dates, effected twice, were done without the knowledge, much less,
would have it believed that these defendants Maglana (sic).
Prescinding from the foregoing, Pioneer, having foreclosed the Pioneer's official Numeriano Carbonel would have it believed that
chattel mortgage on the planes and spare parts, no longer has any these defendants and defendant Maglana knew of and consented
further action against the defendants as indemnitors to recover any to the modification of the obligations. But if that were so, there
unpaid balance of the price. The indemnity agreement was ipso would have been the corresponding documents in the form of a
jure extinguished upon the foreclosure of the chattel mortgage. written notice to as well as written conformity of these defendants,
These defendants, as indemnitors, would be entitled to be and there are no such document. The consequence of this was the
subrogated to the right of Pioneer should they make payments to extinguishment of the obligations and of the surety bond secured
by the indemnity agreement which was thereby also extinguished.
Applicable by analogy are the rulings of the Supreme Court in the Cervanteses and the other one-half to defendant Maglana. It is
case of Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and established in the records that defendant Lim had duly received the
the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538. amount of Pl51,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the subject
Art. 2079. An extension granted to the debtor by the creditor without airplanes and spare parts (Exhibit 58). In addition, the cross-party
the consent of the guarantor extinguishes the guaranty The mere plaintiffs incurred additional expenses, hence, the total sum of P
failure on the part of the creditor to demand payment after the debt 184,878.74.
has become due does not of itself constitute any extension time
referred to herein, (New Civil Code).' We first state the principles.

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. While it has been held that as between themselves the rights of the
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571. stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state relating
Pioneer's liability as surety to JDA had already prescribed when thereto and not by the rules governing partners (Cannon v. Brush
Pioneer paid the same. Consequently, Pioneer has no more cause Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily
of action to recover from these defendants, as supposed held that persons who attempt, but fail, to form a corporation and
indemnitors, what it has paid to JDA. By virtue of an express who carry on business under the corporate name occupy the
stipulation in the surety bond, the failure of JDA to present its claim position of partners inter se (Lynch v. Perryman, 119 P. 229, 29
to Pioneer within ten days from default of Lim or SAL on every Okl. 615, Ann. Cas. 1913A 1065). Thus, where persons associate
installment, released Pioneer from liability from the claim. themselves together under articles to purchase property to carry on
a business, and their organization is so defective as to come short
Therefore, Pioneer is not entitled to exact reimbursement from of creating a corporation within the statute, they become in legal
these defendants thru the indemnity. effect partners inter se, and their rights as members of the company
to the property acquired by the company will be recognized (Smith
v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple
Art. 1318. Payment by a solidary debtor shall not entitle him to
v. Parker, 29 Mich. 369). So, where certain persons associated
reimbursement from his co-debtors if such payment is made after
themselves as a corporation for the development of land for
the obligation has prescribed or became illegal.
irrigation purposes, and each conveyed land to the corporation,
and two of them contracted to pay a third the difference in the
These defendants are entitled to recover damages and attorney's proportionate value of the land conveyed by him, and no stock was
fees from Pioneer and its surety by reason of the filing of the instant ever issued in the corporation, it was treated as a trustee for the
case against them and the attachment and garnishment of their associates in an action between them for an accounting, and its
properties. The instant action is clearly unfounded insofar as capital stock was treated as partnership assets, sold, and the
plaintiff drags these defendants and defendant Maglana.' (Record proceeds distributed among them in proportion to the value of the
on Appeal, pp. 363-369, Rollo of G.R. No. 84157). property contributed by each (Shorb v. Beaudry, 56 Cal.
446). However, such a relation does not necessarily exist, for
We find no cogent reason to reverse or modify these findings. ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that no
Hence, it is our conclusion that the petition in G.R. No. 84197 is not partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6
meritorious. S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be
implied only when necessary to do justice between the parties;
We now discuss the merits of G.R. No. 84157. thus, one who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed does not
Petitioner Jacob S. Lim poses the following issues: become a partner with other subscribers who engage in business
under the name of the pretended corporation, so as to be liable as
such in an action for settlement of the alleged partnership and
l. What legal rules govern the relationship among co-investors
contribution (Ward v. Brigham, 127 Mass. 24). A partnership
whose agreement was to do business through the corporate
relation between certain stockholders and other stockholders, who
vehicle but who failed to incorporate the entity in which they had
were also directors, will not be implied in the absence of an
chosen to invest? How are the losses to be treated in situations
agreement, so as to make the former liable to contribute for
where their contributions to the intended 'corporation' were
payment of debts illegally contracted by the latter (Heald v. Owen,
invested not through the corporate form? This Petition presents
44 N.W. 210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p.
these fundamental questions which we believe were resolved
464). (Italics supplied).
erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
In the instant case, it is to be noted that the petitioner was declared
These questions are premised on the petitioner's theory that as a
non-suited for his failure to appear during the pretrial despite
result of the failure of respondents Bormaheco, Spouses
notification. In his answer, the petitioner denied having received
Cervantes, Constancio Maglana and petitioner Lim to incorporate,
any amount from respondents Bormaheco, the Cervanteses and
a de facto partnership among them was created, and that as a
Maglana. The trial court and the appellate court, however, found
consequence of such relationship all must share in the losses
through Exhibit 58, that the petitioner received the amount of
and/or gains of the venture in proportion to their contribution. The
P151,000.00 representing the participation of Bormaheco and Atty.
petitioner, therefore, questions the appellate court's findings
Constancio B. Maglana in the ownership of the subject airplanes
ordering him to reimburse certain amounts given by the
and spare parts. The record shows that defendant Maglana gave
respondents to the petitioner as their contributions to the intended
P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
corporation, to wit:
It is therefore clear that the petitioner never had the intention to
However, defendant Lim should be held liable to pay his co-
form a corporation with the respondents despite his
defendants' cross-claims in the total amount of P184,878.74 as
representations to them. This gives credence to the cross-claims
correctly found by the trial court, with interest from the filing of the
of the respondents to the effect that they were induced and lured
cross-complaints until the amount is fully paid. Defendant Lim
by the petitioner to make contributions to a proposed corporation
should pay one-half of the said amount to Bormaheco and the
which was never formed because the petitioner reneged on their D. CORPORATE JURIDICAL PERSONALITY
agreement. Maglana alleged in his cross-claim:
G.R. No. 124293. September 24, 2003]

... that sometime in early 1965, Jacob Lim proposed to Francisco JG SUMMIT HOLDINGS, INC., petitioner, vs. COURT OF APPEALS,
Cervantes and Maglana to expand his airline business. Lim was to COMMITTEE ON PRIVATIZATION, its Chairman and Members; ASSET
procure two DC-3's from Japan and secure the necessary PRIVATIZATION TRUST and PHILYARDS HOLDINGS, INC., respondents.
certificates of public convenience and necessity as well as the
RESOLUTION
required permits for the operation thereof. Maglana sometime in
May 1965, gave Cervantes his share of P75,000.00 for delivery to PUNO, J.:
Lim which Cervantes did and Lim acknowledged receipt thereof.
Cervantes, likewise, delivered his share of the undertaking. Lim in The core issue posed by the Motions for Reconsideration is whether a
shipyard is a public utility whose capitalization must be sixty percent (60%)
an undertaking sometime on or about August 9,1965, promised to
owned by Filipinos. Our resolution of this issue will determine the fate of the
incorporate his airline in accordance with their agreement and shipbuilding and ship repair industry. It can either spell the industrys demise
proceeded to acquire the planes on his own account. Since then or breathe new life to the struggling but potentially healthy partner in the
up to the filing of this answer, Lim has refused, failed and still countrys bid for economic growth. It can either kill an initiative yet in its infancy,
refuses to set up the corporation or return the money of Maglana. or harness creativity in the productive disposition of government assets.
(Record on Appeal, pp. 337-338).
The facts are undisputed and can be summarized briefly as follows:
while respondents Bormaheco and the Cervanteses alleged in their On January 27, 1977, the National Investment and Development Corporation
answer, counterclaim, cross-claim and third party complaint: (NIDC), a government corporation, entered into a Joint Venture Agreement
(JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan (KAWASAKI) for
Sometime in April 1965, defendant Lim lured and induced the the construction, operation and management of the Subic National Shipyard,
answering defendants to purchase two airplanes and spare parts Inc. (SNS) which subsequently became the Philippine Shipyard and
from Japan which the latter considered as their lawful contribution Engineering Corporation (PHILSECO). Under the JVA, the NIDC and
KAWASAKI will contribute P330 million for the capitalization of PHILSECO in
and participation in the proposed corporation to be known as SAL.
the proportion of 60%-40% respectively.[1] One of its salient features is the
Arrangements and negotiations were undertaken by defendant grant to the parties of the right of first refusal should either of them decide to
Lim. Down payments were advanced by defendants Bormaheco sell, assign or transfer its interest in the joint venture, viz:
and the Cervanteses and Constancio Maglana (Exh. E- 1).
Contrary to the agreement among the defendants, defendant Lim 1.4 Neither party shall sell, transfer or assign all or any part of its interest in
in connivance with the plaintiff, signed and executed the alleged SNS [PHILSECO] to any third party without giving the other under the same
chattel mortgage and surety bond agreement in his personal terms the right of first refusal. This provision shall not apply if the transferee is
capacity as the alleged proprietor of the SAL. The answering a corporation owned or controlled by the GOVERNMENT or by a KAWASAKI
defendants learned for the first time of this trickery and affiliate.[2]
misrepresentation of the other, Jacob Lim, when the herein plaintiff On November 25, 1986, NIDC transferred all its rights, title and interest in
chattel mortgage (sic) allegedly executed by defendant Lim, PHILSECO to the Philippine National Bank (PNB). Such interests were
thereby forcing them to file an adverse claim in the form of third subsequently transferred to the National Government pursuant to
party claim. Notwithstanding repeated oral demands made by Administrative Order No. 14. On December 8, 1986, President Corazon C.
defendants Bormaheco and Cervanteses, to defendant Lim, to Aquino issued Proclamation No. 50 establishing the Committee on
surrender the possession of the two planes and their accessories Privatization (COP) and the Asset Privatization Trust (APT) to take title to, and
and or return the amount advanced by the former amounting to an possession of, conserve, manage and dispose of non-performing assets of the
aggregate sum of P 178,997.14 as evidenced by a statement of National Government. Thereafter, on February 27, 1987, a trust agreement
accounts, the latter ignored, omitted and refused to comply with was entered into between the National Government and the APT wherein the
latter was named the trustee of the National Governments share in
them. (Record on Appeal, pp. 341-342).
PHILSECO. In 1989, as a result of a quasi-reorganization of PHILSECO to
settle its huge obligations to PNB, the National Governments shareholdings in
Applying therefore the principles of law earlier cited to the facts of PHILSECO increased to 97.41% thereby reducing KAWASAKIs
the case, necessarily, no de facto partnership was created among shareholdings to 2.59%.[3]
the parties which would entitle the petitioner to a reimbursement of
the supposed losses of the proposed corporation. The record In the interest of the national economy and the government, the COP and the
APT deemed it best to sell the National Governments share in PHILSECO to
shows that the petitioner was acting on his own and not in behalf
private entities. After a series of negotiations between the APT and
of his other would-be incorporators in transacting the sale of the
KAWASAKI, they agreed that the latters right of first refusal under the JVA be
airplanes and spare parts. exchanged for the right to top by five percent (5%) the highest bid for the said
shares. They further agreed that KAWASAKI would be entitled to name a
WHEREFORE, the instant petitions are DISMISSED. The company in which it was a stockholder, which could exercise the right to top.
questioned decision of the Court of Appeals is AFFIRMED. On September 7, 1990, KAWASAKI informed APT that Philyards Holdings,
Inc. (PHI) would exercise its right to top.[4]
SO ORDERED. At the pre-bidding conference held on September 18, 1993, interested bidders
were given copies of the JVA between NIDC and KAWASAKI, and of the Asset
Specific Bidding Rules (ASBR) drafted for the National Governments 87.6%
equity share in PHILSECO.[5] The provisions of the ASBR were explained to
the interested bidders who were notified that the bidding would be held on
December 2, 1993. A portion of the ASBR reads:

1.0 The subject of this Asset Privatization Trust (APT) sale through public
bidding is the National Governments equity in PHILSECO consisting of
896,869,942 shares of stock (representing 87.67% of PHILSECOs
outstanding capital stock), which will be sold as a whole block in accordance
with the rules herein enumerated.

...

2.0 The highest bid, as well as the buyer, shall be subject to the final approval
of both the APT Board of Trustees and the Committee on Privatization (COP).
2.1 APT reserves the right in its sole discretion, to reject any or all bids. referred to the Court of Appeals. On July 18, 1995, the Court of Appeals denied
the same for lack of merit. It ruled that the petition for mandamus was not the
3.0 This public bidding shall be on an Indicative Price Bidding basis. The proper remedy to question the constitutionality or legality of the right of first
Indicative price set for the National Governments 87.67% equity in PHILSECO refusal and the right to top that was exercised by KAWASAKI/PHI, and that
is PESOS: ONE BILLION THREE HUNDRED MILLION (P1,300,000,000.00). the matter must be brought by the proper party in the proper forum at the
proper time and threshed out in a full blown trial. The Court of Appeals further
...
ruled that the right of first refusal and the right to top are prima facie legal and
6.0 The highest qualified bid will be submitted to the APT Board of Trustees at that the petitioner, by participating in the public bidding, with full knowledge of
its regular meeting following the bidding, for the purpose of determining the right to top granted to KASAWASAKI/Philyards is . . .estopped from
whether or not it should be endorsed by the APT Board of Trustees to the questioning the validity of the award given to Philyards after the latter
COP, and the latter approves the same. The APT shall advise Kawasaki exercised the right to top and had paid in full the purchase price of the subject
Heavy Industries, Inc. and/or its nominee, Philyards Holdings, Inc., that the shares, pursuant to the ASBR. Petitioner filed a Motion for Reconsideration of
highest bid is acceptable to the National Government. Kawasaki Heavy said Decision which was denied on March 15, 1996. Petitioner thus filed a
Industries, Inc. and/or Philyards Holdings, Inc. shall then have a period of thirty Petition for Certiorari with this Court alleging grave abuse of discretion on the
(30) calendar days from the date of receipt of such advice from APT within part of the appellate court.[11]
which to exercise their Option to Top the Highest Bid by offering a bid
On November 20, 2000, this Court rendered the now assailed Decision ruling
equivalent to the highest bid plus five (5%) percent thereof.
among others that the Court of Appeals erred when it dismissed the petition
6.1 Should Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc. on the sole ground of the impropriety of the special civil action
exercise their Option to Top the Highest Bid, they shall so notify the APT about of mandamus because the petition was also one of certiorari.[12] It further ruled
such exercise of their option and deposit with APT the amount equivalent to that a shipyard like PHILSECO is a public utility whose capitalization must be
ten percent (10%) of the highest bid plus five percent (5%) thereof within the sixty percent (60%) Filipino-owned.[13] Consequently, the right to top granted
thirty (30)-day period mentioned in paragraph 6.0 above. APT will then serve to KAWASAKI under the Asset Specific Bidding Rules (ASBR) drafted for the
notice upon Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc. sale of the 87.67% equity of the National Government in PHILSECO is illegal-
declaring them as the preferred bidder and they shall have a period of ninety --not only because it violates the rules on competitive bidding--- but more so,
(90) days from the receipt of the APTs notice within which to pay the balance because it allows foreign corporations to own more than 40% equity in the
of their bid price. shipyard.[14] It also held that although the petitioner had the opportunity to
examine the ASBR before it participated in the bidding, it cannot be estopped
6.2 Should Kawasaki Heavy Industries, Inc. and/or Philyards Holdings, Inc. fail from questioning the unconstitutional, illegal and inequitable provisions
to exercise their Option to Top the Highest Bid within the thirty (30)-day period, thereof.[15] Thus, this Court voided the transfer of the national governments
APT will declare the highest bidder as the winning bidder. 87.67% share in PHILSECO to Philyard Holdings, Inc., and upheld the right of
JG Summit, as the highest bidder, to take title to the said shares, viz:
...
WHEREFORE, the instant petition for review on certiorari is GRANTED. The
12.0 The bidder shall be solely responsible for examining with appropriate care
assailed Decision and Resolution of the Court of Appeals are REVERSED and
these rules, the official bid forms, including any addenda or amendments
SET ASIDE. Petitioner is ordered to pay to APT its bid price of Two Billion
thereto issued during the bidding period. The bidder shall likewise be
Thirty Million Pesos (P2,030,000,000.00 ), less its bid deposit plus interests
responsible for informing itself with respect to any and all conditions
upon the finality of this Decision. In turn, APT is ordered to:
concerning the PHILSECO Shares which may, in any manner, affect the
bidders proposal. Failure on the part of the bidder to so examine and inform (a) accept the said amount of P2,030,000,000.00 less bid deposit and
itself shall be its sole risk and no relief for error or omission will be given by interests from petitioner;
APT or COP. . ..[6]
(b) execute a Stock Purchase Agreement with petitioner;
At the public bidding on the said date, petitioner J.G. Summit Holdings, Inc.
submitted a bid of Two Billion and Thirty Million Pesos (P2,030,000,000.00) (c) cause the issuance in favor of petitioner of the certificates of stocks
with an acknowledgement of KAWASAKI/Philyards right to top, viz: representing 87.6% of PHILSECOs total capitalization;

4. I/We understand that the Committee on Privatization (COP) has up to thirty (d) return to private respondent PHGI the amount of Two Billion One Hundred
(30) days to act on APTs recommendation based on the result of this bidding. Thirty-One Million Five Hundred Thousand Pesos (P2,131,500,000.00); and
Should the COP approve the highest bid, APT shall advise Kawasaki Heavy
(e) cause the cancellation of the stock certificates issued to PHI.
Industries, Inc. and/or its nominee, Philyards Holdings, Inc. that the highest
bid is acceptable to the National Government. Kawasaki Heavy Industries, Inc. SO ORDERED.[16]
and/or Philyards Holdings, Inc. shall then have a period of thirty (30) calendar
days from the date of receipt of such advice from APT within which to exercise In separate Motions for Reconsideration,[17] respondents submit three basic
their Option to Top the Highest Bid by offering a bid equivalent to the highest issues for our resolution: (1) Whether PHILSECO is a public utility; (2) Whether
bid plus five (5%) percent thereof.[7] under the 1977 JVA, KAWASAKI can exercise its right of first refusal only up
to 40% of the total capitalization of PHILSECO; and (3) Whether the right to
As petitioner was declared the highest bidder, the COP approved the sale on top granted to KAWASAKI violates the principles of competitive bidding.
December 3, 1993 subject to the right of Kawasaki Heavy Industries,
Inc./Philyards Holdings, Inc. to top JGSMIs bid by 5% as specified in the I.
bidding rules.[8]
Whether PHILSECO is a Public Utility.
On December 29, 1993, petitioner informed APT that it was protesting the offer
of PHI to top its bid on the grounds that: (a) the KAWASAKI/PHI consortium After carefully reviewing the applicable laws and jurisprudence, we hold that
composed of Kawasaki, Philyards, Mitsui, Keppel, SM Group, ICTSI and PHILSECO is not a public utility for the following reasons:
Insular Life violated the ASBR because the last four (4) companies were the
First. By nature, a shipyard is not a public utility.
losing bidders thereby circumventing the law and prejudicing the weak winning
bidder; (b) only KAWASAKI could exercise the right to top; (c) giving the same A public utility is a business or service engaged in regularly supplying the
option to top to PHI constituted unwarranted benefit to a third party; (d) no right public with some commodity or service of public consequence such as
of first refusal can be exercised in a public bidding or auction sale; and (e) the electricity, gas, water, transportation, telephone or telegraph service.[18] To
JG Summit consortium was not estopped from questioning the proceedings.[9] constitute a public utility, the facility must be necessary for the maintenance of
life and occupation of the residents. However, the fact that a business offers
On February 2, 1994, petitioner was notified that PHI had fully paid the balance
services or goods that promote public good and serve the interest of the public
of the purchase price of the subject bidding. On February 7, 1994, the APT
does not automatically make it a public utility. Public use is not synonymous
notified petitioner that PHI had exercised its option to top the highest bid and
with public interest. As its name indicates, the term public utility implies public
that the COP had approved the same on January 6, 1994. On February 24,
use and service to the public. The principal determinative
1994, the APT and PHI executed a Stock Purchase
characteristic of a public utility is that of service to, or readiness to serve, an
Agreement.[10] Consequently, petitioner filed with this Court a Petition for
indefinite public or portion of the public as such which has a legal right to
Mandamus under G.R. No. 114057. On May 11, 1994, said petition was
demand and receive its services or commodities. Stated otherwise, the owner
or person in control of a public utility must have devoted it to such use that the Sec. 8. No franchise, certificate, or any other form or authorization for the
public generally or that part of the public which has been served and has operation of a public utility shall be granted except to citizens of the Philippines
accepted the service, has the right to demand that use or service so long as it or to corporations or other entities organized under the laws of the
is continued, with reasonable efficiency and under proper charges. [19] Unlike a Philippines, sixty per centum of the capital of which is owned by citizens
private enterprise which independently determines whom it will serve, a public of the Philippines, nor shall such franchise, certificate or authorization be
utility holds out generally and may not refuse legitimate demand for exclusive in character or for a longer period than fifty years. No franchise or
service.[20] Thus, in Iloilo Ice and Cold Storage Co. vs. Public Utility right shall be granted to any individual, firm or corporation, except under the
Board,[21] this Court defined public use, viz: condition that it shall be subject to amendment, alteration, or repeal by the
National Assembly when the public interest so requires. (emphasis supplied)
Public use means the same as use by the public. The essential feature of the
public use is that it is not confined to privileged individuals, but is open to the To accelerate the development of shipbuilding and ship repair industry, former
indefinite public. It is this indefinite or unrestricted quality that gives it its public President Ferdinand E. Marcos issued P.D. No. 666 granting the following
character. In determining whether a use is public, we must look not only to the incentives:
character of the business to be done, but also to the proposed mode of doing
it. If the use is merely optional with the owners, or the public benefit is merely SECTION 1. Shipbuilding and ship repair yards duly registered with the
incidental, it is not a public use, authorizing the exercise of jurisdiction of the Maritime Industry Authority shall be entitled to the following incentive benefits:
public utility commission. There must be, in general, a right which the law
(a) Exemption from import duties and taxes.- The importation of machinery,
compels the owner to give to the general public. It is not enough that the
equipment and materials for shipbuilding, ship repair and/or alteration,
general prosperity of the public is promoted. Public use is not synonymous
including indirect import, as well as replacement and spare parts for the repair
with public interest. The true criterion by which to judge the character of
and overhaul of vessels such as steel plates, electrical machinery and
the use is whether the public may enjoy it by right or only by
electronic parts, shall be exempt from the payment of customs duty and
permission.[22] (emphasis supplied)
compensating tax: Provided, however, That the Maritime Industry Authority
Applying the criterion laid down in Iloilo to the case at bar, it is crystal clear certifies that the item or items imported are not produced locally in sufficient
that a shipyard cannot be considered a public utility. quantity and acceptable quality at reasonable prices, and that the importation
is directly and actually needed and will be used exclusively for the
A shipyard is a place or enclosure where ships are built or repaired. [23] Its construction, repair, alteration, or overhaul of merchant vessels, and other
nature dictates that it serves but a limited clientele whom it may choose to watercrafts; Provided, further, That if the above machinery, equipment,
serve at its discretion. While it offers its facilities to whoever may wish to avail materials and spare parts are sold to non-tax exempt persons or entities, the
of its services, a shipyard is not legally obliged to render its services corresponding duties and taxes shall be paid by the original
indiscriminately to the public. It has no legal obligation to render the importer; Provided, finally, That local dealers and/or agents who sell
services sought by each and every client. The fact that it publicly offers its machinery, equipment, materials and accessories to shipyards for shipbuilding
services does not give the public a legal right to demand that such services be and ship repair are entitled to tax credits, subject to approval by the total tariff
rendered. duties and compensating tax paid for said machinery, equipment, materials
and accessories.
There can be no disagreement that the shipbuilding and ship repair industry is
imbued with public interest as it involves the maintenance of the (b) Accelerated depreciation.- Industrial plant and equipment may, at the
seaworthiness of vessels dedicated to the transportation of either persons or option of the shipbuilder and ship repairer, be depreciated for any number of
goods. Nevertheless, the fact that a business is affected with public interest years between five years and expected economic life.
does not imply that it is under a duty to serve the public. While the business
may be regulated for public good, the regulation cannot justify the (c) Exemption from contractors percentage tax.- The gross receipts derived by
classification of a purely private enterprise as a public utility. The legislature shipbuilders and ship repairers from shipbuilding and ship repairing activities
cannot, by its mere declaration, make something a public utility which is not in shall be exempt from the Contractors Tax provided in Section 91 of the
fact such; and a private business operated under private contracts with National Internal Revenue Code during the first ten years from registration with
selected customers and not devoted to public use cannot, by legislative the Maritime Industry Authority, provided that such registration is effected not
fiat or by order of a public service commission, be declared a public later than the year 1990; Provided, That any and all amounts which would
utility, since that would be taking private property for public use without just otherwise have been paid as contractors tax shall be set aside as a separate
compensation, which cannot be done consistently with the due process fund, to be known as Shipyard Development Fund, by the contractor for the
clause.[24] purpose of expansion, modernization and/or improvement of the contractors
own shipbuilding or ship repairing facilities; Provided, That, for this purpose,
It is worthy to note that automobile and aircraft manufacturers, which are of the contractor shall submit an annual statement of its receipts to the Maritime
similar nature to shipyards, are not considered public utilities despite the fact Industry Authority; and Provided, further, That any disbursement from such
that their operations greatly impact on land and air transportation. The reason fund for any of the purposes hereinabove stated shall be subject to approval
is simple. Unlike commodities or services traditionally regarded as public by the Maritime Industry Authority.
utilities such as electricity, gas, water, transportation, telephone or telegraph
service, automobile and aircraft manufacturing---and for that matter ship In addition, P.D. No. 666 removed the shipbuilding and ship repair industry
building and ship repair--- serve the public only incidentally. from the list of public utilities, thereby freeing the industry from the 60%
citizenship requirement under the Constitution and from the need to obtain
Second. There is no law declaring a shipyard as a public utility. Certificate of Public Convenience pursuant to section 15 of C.A No.
146. Section 1 (d) of P.D. 666 reads:
History provides us hindsight and hindsight ought to give us a better view of
the intent of any law. The succession of laws affecting the status of shipyards (d) Registration required but not as a Public Utility.- The business of
ought not to obliterate, but rather, give us full picture of the intent of the constructing and repairing vessels or parts thereof shall not be
legislature. The totality of the circumstances, including the contemporaneous considered a public utility and no Certificate of Public Convenience shall
interpretation accorded by the administrative bodies tasked with the be required therefor. However, no shipyard, graving dock, marine railway or
enforcement of the law all lead to a singular conclusion: that shipyards are not marine repair shop and no person or enterprise shall engage in construction
public utilities. and/or repair of any vessel, or any phase or part thereof, without a valid
Certificate of Registration and license for this purpose from the Maritime
Since the enactment of Act No. 2307 which created the Public Utility Industry Authority, except those owned or operated by the Armed Forces of
Commission (PUC) until its repeal by Commonwealth Act No. 146, the Philippines or by foreign governments pursuant to a treaty or agreement.
establishing the Public Service Commission (PSC), a shipyard, by legislative (emphasis supplied)
declaration, has been considered a public utility.[25] A Certificate of Public
Convenience (CPC) from the PSC to the effect that the operation of the said Any law, decree, executive order, or rules and regulations inconsistent with
service and the authorization to do business will promote the public interests P.D. No. 666 were repealed or modified accordingly.[28] Consequently,
in a proper and suitable manner is required before any person or corporation sections 13 (b) and 15 of C.A. No. 146 were repealed in so far as the former
may operate a shipyard.[26] In addition, such persons or corporations should law included shipyards in the list of public utilities and required the certificate
abide by the citizenship requirement provided in Article XIII, section 8 of the of public convenience for their operation. Simply stated, the repeal was due to
1935 Constitution,[27] viz: irreconcilable inconsistency, and by definition, this kind of repeal falls under
the category of an implied repeal.[29]
On April 28, 1983, Batas Pambansa Blg. 391, also known as the Investment basis in the conclusion that shipyards remain to be a public utility. A repealed
Incentive Policy Act of 1983, was enacted. It laid down the general policy of statute cannot be the basis for classifying shipyards as public utilities.
the government to encourage private domestic and foreign investments in the
various sectors of the economy, to wit: In view of the foregoing, there can be no other conclusion than to hold that a
shipyard is not a pubic utility. A shipyard has been considered a public utility
Sec. 2. Declaration of Investment Policy.- It is the policy of the State to merely by legislative declaration. Absent this declaration, there is no more
encourage private domestic and foreign investments in industry, agriculture, reason why it should continuously be regarded as such. The fact that the
mining and other sectors of the economy which shall: provide significant legislature did not clearly and unambiguously express its intention to include
employment opportunities relative to the amount of the capital being invested; shipyards in the list of public utilities indicates that that it did not intend to do
increase productivity of the land, minerals, forestry, aquatic and other so. Thus, a shipyard reverts back to its status as non-public utility prior to the
resources of the country, and improve utilization of the products thereof; enactment of the Public Service Law.
improve technical skills of the people employed in the enterprise; provide a
foundation for the future development of the economy; accelerate This interpretation is in accord with the uniform interpretation placed upon it
development of less developed regions of the country; and result in increased by the Board of Investments (BOI), which was entrusted by the legislature with
volume and value of exports for the economy. the preparation of annual Investment Priorities Plan (IPPs). The BOI has
consistently classified shipyards as part of the manufacturing sector and not
It is the policy of the State to extend to projects which will significantly of the public utilities sector. The enactment of Batas Pambansa Blg. 391 did
contribute to the attainment of these objectives, fiscal incentives without not alter the treatment of the BOI on shipyards. It has been, as at present,
which said projects may not be established in the locales, number and/or pace classified as part of the manufacturing and not of the public utilities sector.[32]
required for optimum national economic development. Fiscal incentive
systems shall be devised to compensate for market imperfections, Furthermore, of the 441 Ship Building and Ship Repair (SBSR) entities
reward performance of making contributions to economic development, registered with the MARINA,[33] none appears to have an existing franchise. If
cost-efficient and be simple to administer. we continue to hold that a shipyard is a pubic utility, it is a necessary
consequence that all these entities should have obtained a franchise as was
The fiscal incentives shall be extended to stimulate establishment and assist the rule prior to the enactment of P.D. No. 666. But MARINA remains without
initial operations of the enterprise, and shall terminate after a period of not authority, pursuant to P.D. No. 474[34] to issue franchises for the operation of
more than 10 years from registration or start-up of operation unless a special shipyards. Surely,
period is otherwise stated.
the legislature did not intend to create a vacuum by continuously treating a
The foregoing declaration shall apply to all investment incentive shipyard as a public utility without giving MARINA the power to issue a
schemes and in particular will supersede article 2 of Presidential Decree No. Certificate of Public Convenience (CPC) or a Certificate of Public Convenience
1789. (emphases supplied) and Necessity (CPCN) as required by section 15 of C.A. No. 146.

With the new investment incentive regime, Batas Pambansa Blg. 391 repealed II.
the following laws, viz:
Whether under the 1977 Joint Venture Agreement,
Sec. 20. The following provisions are hereby repealed:
KAWASAKI can purchase only a maximum of 40%
1) Section 53, P.D. 463 (Mineral Resources Development Decree);
of PHILSECOs total capitalization.
2.) Section 1, P.D. 666 (Shipbuilding and Ship Repair Industry);
A careful reading of the 1977 Joint Venture Agreement reveals that there is
3) Section 6, P.D. 1101 (Radioactive Minerals); nothing that prevents KAWASAKI from acquiring more than 40% of
PHILSECOs total capitalization. Section 1 of the 1977 JVA states:
4) LOI 508 extending P.D. 791 and P.D. 924 (Sugar); and
1.3 The authorized capital stock of Philseco shall be P330 million. The parties
5) The following articles of Presidential Decree 1789: 2, 18, 19, 22, 28, 30, 39, shall thereafter increase their subscription in Philseco as may be necessary
49 (d), 62, and 77. Articles 45, 46 and 48 are hereby amended only with and as called by the Board of Directors, maintaining a proportion of 60%-40%
respect to domestic and export producers. for NIDC and KAWASAKI respectively, up to a total subscribed and paid-up
capital stock of P312 million.
All other laws, decrees, executive orders, administrative orders, rules and
regulations or parts thereof which are inconsistent with the provisions of this 1.4 Neither party shall sell, transfer or assign all or any part of its interest in
Act are hereby repealed, amended or modified accordingly. SNS [renamed PHILSECO] to any third party without giving the other under
the same terms the right of first refusal. This provision shall not apply if the
All other incentive systems which are not in any way affected by the provisions
transferee is a corporation owned and controlled by the GOVERMENT [of the
of this Act may be restructured by the President so as to render them cost-
Philippines] or by a Kawasaki affiliate.
efficient and to make them conform with the other policy guidelines in the
declaration of policy provided in Section 2 of this Act. (emphasis supplied) 1.5 The By-Laws of SNS [PHILSECO] shall grant the parties preemptive rights
to unissued shares of SNS [PHILSECO].[35]
From the language of the afore-quoted provision, the whole of P.D. No. 666,
section 1 was expressly and categorically repealed. As a consequence, the Under section 1.3, the parties agreed to the amount of P330 million as the total
provisions of C.A. No. 146, which were impliedly repealed by P.D. No. 666, capitalization of their joint venture. There was no mention of the amount of
section 1 were revived.[30] In other words, with the enactment of Batas their initial subscription. What is clear is that they are to infuse the needed
Pambansa Blg. 391, a shipyard reverted back to its status as a public utility capital from time to time until the total subscribed and paid-up capital
and as such, requires a CPC for its operation. reaches P312 million. The phrase maintaining a proportion of 60%-40% refers
to their respective share of the burden each time the Board of Directors
The crux of the present controversy is the effect of the express repeal of Batas
decides to increase the subscription to reach the target paid-up capital of P312
Pambansa Blg. 391 by Executive Order No. 226 issued by former President
million. It does not bind the parties to maintain the sharing scheme all
Corazon C. Aquino under her emergency powers.
throughout the existence of their partnership.
We rule that the express repeal of Batas Pambansa Blg. 391 by E.O. No. 226
The parties likewise agreed to arm themselves with protective mechanisms to
did not revive Section 1 of P.D. No. 666. But more importantly, it also put a
preserve their respective interests in the partnership in the event that (a) one
period to the existence of sections 13 (b) and 15 of C.A. No. 146. It bears
party decides to sell its shares to third parties; and (b) new Philseco shares
emphasis that sections 13 (b) and 15 of C.A. No. 146, as originally written,
are issued. Anent the first situation, the non-selling party is given the right of
owed their continued existence to Batas Pambansa Blg. 391. Had the latter
first refusal under section 1.4 to have a preferential right to buy or to refuse
not repealed P.D. No. 666, the former should have been modified accordingly
the selling partys shares. The right of first refusal is meant to protect the
and shipyards effectively removed from the list of public utilities. Ergo, with the
original or remaining joint venturer(s) or shareholder(s) from the entry of third
express repeal of Batas Pambansa Blg. 391 by E.O. No. 226, the revival of
persons who are not acceptable to it as co-venturer(s) or co-shareholder(s).
sections 13 (b) and 15 of C.A. No. 146 had no more leg to stand on. A law that
The joint venture between the Philippine Government and KAWASAKI is in
has been expressly repealed ceases to exist and becomes inoperative from
the nature of a partnership[36] which, unlike an ordinary corporation, is based
the moment the repealing law becomes effective.[31] Hence, there is simply no
on delectus personae.[37] No one can become a member of the partnership
association without the consent of all the other associates. The right of first case may be, is not entitled to an award as a matter of right for it does not
refusal thus ensures that the parties are given control over who may become become a ministerial duty of the Government to make such an award. Thus, it
a new partner in substitution of or in addition to the original partners. Should has been held that where the right to reject is so reserved, the lowest bid or
the selling partner decide to dispose all its shares, the non-selling partner may any bid for that matter may be rejected on a mere technicality, that all bids
acquire all these shares and terminate the partnership. No person or may be rejected, even if arbitrarily and unwisely, or under a mistake, and that
corporation can be compelled to remain or to continue the partnership. Of in the exercise of a sound discretion, the award may be made to another than
course, this presupposes that there are no other restrictions in the maximum the lowest bidder. And so, where the Government as advertiser, availing itself
allowable share that the non-selling partner may acquire such as the of that right, makes its choice in rejecting any or all bids, the losing bidder has
constitutional restriction on foreign ownership in public utility. The theory that no cause to complain nor right to dispute that choice, unless an unfairness or
KAWASAKI can acquire, as a maximum, only 40% of PHILSECOs shares is injustice is shown. Accordingly, he has no ground of action to compel the
correct only if a shipyard is a public utility. In such instance, the non-selling Government to award the contract in his favor, nor compel it to accept his
partner who is an alien can acquire only a maximum of 40% of the total bid.[41]
capitalization of a public utility despite the grant of first refusal. The partners
cannot, by mere agreement, avoid the constitutional proscription. But as afore- In the instant case, the sale of the Government shares in PHILSECO was
discussed, PHILSECO is not a public utility and no other restriction is present publicly known. All interested bidders were welcomed. The basis for
that would limit the right of KAWASAKI to purchase the Governments share to comparing the bids were laid down. All bids were accepted sealed and were
40% of Philsecos total capitalization. opened and read in the presence of the COAs official representative and
before all interested bidders. The only question that remains is whether or not
Furthermore, the phrase under the same terms in section 1.4 cannot be given the existence of KAWASAKIs right to top destroys the essence of competitive
an interpretation that would limit the right of KAWASAKI to purchase bidding so as to say that the bidders did not have an opportunity for
PHILSECO shares only to the extent of its original proportionate contribution competition. We hold that it does not.
of 40% to the total capitalization of the PHILSECO. Taken together with the
whole of section 1.4, the phrase under the same terms means that a The essence of competition in public bidding is that the bidders are placed on
partner to the joint venture that decides to sell its shares to a third party equal footing. This means that all qualified bidders have an equal chance of
shall make a similar offer to the non-selling partner. The selling partner winning the auction through their bids. In the case at bar, all of the bidders
cannot make a different or a more onerous offer to the non-selling partner. were exposed to the same risk and were subjected to the same condition, i.e.,
the existence of KAWASAKIs right to top. Under the ASBR, the Government
The exercise of first refusal presupposes that the non-selling partner is aware expressly reserved the right to reject any or all bids, and manifested its
of the terms of the conditions attendant to the sale for it to have a guided intention not to accept the highest bid should KAWASAKI decide to exercise
choice. While the right of first refusal protects the non-selling partner from the its right to top under the ABSR. This reservation or qualification was made
entry of third persons, it cannot also deprive the other partner the right to sell known to the bidders in a pre-bidding conference held on September 28, 1993.
its shares to third persons if, under the same offer, it does not buy the shares. They all expressly accepted this condition in writing without any qualification.
Furthermore, when the Committee on Privatization notified petitioner of the
Apart from the right of first refusal, the parties also have preemptive approval of the sale of the National Government shares of stock in PHILSECO,
rights under section 1.5 in the unissued shares of Philseco. Unlike the former, it specifically stated that such approval was subject to the right of KAWASAKI
this situation does not contemplate transfer of a partners shares to third parties Heavy Industries, Inc./Philyards Holdings, Inc. to top JGSMIs bid by 5% as
but the issuance of new Philseco shares. The grant of preemptive rights specified in the bidding rules. Clearly, the approval of the sale was a
preserves the proportionate shares of the original partners so as not to dilute conditional one. Since Philyards eventually exercised its right to top petitioners
their respective interests with the issuance of the new shares. Unlike the right bid by 5%, the sale was not consummated. Parenthetically, it cannot be
of first refusal, a preemptive right gives a partner a preferential right over the argued that the existence of the right to top set for naught the entire public
newly issued shares only to the extent that it retains its original proportionate bidding. Had Philyards Holdings, Inc. failed or refused to exercise its right to
share in the joint venture. top, the sale between the petitioner and the National Government would have
been consummated. In like manner, the existence of the right to top cannot be
The case at bar does not concern the issuance of new shares but the transfer
likened to a second bidding, which is countenanced, except when there is
of a partners share in the joint venture. Verily, the operative protective
failure to bid as when there is only one bidder or none at all. A prohibited
mechanism is the right of first refusal which does not impose any limitation in
second bidding presupposes that based on the terms and conditions of the
the maximum shares that the non-selling partner may acquire.
sale, there is already a highest bidder with the right to demand that the seller
III. accept its bid. In the instant case, the highest bidder was well aware that the
acceptance of its bid was conditioned upon the non-exercise of the right to top.
Whether the right to top granted to KAWASAKI
To be sure, respondents did not circumvent the requirements for bidding by
in exchange for its right of first refusal violates granting KAWASAKI, a non-bidder, the right to top the highest bidder. The fact
that KAWASAKIs nominee to exercise the right to top has among its
the principles of competitive bidding.
stockholders some losing bidders cannot also be deemed unfair.
We also hold that the right to top granted to KAWASAKI and exercised by
It must be emphasized that none of the parties questions the existence of
private respondent did not violate the rules of competitive bidding.
KAWASAKIs right of first refusal, which is concededly the basis for the grant
The word bidding in its comprehensive sense means making an offer or an of the right to top. Under KAWASAKIs right of first refusal, the National
invitation to prospective contractors whereby the government manifests its Government is under the obligation to give preferential right to KAWASAKI in
intention to make proposals for the purpose of supplies, materials and the event it decides to sell its shares in PHILSECO. It has to offer to
equipment for official business or public use, or for public works or KAWASAKI the shares and give it the option to buy or refuse under the same
repair.[38] The three principles of public bidding are: (1) the offer to the public; terms for which it is willing to sell the said shares to third parties. KAWASAKI
(2) an opportunity for competition; and (3) a basis for comparison of bids.[39] As is not a mere non-bidder. It is a partner in the joint venture; the incidents of
long as these three principles are complied with, the public bidding can be which are governed by the law on contracts and on partnership.
considered valid and legal. It is not necessary that the highest bid be
It is true that properties of the National Government, as a rule, may be sold
automatically accepted. The bidding rules may specify other conditions or the
only after a public bidding is held. Public bidding is the accepted method in
bidding process be subjected to certain reservation or qualification such as
arriving at a fair and reasonable price and ensures that overpricing, favoritism
when the owner reserves to himself openly at the time of the sale the right to
and other anomalous practices are eliminated or minimized.[42] But the
bid upon the property, or openly announces a price below which the property
requirement for public bidding does not negate the exercise of the right of first
will not be sold. Hence, where the seller reserves the right to refuse to accept
refusal. In fact, public bidding is an essential first step in the exercise of the
any bid made, a binding sale is not consummated between the seller and the
right of first refusal because it is only after the public bidding that the terms
bidder until the seller accepts the bid. Furthermore, where a right is reserved
upon which the Government may be said to be willing to sell its shares to third
in the seller to reject any and all bids received, the owner may exercise the
parties may be known. It is only after the public bidding that the Government
right even after the auctioneer has accepted a bid, and this applies to the
will have a basis with which to offer KAWASAKI the option to buy or forego the
auction of public as well as private property. [40] Thus:
shares.
It is a settled rule that where the invitation to bid contains a reservation for the
Assuming that the parties did not swap KAWASAKIs right of first refusal with
Government to reject any or all bids, the lowest or the highest bidder, as the
the right to top, KAWASAKI would have been able to buy the National
Governments shares in PHILSECO under the same terms as offered by the Inc., and not with Ong in his personal capacity; and that the payment of the
highest bidder. Stated otherwise, by exercising its right of first refusal, check was stopped because the subject tractor had been priced as a brand
KAWASAKI could have bought the shares for only P2.03 billion and not the new, not as a reconditioned unit.
higher amount of P2.1315 billion. There is, thus, no basis in the submission
that the right to top unfairly favored KAWASAKI. In fact, with the right to top, On 02 November 1989, after the reception of evidence, the trial court rendered
KAWASAKI stands to pay higher than it should had it settled with its right of a decision, the dispositive portions of which read:
first refusal. The obvious beneficiary of the scheme is the National
WHEREFORE, in view of the foregoing consideration, judgment is hereby
Government.
rendered:
If at all, the obvious consideration for the exchange of the right of first refusal
1. Ordering the defendants, jointly and severally, to pay the plaintiff the sum of
with the right to top is that KAWASAKI can name a nominee, which it is a
P33,500.00 with legal interest thereon at the rate of 12% per annum from July
shareholder, to exercise the right to top. This is a valid contractual stipulation;
7, 1984 until fully paid; and
the right to top is an assignable right and both parties are aware of the full legal
consequences of its exercise. As aforesaid, all bidders were aware of the 2. Ordering the defendants, jointly and severally, to pay the plaintiff the sum of
existence of the right to top, and its possible effects on the result of the public P10,000.00 as attorney's fees, and the costs of this suit.
bidding was fully disclosed to them. The petitioner, thus, cannot feign
ignorance nor can it be allowed to repudiate its acts and question the SO ORDERED. 1
proceedings it had fully adhered to.[43]
An appeal was timely interposed by the defendants. On 04 March 1993, the
The fact that the losing bidder, Keppel Consortium (composed of Keppel, SM Court of Appeals affirmed in toto the decision of the trial court. Defendant-
Group, Insular Life Assurance, Mitsui and ICTSI), has joined Philyards in the appellants' motion for reconsideration was denied.
latters effort to raise P2.131 billion necessary in exercising the right to top is
Hence, the instant petition.
not contrary to law, public policy or public morals. There is nothing in the ASBR
that bars the losing bidders from joining either the winning bidder (should the We could find no reason to reverse the factual findings of both the trial court
right to top is not exercised) or KAWASAKI/PHI (should it exercise its right to and the appellate court, particularly in holding that the contract between de la
top as it did), to raise the purchase price. The petitioner did not allege, nor was Cuesta and TRAMAT was one of absolute, not conditional, sale of the tractor
it shown by competent evidence, that the participation of the losing bidders in and that de la Cuesta did not violate any warranty on the sale of the tractor to
the public bidding was done with fraudulent intent. Absent any proof of fraud, TRAMAT. The appellate court, in its decision, adequately explained:
the formation by Philyards of a consortium is legitimate in a free enterprise
system. The appellate court is thus correct in holding the petitioner estopped If the perfection of the sale was dependent upon acceptance by the MWSS of
from questioning the validity of the transfer of the National Governments the subject tractor why did the appellants issue a check in payment of the item
shares in PHILSECO to respondent. to the appellee? And long after MWSS had complained about the defective
tractor engine, and after the appellee had failed to remedy the defect, why did
Finally, no factual basis exists to support the view that the drafting of the ASBR the appellants still draw and deliver a replacement check to the appellee for
was illegal because no prior approval was given by the COA for it, specifically the increased amount of P33,500.00?
the provision on the right to top the highest bidder and that the public auction
on December 2, 1993 was not witnessed by a COA representative. No These payments argue against the claim now made by the defendants that
evidence was proffered to prove these allegations and the Court cannot make the sale was conditional.
legal conclusions out of mere allegations. Regularity in the performance of
official duties is presumed[44] and in the absence of competent evidence to According to the appellee, the additional amount covered the cost of replacing
rebut this presumption, this Court is duty bound to uphold this presumption. the oil gasket of the tractor engine when it was repaired in Soledad Cac's
gasoline station in Quezon City. The appellants, on the other hand, claims the
IN VIEW OF THE FOREGOING, the Motion for Reconsideration is hereby amount represented the freight charges for transporting the tractor from
GRANTED. The impugned Decision and Resolution of the Court of Appeals Cauayan, Isabela to Metro Manila.
are AFFIRMED.
The appellants should have explained why they failed to include the freight
SO ORDERED. charges in the first check. The tractor was transported from Isabela to Metro
Manila as early as April 1984, and the first check was drawn at about the same
time. The freight charges cannot be said to have been incurred when the
tractor engine was delivered back to the supplier for repairs. The appellants
G.R. No. 111008 November 7, 1994
admitted that the engine was not brought back to Isabela. The repairs were
TRAMAT MERCANTILE, INC. AND DAVID ONG, petitioners, done at Soledad Cac's gasoline station in Quezon City.
vs.
Anent the first assigned error, We sustain the trial court's finding that at the
HON. COURT OF APPEALS AND MELCHOR DE LA
time of the purchase, the appellants did not reveal to the appellee the true
CUESTA, respondents.
purpose for which the tractor would be used. Granting that the appellants
informed the appellee that they would be reselling the unit to the MWSS, an
entity admittedly not engaged in farming, and that they ordered the tractor
VITUG, J.: without the power tiller, an indispensable accessory if the tractor would be
used in farming, these in themselves would not constitute the required implied
This petition for review on certiorari challenges the 04th March 1993 decision
notice to the appellee as seller.
of the Court of Appeals and its resolution of 01 July 1993 denying the motion
for reconsideration. xxx xxx xxx
On 09 April 1984, Melchor de la Cuesta, doing business under the name and In regard to the second assigned error, We do not agree that the appellee
style of "Farmers Machineries," sold to Tramat Mercantile, Inc. ("Tramat"), one should have been held liable for the tractor's alleged hidden defects. . . .
(1) unit HINOMOTO TRACTOR Model MB 1100D powered by a 13 H.P. diesel
engine. In payment, David Ong, Tramat's president and manager, issued a It has to be noted in this regard that, to satisfy the requirements of the MWSS,
check for P33,500.00 (apparently replacing an earlier postdated check for the appellants borrowed a lawn mower from the MWSS so they could fabricate
P33,080.00). Tramat, in turn, sold the tractor, together with an attached lawn one such mower. The appellants' witness stated that the kind of mid-mounted
mower fabricated by it, to the Metropolitan Waterworks and Sewerage System lawn mower was being manufactured by their competitor, Alpha Machinery,
("NAWASA") for P67,000.00. David Ong caused a "stop payment" of the check which had by then stopped supplying the same (tsn,
when NAWASA refused to pay the tractor and lawn mower after discovering Nov. 29, 1988, pp. 73-74). There is no showing that the appellants had had
that, aside from some stated defects of the attached lawn mower, the engine any previous experience in the fabrication of this lawn mower. In fact, as
(sold by de la Cuesta) was a reconditioned unit. aforesaid, they had to borrow one from the MWSS which they could copy. But
although they made a copy with the same specifications and design, there was
On 28 May 1985, de la Cuesta filed an action for the recovery of P33,500.00, no assurance that the copy would function as well as with the model.
as well as attorney's fees of P10,000.00, and the costs of suit. Ong, in his
answer, averred, among other things, that de la Cuesta had no cause of action; xxx xxx xxx
that the questioned transaction was between plaintiff and Tramat Mercantile,
Although the trial court discussed it in a different light, We view the matter in Secretary-Treasurer of a supposed corporation; the fact that twenty-five
the same way the trial court did that the lawn mower as fabricated by the certificates were signed by its president for no justifiable reason; the fact that
appellants was the root of the parties' problems. its principal stockholder had made enormous profits and, therefore, had a
motive to hide them to evade the payment of taxes; the fact that the other
Having had no previous experience in the manufacture of lawn mowers of the subscribers had no incomes of sufficient magnitude to justify their big
same type as that in litigation, and in a possibly patent-infringing effort to subscriptions; the fact that the treasurer in the name of the alleged corporation
undercut their competition, the appellants gathered enough daring to do the but were kept by the principal stockholder herself; the fact that the
fabrication themselves. But the product might have proved too much for the stockholders or the directors never appeared to have ever met to discuss the
subject tractor to power, and the tractor's engine was strained beyond its limits, business of the corporation; the fact that she advanced big sums of money to
causing it to overheat and damage its gaskets. the corporation without any previous arrangement or accounting; and the fact
that the books of accounts were kept as if they belonged to her alone are
No wonder, then, it was a gasket Soledad Cac had to replace, at a cost
circumstantial evidence which are not only convincing but conclusive that she
chargeable to the appellants. No wonder, furthermore, the appellants' witness
is the sole and exclusive owner of all the shares of stock of the corporation
declared that even after the replacement of that one gasket, the engine still
and that the other partners are her dummies.
leaked oil after being torture-tested. The integrity of the other engine gaskets
might have been impaired, too. Such was the burden placed on the engine.
The engine malfunctioned not necessarily because the engine, as alleged by
the appellants, had been a reconditioned, and not a brand new, one. It
malfunctioned because it was made to do what it simply could not.2 DECISION

It was, nevertheless, an error to hold David Ong jointly and severally liable with
TRAMAT to de la Cuesta under the questioned transaction. Ong had there so
acted, not in his personal capacity, but as an officer of a corporation, TRAMAT,
with a distinct and separate personality. As such, it should only be the LABRADOR, J.:
corporation, not the person acting for and on its behalf, that properly could be
made liable thereon.3

Personal liability of a corporate director, trustee or officer along (although not


This action was brought by plaintiffs as stockholders of the Marvel Building
necessarily) with the corporation may so validly attach, as a rule, only when
Corporation to enjoin the defendant Collector of Internal Revenue from selling

at public auction various properties described in the complaint, including three


1. He assents (a) to a patently unlawful act of the corporation, or parcels of land, with the buildings situated thereon, known as the Aguinaldo
(b) for bad faith, or gross negligence in directing its affairs, or (c) for conflict of Building, the Wise Building, and the Dewey Boulevard-Padre Faura Mansion,
interest, resulting in damages to the corporation, its stockholders or other all registered in the name of said corporation. Said properties were seized and
persons;4 distrained by defendant to collect war profits taxes assessed against plaintiff
Maria B. Castro (Exhibit B). Plaintiffs allege that the said three properties
2. He consents to the issuance of watered stocks or who, having knowledge (lands and buildings) belong to the Marvel Building corporation and not to
thereof, does not forthwith file with the corporate secretary his written objection Maria B. Castro, while the defendant claims that Maria B. Castro is the true
thereto;5 and sole owner of all the subscribed stock of the Marvel Building Corporation,
including those appearing to have been subscribed and paid for by the other
3. He agrees to hold himself personally and solidarily liable with the members, and consequently said Maria B. Castro is also the true and
corporation;6 or exclusive owner of the properties seized. The trial court held that the evidence,
which is mostly circumstantial, fails to show to its satisfaction that Maria B.
4. He is made, by a specific provision of law, to personally answer for his
Castro is the true owner of all the stock certificates of the corporation, because
corporate action.7
the evidence is susceptible of two interpretations and an interpretation may
In the case at bench, there is no indication that petitioner David Ong could be not be made which would deprive one of property without due process of law.
held personally accountable under any of the abovementioned cases.
It appears that on September 15, 1950, the Secretary of Finance, upon
WHEREFORE, the petition is given DUE COURSE and the decision of the trial consideration of the report of a special committee assigned to study the war
court, affirmed by the appellate court, is MODIFIED insofar as it holds profits tax case of Mrs. Maria B. Castro, recommended the collection of
petitioner David Ong jointly and severally liable with Tramat Mercantile, Inc., P3,593,950.78 as war profits taxes for the latter, and on September 22, 1953
which portion of the questioned judgment is SET ASIDE. In all other respects, the President instructed the Collector that steps be taken to collect the same
the decision appealed from is AFFIRMED. No costs. (Exhibits 114, 114-A to 114-D). Pursuant thereto various properties, including
the three above mentioned, were seized by the Collector of Internal Revenue
SO ORDERED.
on October 31, 1950. On November 13, 1950, the original complaint in this
case was filed. After trial, the Court of First Instance of Manila rendered
judgment ordering the release of the properties mentioned, and enjoined the
EN BANC Collector of Internal Revenue from selling the same. The Collector of Internal
Revenue has appealed to this Court against the judgment.
[G.R. No. L-5081. February 24, 1954.]
The following facts are not disputed, or are satisfactorily proved by the
MARVEL BUILDING CORPORATION, ET AL., Plaintiffs-Appellees, v. evidence:chanrob1es virtual 1aw library
SATURNINO DAVID, in his capacity as Collector, Bureau of Internal
Revenue, Defendant-Appellant. The Articles of Incorporation of the Marvel Building Corporation is dated
February 12, 1947 and according to it the capital stock is P2,000,000, of which
Assistant Solicitor General Francisco Carreon for Appellant. P1,025,000 was (at the time of incorporation) subscribed and paid by the
following incorporators:chanrob1es virtual 1aw library
Antonio Quirino and Rosendo J. Tansinsin for Appellees.
Maria B. Castro -------- 250 shares ------P250,000.00

Amado A. Yatco ------- 100" ------ 100,000.00


SYLLABUS
Santiago Tan ----------- 100" ------ 100,000.00

Jose T. Lopez ---------- 90" ------ 90,000.00

CORPORATIONS; CIRCUMSTANTIAL EVIDENCE SHOWING ONE-MAN Benita Lamagna --------- 90" ------ 90,000.00
CORPORATION. the existence of endorsed certificates discovered by
internal revenue agents between 1948 and 1949 in the possession of the C.S. Gonzales ----------- 80" ------ 80,000.00
Maria Cristobal --------- 70" ------ 70,000.00 The main issue involved in these proceedings is: Is Maria B. Castro the owner
of all the shares of stock of the Marvel Building Corporation and the other
Segundo Esguerra, Sr. -- 75" ------ 75,000.00 stockholders mere dummies of hers?

Ramon Sangalang -------- 70" ------ 70,000.00 The most important evidence presented by the Collector of Internal Revenue
to prove his claim that Maria B. Castro is the sole and exclusive owner of the
Maximo Cristobal ------- 55" ------ 55,000.00 shares of stock of the Marvel Building Corporation is the supposed
endorsement in blank of the shares of stock issued in the name of the other
Antonio Cristobal ------ 45" ------ 45,000.00 incorporators, and the possession thereof by Maria B. Castro. The existence
of said endorsed certificates was testified to by witnesses Felipe Aquino,
____________ internal revenue examiner, Antonio Mariano, examiner, and Crispin Llamado,
Under-Secretary of Finance, who declared as follows: Towards the end of the
P1,025,000.00. year of 1948 and about the beginning of the year 1949, while Aquino and
Mariano were examining the books and papers of the Marvel Building
Maria B. Castro was elected President and maximo Cristobal, Secretary- Corporation at its place of business, which books and papers were furnished
Treasurer (Exhibit A). by its Secretary, Maximo Cristobal, they came across an envelope containing
eleven stock certificates, bound together by an Acco fastener, which
The Wise Building was purchased on September 4, 1946, the purchase being (certificates) corresponded in number and in amount on their face to the
made in the name of Dolores Trinidad, wife of Amado A. Yatco (Exhibit V), and subscriptions of the stockholders that all the certificates, except that in the
the Aguinaldo Building, on January 17, 1947, in the name of Segundo name of Maria B. Castro, were endorsed in blank by the subscribers; that as
Esguerra, Sr. (Exhibit M). Both building were purchased for P1,800,00, but as two revenue agents could not agree what to do with the certificates, Aquino
the corporation had only P1,025,000, the balance of the purchase price was brought them to Under-Secretary of Finance Llamado, who thereupon
obtained as loans from the Insular Life Assurance Co., Ltd. and the Philippine suggested that photostatic copies thereof be taken; that this was done, and
Guaranty Co., Inc. (Exhibit C). the photostatic copies placed by him in his office safe; that Aquino returned
the certificates that same day after the photostatic copies had been taken; that
Of the incorporators of the Marvel Building Corporation, Maximo Cristobal and the photostatic copies taken are Exhibits 4, 5, 6, 7, 8, 9, 10, 11, 12, and 13;
Antonio Cristobal are half-brothers of Maria B. Castro, Manila Cristobal is a and in that July, 1950, copy-cat copies of the above photostats were taken,
half-sister, and Segundo Esguerra, Sr. a brother-in-law, husband of Maria and said copy-cat copies are Exhibits 40-49.
Cristobal, Maria B. Castros half-sister. Maximo B. Cristobal did not file any
income tax returns before the year 1946, except for the years 1939 and 1940, Julio Llamado, bookkeeper of the Marvel Building Corporation from 1947 to
but in these years he was exempted from the tax. He has not filed any war May, 1948, also testified that he was the one who had prepared the original
profits tax return (Exhibit 54). Antonio Cristobal, Segundo Esguerra, Sr. and certificates, putting therein the number of shares in words in handprint; that
Jose T. Lopez did not file any income tax returns for the years prior to 1946, the originals were given to him by Maria B. Castro for comparison with the
and neither did they file any war profits tax returns (Exhibit 52). Maria Cristobal articles of incorporation; that they were not yet signed by the President and by
filed income tax returns for the years 1929 to 1942, but they were exempt from the Secretary-Treasurer when he had the certificates; and that after the
the tax (Exhibit 53). Benita A. Lamagna did not file any income tax returns prior checking he returned all of them to Mrs. Castro. He recognized the photostats,
to 1945, except for 1942 which was exempt. Since did not file any war profits Exhibits 4 to 13 as photostats of the said originals. He also declared that he
tax (Exhibit 55). Ramon M. Sangalang did not file income tax returns up to also prepared a set of stock certificates, similar to the certificates which were
1945 except for the years 1936, 1937, 1938, 1939 and 1940. He has not filed copied in the photostats, filling the blanks for the name of the stockholder, the
any war profits tax return (Exhibit 56). Santiago Tan did not file any income tax number of shares, and the date of issue, and that the certificates he had
returns prior to 1945, except for the years 1938, 1939, 1940 and 1942, but all prepared are Exhibits H, H-1 to H-7 and J (Exhibits 30-38). This set of
of these were exempt. He did not file any war profits tax return (Exhibit 57). certificates was made him first and the set of which photostats were taken, a
Amado A. Yatco did not file income tax returns prior to 1945, except for the few days later.
years 1937, 1938, 1939, 1941 and 1942, but these were exempt. He did not
file any war profits tax return (Exhibit 58). The plaintiffs offered a half-hearted denial of the existence of the endorsed
blank certificates, Maximo Cristobal, secretary of the corporation, saying that
Antonio Cristobals income in 1946 is P15,630, and in 1947, P4,550 (Exhibits no investigation was ever made by Aquino and Mariano in which said
59-60); Maximo B. Cristobals income in 1946 is P19,759.10, in 1947, certificates were discovered by the latter. The, however, vigorously attack the
P9,773.47 (Exhibits 61-62); Segundo Esguerras income in 1946 is P5,500, in credibility of the witnesses for the defendant, imputing to the Llamados, enmity
1947, P7,754.32 (Exhibits 63-64); Jose T. Lopezs income in 1946 is P20,785, against Maria B. Castro, and to Aquino and Mariano, a very doubtful conduct
in 1947, P14,302.77 (Exhibits 69- 70); Benita A. Lamagnas income in 1945 is in not divulging the existence of the certificates either to Lobrin, Chief Income
P1,559, in 1946, P6,463.36, in 1947, P6,189.79 and her husbands income in Tax Examiner, or to the Collector of Internal Revenue, both their immediate
1947 is P10,825.53 (Exhibits 65-68); Ramon M. Sangalangs income in 1945 chiefs. Reliance is also placed on a certificate, Exhibit W, wherein Aquino and
is P5,500, in 1946, P18,300.00 (Exhibits 71-72); Santiago Tans income in others, declare that the certificates (Exhibits not endorsed when the same
1945 is P456, in 1947 is P9,167.95, and in 1947, P7,620.11 (Exhibits 73-75); were examined. In connection with this certificate, Exhibit W, we note that it
and Amado Yatcos income in 1945 is P12,600 in 1946, P23,960, and in 1947, states that the certificates examined were Exhibits 30 to 38, the existence or
P11,160 (Exhibits 76-78). character of which are not disputed. But the statement contains nothing to the
effect that the above certificates were the only ones in existence, according to
In October, 1945 Maria B. Castro, Nicasio Yatco, Maxima Cristobal de their knowledge. Again the certificate was issued for an examination on
Esguerra, Maria Cristobal Lopez and Maximo Cristobal organized the Maria September 1949, not by Aquino and Mariano at the end of 1948 or the
B. Castro, Inc. with a capital stock of P100,00, of which Maria B. Castro beginning of 1949. The certificate, therefore, neither denies the existence of
subscribed for P99,600 and all the others for P100 each. This was increased the endorsed certificates, nor that Aquino and Mariano had made an
in 1950 to P500,000 and Maria B. Castro subscribed P76,000 and the others examination of the papers of the corporation at the end of the year 1948. It
P1,000 each (Exhibit 126). can not, therefore, discredit the testimonies of the defendants witnesses.

It does not appear that the stockholders or the board of directors of the Marvel As to the supposed enmity of the Llamados towards the plaintiff Maria B.
Building Corporation have ever held a business meeting, for no books thereof Castro, we note that, supposing that there really was such enmity, it does not
or minutes of meeting were ever mentioned by the officers thereof or appear that it was of such magnitude or force as could have induced the
presented by them at the trial. The by-laws of the corporation, if any had ever Llamados to lie or fabricate evidence against her. It seems that the Llamados
been approved, has not been presented. Neither does it appear that any report and Maria B. Castro were close friends way back in 1947 and up to 1949; but
of the affairs of the corporation has been made, either of its transactions or that at the time of the trial the friendship had been marred by
accounts. misunderstandings. We believe that in 1948 and 1949 the Llamados were
trusted friends of Maria B. Castro, and this explains why they had knowledge
From the book of accounts of the corporation, advances to the Marvel Building of her secret transactions. The younger Llamado even made advances for the
Corporation of P125,000 were made by Maria B. Castro in 1947, P102,916.05 hand of Maria B. Castros daughter, and this at the time when as a bookkeeper
in 1948, and P160,910.96 in 1949 (Exhibit 118). he was entrusted with checking up the certificates of stock. When the older
Llamado kept secret the existence of the endorsed certificates, the friendship find them subject to various objections. Maximo Cristobal declared that he
between the two families was yet intact; hence, the existence of the endorsed issued provincial receipts for the subscriptions supposedly paid to him in 1946;
certificates must have been kept to himself by the older Llamado. All the above but none of the supposed receipts was presented. If the subscriptions were
circumstances reinforce our belief that the Llamados had personal knowledge really received by him, big as the amounts were, he would have been able to
of the facts they testified to, and the existence of this knowledge in turn renders tell specifically, by dates and in fixed amounts, when and how the payments
improbable plaintiffs claim that their testimonies were biased. were made. The general assertion of alleged payments, without the concrete
days and amounts of payments, are, according to our experience, positive
Attempt was also made by the plaintiffs to show by expert evidence that the indications of untruthfulness, for when a witness testified to a fact that actually
endorsement could have been super-imposed, i.e., that the signatures made occurs, the act is concretely stated and no generalization is made.
on other papers and these were pasted and thereafter the documents
photographed. Judicial experience is to the effect that expert witnesses can With respect to Maria B. Castros testimony, we find it to be as untruthful as
always be obtained for both sides of an issue, most likely because expert that of Cristobal. She declared that payments of the subscriptions took place
witnesses are no longer impermeable to the influence of fees (II Wigmore, between July and December, 1946, and that said payments were first
Sec. 563 (2), p. 646). and if parties are capable of paying fees, expert opinion deposited by her in the National City Bank of New York. A study of her account
should be received with caution. In the case at bar, the opinion on the in said bank (Exhibit 82), however, fails to show the alleged deposit of the
supposed superimposition was merely a possibility, and we note various subscriptions during the year 1946 (See Exhibits 83-112). This fact completely
circumstances which prove that the signatures were not superimposed and belies her assertion. As to the testimony of C. S. Gonzales that Maria B. Castro
corroborate defendants claim that they were genuine. In the first place, the advanced his subscription, there is nothing in the evidence to corroborate it,
printed endorsement contains a very heavy line at the bottom for the signature and the circumstances show otherwise. If he had really been a stockholder
of the endorsee. This line in almost all of the endorsements is as clear as the and Maria B. Castro advanced his subscription, the agreement between him
printed letters above it, and at the points where the letters of the signature and Castro should have been put in writing, the amount advanced being quite
extend down and traverse it (the line), there is no indication that the line is considerable (P80,000), and it appearing further that Gonzales is no close
covered by a superimposed paper. Again in these places both the signatures relative or confidant of Castro.
and the lines are clear and distinct where the cross one another. Had there
been superimpositions the above features could not have been possible. In Lastly, it is significant that the plaintiffs, the supposed subscribers, who should
the second place, Maria B. Castro admitted having singed 25 stock have come to court to assert that they actually paid for their subscriptions, and
certificates, but only eleven were issued (t.s.n., p. 662). No explanation is are not mere dummies, did not do so. They could not have afforded such a
given by her why she had to sign as many as 25 forms when there were only costly indifference, valued at from P70,000 to P100,000 each, if they were not
eleven subscribers and eleven forms to be filled. This circumstances actual dummies. This failure on their part to take the witness stand to deny or
corroborate the young Llamados declaration that two sets of certificates had refute the charge that they were mere dummies is to us of utmost significance.
been prepared. The nineteen issued must be Exhibits H, H-1 to H-7 and J, or What could have been easier to disprove the charge that they were dummies,
Nos. 30 to 38, and the stock certificates endorsed whose photostatic copies than for them to come to court and show their receipts and testify on the
are Exhibits 4 to 13. It is to be remembered also, that it is a common practice payments they have made on their subscriptions? This they, however, refused
among unscrupulous merchants to carry two sets of books, one set for to do. They had it in their power to rebut the charges, but they chose to keep
themselves and another to be shown to tax collectors. This practice could not silent. The non-production of evidence that would naturally have been
have been unknown to Maria B. Castro, who apparently had been able to produced by an honest and therefore fearless claimant permits the inference
evade the payment of her war profits taxes. These circumstances, coupled that its tenor is unfavorable to the partys cause (II Wigmore, Sec. 285, p. 162).
with the testimony of Julio Llamado that two sets of certificates were given to A partys silence to adverse testimony is equivalent to an admission of its truth
him for checking, show to an impartial mind the existence of the set of (Ibid, Sec. 289, p. 175).
certificates endorsed in blank, thus confirming the testimonies of the
defendants witnesses, Aquino, Mariano and Crispin Llamado, and thus Our consideration of the evidence submitted on both sides, leads us to a
discrediting the obviously partial testimony of the expert presented by conclusion exactly opposite that arrived at by the trial court. In general the
plaintiffs. The genuineness of the signatures on the endorsement is not evidence offered by the plaintiffs is testimonial and direct evidence, easy of
disputed. How could the defendant had secured these genuine signatures? fabrication; that offered by defendant, documentary and circumstantial, not
Plaintiffs offer no explanation for this, although they do not question them. It only difficult of fabrication but in most cases found in the possession of
follows that the genuine signatures must have been made on the stock plaintiffs. There is very little room for choice as between the two. The
certificates themselves. circumstantial evidence is not only convincing; it is conclusive. The existence
of endorsed certificates, discovered by the internal revenue agents between
Next in importance among the evidence submitted by the defendant collector 1943 and 1949 in the possession of the Secretary-Treasurer, the fact that
to prove his contention that Maria B. Castro is the sole owner of the shares of twenty-five certificates were signed by the president of the corporation, for no
stock of the Marvel Building Corporation, is the fact that the other stockholders justifiable reason, the fact that two sets of certificates were issued, the
did not have incomes in such amounts, during the time of the organization of undisputed fact that Maria B. Castro had made enormous profits and,
the corporation in 1947, or immediately thereto, as to enable them to pay in therefore, had a motive to hide them to evade the payment of taxes, the fact
full for their supposed subscriptions. This fact is proved by their income tax that the other subscribers had no incomes of sufficient magnitude to justify
returns, or the absence thereof. Let us take Amado A. Yatco as an example. their big subscriptions, the fact that the subscriptions were not receipted for
Before 1945 his returns were exempt from the tax, in 1945 he had P12,600 and deposited by the treasurer in the name of the corporation but were kept
and in 1946, P23,000. He has four children. How could he have paid P100,000 by Maria B. Castro herself, the fact that the stockholders or the directors never
in 1945 and 1946? Santiago Tan who also contributed P100,000 had no appeared to have ever met to discuss the business of the corporation, the fact
appreciable income before 1946, and in this year an income of only P9,167.95. that Maria B. Castro advanced big sums of money to the corporation without
Jose T. Lopez also did not file any income tax returns before 1940 and in 1946 any previous arrangement or accounting, and the fact that the books of
he had an income of only P20,785, whereas he is supposed to have accounts were kept as if they belonged to Maria B. Castro alone these facts
subscribed P90,000 worth of stock early in 1947. Benita Lamagna had no are of patent and potent significance. What are their necessary implications?
returns either up to 1945, except in 1942, which was exempt, and in 1945 she Maria B. Castro would not have asked them to endorse their stock certificates,
had an income of P1,550 and in 1946, P6,463.36. In the same situation are all or be keeping these in her possession, if they were really the owners. They
the others, and besides, brothers and sisters and brother-in- law of Maria B. never would have consented that Maria B. Castro keep the funds without
Castro. On the other hand, Maria B. Castro had been found to have made receipts or accounting, nor that she manages the business without their
enormous gains or profits in her business such that the taxes thereon were knowledge or concurrence, were they owners of the stocks in their own rights.
assessed at around P3,000,000. There was, therefore, a prima facie case Each and every one of the facts all set forth above, in the same manner, is
made out by the defendant collector that Maria B. Castro had furnished all the inconsistent with the claim that the stockholders, other than Maria B. Castro,
money that the Marvel Building Corporation had. owned their shares in their own right. On the other hand, each and every one
of them, and all of them, can point to no other conclusion than that Maria B.
In order to meet the above evidence only three of the plaintiffs testified, Castro was the sole and exclusive owner of the shares and that they were only
namely, Maximo Cristobal, the corporations secretary, who made the general her dummies.
assertion on the witness stand that the other stockholders paid for their shares
in full, Maria B. Castro, who stated that payments of the subscriptions were In our opinion, the facts and circumstances duly set forth above, all of which
made to her, and C. S. Gonzales, who admitted that Maria B. Castro paid for have been proved to our satisfaction, prove conclusively and beyond
his subscription. After a careful study of the above testimonies, however, we reasonable doubt (section 89, Rule 123 of the Rules of Court and section 42
of the Provisional law for the application of the Penal Code) that Maria B. of 1948, as amended, the amount involved being more than P200,000.00,
Castro is the sole and exclusive owner of all the shares of stock of the Marvel exclusive of interests and cost.
Building Corporation and that the other partners are her dummies.
The only issue to be resolved is whether, upon the facts found by the trial
Wherefore, the judgment appealed from should be, as it hereby is, reversed court, which, in our opinion, are fully supported by the evidence
and the action filed by plaintiffs-appellees, dismissed, with costs against Francisco Sycip may be held liable, jointly and severally with his co-defendant,
plaintiffs-appellees. So ordered. for the sums of money adjudged in favor of NAMARCO.

The evidence of record shows that, of the capital stock of ASSOCIATED, Sycip
owned P60,000.00 worth of shares, while his wife the second biggest
G.R. No. L-20886 April 27, 1967 stockholder owned P20,000.00 worth of shares; that the par value of the
subscribed capital stock of ASSOCIATED was only P105,000.00; that
NATIONAL MARKETING CORPORATION (NAMARCO), plaintiff-appellant, negotiations that lead to the execution of the exchange agreement in question
vs. were conducted exclusively by Sycip on behalf of ASSOCIATED; that, as a
ASSOCIATED FINANCE COMPANY, INC., and FRANCISCO matter of fact, in the course of his testimony, Sycip referred to himself as the
SYCIP, defendants. one who contracted or transacted the business in his personal capacity, and
FRANCISCO SYCIP, defendant-appellee. asserted that the exchange agreement was his personal contract; that it was
Sycip who made personal representations and gave assurances that
Tomas P. Matic, Jr,. for plaintiff and appellant.
ASSOCIATED was in actual possession of the 22,516 bags of "Victorias"
Francisco Sycip in his behalf as defendant and appellee.
and/or "National" refined sugar which the latter had agreed to deliver to
DIZON, J.: NAMARCO, and that the same was ready for delivery; that, as a matter of fact,
ASSOCIATED was at that time already insolvent; that when NAMARCO made
Appeal by the National Marketing Corporation hereinafter referred to as demands upon ASSOCIATED to deliver the 22,516 bags of refined sugar it
NAMARCO, from the decision of the Court of First Instance of Manila in Civil was under obligation to deliver to the former, ASSOCIATED and Sycip, instead
Case No. 45770 ordering the Associated Finance Company, Inc. of making delivery of the sugar, offered to pay its value at the rate of P15.30
hereinafter referred to as the ASSOCIATED to pay the NAMARCO the sum per bag a clear indication that they did not have the sugar contracted
of P403,514.28, with legal interest thereon from the date of filing of the action for.1wph1.t
until fully paid, P80,702.26 as liquidated damages, P5,000.00 as attorney's
fees, plus costs, but dismissing the complaint insofar as defendant Francisco The foregoing facts, fully established by the evidence, can lead to no other
Sycip was concerned, as well as the latter's counterclaim. The appeal is only conclusion than that Sycip was guilty of fraud because through false
from that portion of the decision dismissing the case as against Francisco representations he succeeded in inducing NAMARCO to enter into the
Sycip. aforesaid exchange agreement, with full knowledge, on his part, on the fact
that ASSOCIATED whom he represented and over whose business and
On March 25, 1958, ASSOCIATED, a domestic corporation, through its affairs he had absolute control, was in no position to comply with the obligation
President, appellee Francisco Sycip, entered into an agreement to exchange it had assumed. Consequently, he can not now seek refuge behind the general
sugar with NAMARCO, represented by its then General Manager, Benjamin principle that a corporation has a personality distinct and separate from that of
Estrella, whereby the former would deliver to the latter 22,516 bags (each its stockholders and that the latter are not personally liable for the corporate
weighing 100 pounds) of "Victorias" and/or "National" refined sugar in obligations. To the contrary, upon the proven facts, We feel perfectly justified
exchange for 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil" raw in "piercing the veil of corporate fiction" and in holding Sycip personally liable,
sugar belonging to NAMARCO, both agreeing to pay liquidated damages jointly and severally with his co-defendant, for the sums of money adjudged in
equivalent to 20% of the contractual value of the sugar should either party fail favor of appellant. It is settled law in this and other jurisdictions that when the
to comply with the terms and conditions stipulated (Exhibit A). Pursuant corporation is the mere alter ego of a person, the corporate fiction may be
thereto, on May 19,1958, NAMARCO delivered to ASSOCIATED 7,732.71 disregarded; the same being true when the corporation is controlled, and its
bars of "Busilak" and 17,285.08 piculs of "Pasumil" domestic raw sugar. As affairs are so conducted as to make it merely an instrumentality, agency or
ASSOCIATED failed to deliver to NAMARCO the 22,516 bags of "Victoria" conduit of another (Koppel Phils., etc. vs. Yatco, etc., 43 O.G. No. 11. Nov.
and/or "National" refined sugar agreed upon, the latter, on January 12, 1959, 1947; Yutivo Sons, etc. vs. Court of Tax Appeals, etc., G.R. No. L-13203,
demanded in writing from the ASSOCIATED either (a) immediate delivery promulgated on January 28, 1961).
thereof before January 20, or (b) payment of its equivalent cash value
amounting to P372,639.80. Wherefore, the decision appealed from is modified by sentencing defendant-
appellee Francisco Sycip to pay, jointly and severally with the Associated
On January 19, 1959, ASSOCIATED, through Sycip, offered to pay Finance Company, Inc., the sum of money which the trial court sentenced the
NAMARCO the value of 22,516 bags of refined sugar at the rate of P15.30 per latter to pay to the National Marketing Corporation, as follows: the sum of
bag, but the latter rejected the offer. Instead, on January 21 of the same year FOUR HUNDRED THREE THOUSAND FIVE HUNDRED FOURTEEN
it demanded payment of the 7,732.71 bags of "Busilak" raw sugar at P15.30 PESOS, and TWENTY-EIGHT CENTAVOS P403,514.28), with interest at the
per bag, amounting to P118,310.40. and of the 17,285.08 piculs of "Pasumil" legal rate from the date of the filing of the action until fully paid plus an
raw sugar at P16.50 per picul, amounting, to P285.203.82, or a total price of additional amount of EIGHTY THOUSAND SEVEN HUNDRED TWO PESOS
P403,514.28 for both kinds of sugar, based on the sugar quotations (Exh. H) and EIGHTY-SIX CENTAVOS (P80,702.86) as liquidated damages and
as of March 20, 1958 the date when the exchange agreement was entered P5,000.00 as attorney's fees and further to pay the costs. With costs.
into.
G.R. No. 96490 February 3, 1992
As ASSOCIATED refused to deliver the raw sugar or pay for the refined sugar
delivered to it, inspite of repeated demands therefore, NAMARCO instituted INDOPHIL TEXTILE MILL WORKERS UNION-PTGWO, petitioner,
the present action in the lower court to recover the sum of P403,514.28 in vs.
payment of the raw sugar received by defendants from it; P80,702.86 as VOLUNTARY ARBITRATOR TEODORICO P. CALICA and INDOPHIL
liquidated damages; P10,000.00 as attorney's fees, expenses of litigation and TEXTILE MILLS, INC., respondents.
exemplary damages, with legal interest thereon from the filing of the complaint
Romeo C. Lagman for petitioner.
until fully paid.
Borreta, Gutierrez & Leogardo for respondent Indophil Textile Mills, Inc.
In their amended answer defendants, by way of affirmative defenses, alleged
that the correct value of the sugar delivered by NAMARCO to them was
P259,451.09 or P13.30 per bag of 100 lbs. weight (quedan basis) and not
P403,514.38 as claimed by NAMARCO. As counterclaim they prayed for the MEDIALDEA, J.:
award of P500,000.00 as moral damages, P100,000.00 as exemplary
damages and P10,000.00 as attorney's fees. This is a petition for certiorari seeking the nullification of the award issued by
the respondent Voluntary Arbitrator Teodorico P. Calica dated December 8,
After due trial court rendered the appealed judgment. The appeal was taken 1990 finding that Section 1 (c), Article I of the Collective Bargaining Agreement
to the Court of Appeals, but on January 15, 1963 the latter certified the case between Indophil Textile Mills, Inc. and Indophil Textile Mill Workers Union-
to us for final adjudication pursuant to sections 17 and 31 of the Judiciary Act PTGWO does not extend to the employees of Indophil Acrylic Manufacturing
Corporation as an extension or expansion of Indophil Textile Mills, The central issue submitted for arbitration is whether or not the operations in
Incorporated. Indophil Acrylic Corporation are an extension or expansion of private
respondent Company. Corollary to the aforementioned issue is the question
The antecedent facts are as follows: of whether or not the rank-and-file employees working at Indophil Acrylic
should be recognized as part of, and/or within the scope of the bargaining unit.
Petitioner Indophil Textile Mill Workers Union-PTGWO is a legitimate labor
organization duly registered with the Department of Labor and Employment Petitioner maintains that public respondent Arbitrator gravely erred in
and the exclusive bargaining agent of all the rank-and-file employees of interpreting Section l(c), Article I of the CBA in its literal meaning without taking
Indophil Textile Mills, Incorporated. Respondent Teodorico P. Calica is cognizance of the facts adduced that the creation of the aforesaid Indophil
impleaded in his official capacity as the Voluntary Arbitrator of the National Acrylic is but a devise of respondent Company to evade the application of the
Conciliation and Mediation Board of the Department of Labor and CBA between petitioner Union and respondent Company.
Employment, while private respondent Indophil Textile Mills, Inc. is a
corporation engaged in the manufacture, sale and export of yarns of various Petitioner stresses that the articles of incorporation of the two corporations
counts and kinds and of materials of kindred character and has its plants at establish that the two entities are engaged in the same kind of business, which
Barrio Lambakin. Marilao, Bulacan. is the manufacture and sale of yarns of various counts and kinds and of other
materials of kindred character or nature.
In April, 1987, petitioner Indophil Textile Mill Workers Union-PTGWO and
private respondent Indophil Textile Mills, Inc. executed a collective bargaining Contrary to petitioner's assertion, the public respondent through the Solicitor
agreement effective from April 1, 1987 to March 31, 1990. General argues that the Indophil Acrylic Manufacturing Corporation is not an
alter ego or an adjunct or business conduit of private respondent because it
On November 3, 1967 Indophil Acrylic Manufacturing Corporation was formed has a separate legitimate business purpose. In addition, the Solicitor General
and registered with the Securities and Exchange Commission. Subsequently, alleges that the primary purpose of private respondent is to engage in the
Acrylic applied for registration with the Board of Investments for incentives business of manufacturing yarns of various counts and kinds and textiles. On
under the 1987 Omnibus Investments Code. The application was approved on the other hand, the primary purpose of Indophil Acrylic is to manufacture, buy,
a preferred non-pioneer status. sell at wholesale basis, barter, import, export and otherwise deal in yarns of
various counts and kinds. Hence, unlike private respondent, Indophil Acrylic
In 1988, Acrylic became operational and hired workers according to its own
cannot manufacture textiles while private respondent cannot buy or import
criteria and standards. Sometime in July, 1989, the workers of Acrylic
yarns.
unionized and a duly certified collective bargaining agreement was executed.
Furthermore, petitioner emphasizes that the two corporations have practically
In 1990 or a year after the workers of Acrylic have been unionized and a CBA
the same incorporators, directors and officers. In fact, of the total stock
executed, the petitioner union claimed that the plant facilities built and set up
subscription of Indophil Acrylic, P1,749,970.00 which represents seventy
by Acrylic should be considered as an extension or expansion of the facilities
percent (70%) of the total subscription of P2,500,000.00 was subscribed to by
of private respondent Company pursuant to Section 1(c), Article I of the CBA,
respondent Company.
to wit,.
On this point, private respondent cited the case of Diatagon Labor Federation
c) This Agreement shall apply to the Company's plant facilities and
v. Ople, G.R. No. L-44493-94, December 3, 1980, 10l SCRA 534, which ruled
installations and to any extension and expansion thereat. (Rollo, p.4)
that two corporations cannot be treated as a single bargaining unit even if their
In other words, it is the petitioner's contention that Acrylic is part of the Indophil businesses are related. It submits that the fact that there are as many
bargaining unit. bargaining units as there are companies in a conglomeration of companies is
a positive proof that a corporation is endowed with a legal personality distinctly
The petitioner's contention was opposed by private respondent which submits its own, independent and separate from other corporations (see Rollo, pp.
that it is a juridical entity separate and distinct from Acrylic. 160-161).
The existing impasse led the petitioner and private respondent to enter into a Petitioner notes that the foregoing evidence sufficiently establish that Acrylic
submission agreement on September 6, 1990. The parties jointly requested is but an extension or expansion of private respondent, to wit:
the public respondent to act as voluntary arbitrator in the resolution of the
pending labor dispute pertaining to the proper interpretation of the CBA (a) the two corporations have their physical plants, offices and facilities
provision. situated in the same compound, at Barrio Lambakin, Marilao, Bulacan;

After the parties submitted their respective position papers and replies, the (b) many of private respondent's own machineries, such as dyeing machines,
public respondent Voluntary Arbitrator rendered its award on December 8, reeling, boiler, Kamitsus among others, were transferred to and are now
1990, the dispositive portion of which provides as follows: installed and being used in the Acrylic plant;

PREMISES CONSIDERED, it would be a strained interpretation and (c) the services of a number of units, departments or sections of private
application of the questioned CBA provision if we would extend to the respondent are provided to Acrylic; and
employees of Acrylic the coverage clause of Indophil Textile Mills CBA.
(d) the employees of private respondent are the same persons manning and
Wherefore, an award is made to the effect that the proper interpretation and
servicing the units of Acrylic. (see Rollo, pp. 12-13)
application of Sec. l, (c), Art. I, of the 1987 CBA do (sic) not extend to the
employees of Acrylic as an extension or expansion of Indophil Textile Mills, Private respondent insists that the existence of a bonafide business
Inc. (Rollo, p.21) relationship between Acrylic and private respondent is not a proof of being a
single corporate entity because the services which are supposedly provided
Hence, this petition raising four (4) issues, to wit:
by it to Acrylic are auxiliary services or activities which are not really essential
1. WHETHER OR NOT THE RESPONDENT ARBITRATOR ERRED IN in the actual production of Acrylic. It also pointed out that the essential services
INTERPRETING SECTION 1(c), ART I OF THE CBA BETWEEN are discharged exclusively by Acrylic personnel under the control and
PETITIONER UNION AND RESPONDENT COMPANY. supervision of Acrylic managers and supervisors.

2. WHETHER OR NOT INDOPHIL ACRYLIC IS A SEPARATE AND In sum, petitioner insists that the public respondent committed grave abuse of
DISTINCT ENTITY FROM RESPONDENT COMPANY FOR PURPOSES OF discretion amounting to lack or in excess of jurisdiction in erroneously
UNION REPRESENTATION. interpreting the CBA provision and in failing to disregard the corporate entity
of Acrylic.
3. WHETHER OR NOT THE RESPONDENT ARBITRATOR GRAVELY
ABUSED HIS DISCRETION AMOUNTING TO LACK OR IN EXCESS OF HIS We find the petition devoid of merit.
JURISDICTION.
Time and again, We stress that the decisions of voluntary arbitrators are to be
4. WHETHER OR NOT THE RESPONDENT ARBITRATOR VIOLATED given the highest respect and a certain measure of finality, but this is not a
PETITIONER UNION'S CARDINAL PRIMARY RIGHT TO DUE PROCESS. hard and fast rule, it does not preclude judicial review thereof where want of
(Rollo, pp. 6-7) jurisdiction, grave abuse of discretion, violation of due process, denial of
substantial justice, or erroneous interpretation of the law were brought to our
attention. (see Ocampo, et al. v. National Labor Relations Commission, G.R.
No. 81677, 25 July 1990, First Division Minute Resolution citing Oceanic Bic wrong is sought to be justified thereby, the corporate fiction or the notion of
Division (FFW) v. Romero, G.R. No. L-43890, July 16, 1984, 130 SCRA 392) legal entity should come to naught. The law in these instances will regard the
corporation as a mere association of persons and, in case of two corporations,
It should be emphasized that in rendering the subject arbitral award, the merge them into one.
voluntary arbitrator Teodorico Calica, a professor of the U.P. Asian Labor
Education Center, now the Institute for Industrial Relations, found that the Thus, where a sister corporation is used as a shield to evade a corporations
existing law and jurisprudence on the matter, supported the private subsidiary liability for damages, the corporation may not be heard to say that
respondent's contentions. Contrary to petitioner's assertion, public respondent it has a personality separate and distinct from the other corporation. The
cited facts and the law upon which he based the award. Hence, public piercing of the corporate veil comes into play.
respondent did not abuse his discretion.
This special civil action ostensibly raises the question of whether the National
Under the doctrine of piercing the veil of corporate entity, when valid grounds Labor Relations Commission committed grave abuse of discretion when it
therefore exist, the legal fiction that a corporation is an entity with a juridical issued a break-open order to the sheriff to be enforced against personal
personality separate and distinct from its members or stockholders may be property found in the premises of petitioners sister company.
disregarded. In such cases, the corporation will be considered as a mere
association of persons. The members or stockholders of the corporation will Petitioner Concept Builders, Inc., a domestic corporation, with principal office
be considered as the corporation, that is liability will attach directly to the at 355 Maysan Road, Valenzuela, Metro Manila, is engaged in the
officers and stockholders. The doctrine applies when the corporate fiction is construction business. Private respondents were employed by said company
used to defeat public convenience, justify wrong, protect fraud, or defend as laborers, carpenters and riggers.
crime, or when it is made as a shield to confuse the legitimate issues, or where
On November, 1981, private respondents were served individual written
a corporation is the mere alter ego or business conduit of a person, or where
notices of termination of employment by petitioner, effective on November 30,
the corporation is so organized and controlled and its affairs are so conducted
1981. It was stated in the individual notices that their contracts of employment
as to make it merely an instrumentality, agency, conduit or adjunct of another
had expired and the project in which they were hired had been completed.
corporation. (Umali et al. v. Court of Appeals, G.R. No. 89561, September 13,
1990, 189 SCRA 529, 542) Public respondent found it to be, the fact, however, that at the time of the
termination of private respondents employment, the project in which they were
In the case at bar, petitioner seeks to pierce the veil of corporate entity of
hired had not yet been finished and completed. Petitioner had to engage the
Acrylic, alleging that the creation of the corporation is a devise to evade the
services of sub-contractors whose workers performed the functions of private
application of the CBA between petitioner Union and private respondent
respondents.
Company. While we do not discount the possibility of the similarities of the
businesses of private respondent and Acrylic, neither are we inclined to apply Aggrieved, private respondents filed a complaint for illegal dismissal, unfair
the doctrine invoked by petitioner in granting the relief sought. The fact that labor practice and non-payment of their legal holiday pay, overtime pay and
the businesses of private respondent and Acrylic are related, that some of the thirteenth-month pay against petitioner.
employees of the private respondent are the same persons manning and
providing for auxilliary services to the units of Acrylic, and that the physical On December 19, 1984, the Labor Arbiter rendered judgment1 ordering
plants, offices and facilities are situated in the same compound, it is our petitioner to reinstate private respondents and to pay them back wages
considered opinion that these facts are not sufficient to justify the piercing of equivalent to one year or three hundred working days.
the corporate veil of Acrylic.
On November 27, 1985, the National Labor Relations Commission (NLRC)
In the same case of Umali, et al. v. Court of Appeals (supra), We already dismissed the motion for reconsideration filed by petitioner on the ground that
emphasized that "the legal corporate entity is disregarded only if it is sought the said decision had already become final and executory.2
to hold the officers and stockholders directly liable for a corporate debt or
On October 16, 1986, the NLRC Research and Information Department made
obligation." In the instant case, petitioner does not seek to impose a claim
the finding that private respondents backwages amounted to P199,800.00.3
against the members of the Acrylic.
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the
Furthermore, We already ruled in the case of Diatagon Labor Federation Local
sheriff to execute the Decision, dated December 19, 1984. The writ was
110 of the ULGWP v. Ople (supra) that it is grave abuse of discretion to treat
partially satisfied through garnishment of sums from petitioners debtor, the
two companies as a single bargaining unit when these companies are
Metropolitan Waterworks and Sewerage Authority, in the amount of
indubitably distinct entities with separate juridical personalities.
P81,385.34. Said amount was turned over to the cashier of the NLRC.
Hence, the Acrylic not being an extension or expansion of private respondent,
On February 1, 1989, an Alias Writ of Execution was issued by the Labor
the rank-and-file employees working at Acrylic should not be recognized as
Arbiter directing the sheriff to collect from herein petitioner the sum of
part of, and/or within the scope of the petitioner, as the bargaining
P117,414.76, representing the balance of the judgment award, and to
representative of private respondent.
reinstate private respondents to their former positions.
All premises considered, the Court is convinced that the public respondent
On July 13, 1989, the sheriff issued a report stating that he tried to serve the
Voluntary Arbitrator did not commit grave abuse of discretion in its
alias writ of execution on petitioner through the security guard on duty but the
interpretation of Section l(c), Article I of the CBA that the Acrylic is not an
service was refused on the ground that petitioner no longer occupied the
extension or expansion of private respondent.
premises.
ACCORDINGLY, the petition is DENIED and the award of the respondent
On September 26, 1986, upon motion of private respondents, the Labor
Voluntary Arbitrator are hereby AFFIRMED.
Arbiter issued a second alias writ of execution.
SO ORDERED.
The said writ had not been enforced by the special sheriff because, as stated
CONCEPT BUILDERS, INC., petitioner, vs. THE NATIONAL LABOR in his progress report, dated November 2, 1989:
RELATIONS COMMISSION, (First Division); and Norberto Marabe,
1. All the employees inside petitioners premises at 355 Maysan Road,
Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos,
Valenzuela, Metro Manila, claimed that they were employees of Hydro Pipes
Pedro Aboigar, Norberto Comendador, Rogello Salut, Emilio Garcia, Jr.,
Philippines, Inc. (HPPI) and not by respondent;
Mariano Rio, Paulina Basea, Aifredo Albera, Paquito Salut, Domingo
Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino 2. Levy was made upon personal properties he found in the premises;
Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben
Robalos, respondents. 3. Security guards with high-powered guns prevented him from removing the
properties he had levied upon.4
DECISION
The said special sheriff recommended that a break-open order be issued to
HERMOSISIMA, JR., J.: enable him to enter petitioners premises so that he could proceed with the
public auction sale of the aforesaid personal properties on November 7, 1989.
The corporate mask may be lifted and the corporate veil may be pierced when
a corporation is just but the alter ego of a person or of another corporation.
Where badges of fraud exist; where public convenience is defeated; where a
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim Antonio W. Lim Chairman
with the Labor Arbiter alleging that the properties sought to be levied upon by
the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice- Elisa C. Lim Member
President.
Dennis S. Cuyegkeng Member
On November 23, 1989, private respondents filed a Motion for Issuance of a
Virgilio O. Casino Member
Break-Open Order, alleging that HPPI and petitioner corporation were owned
by the same incorporator! stockholders. They also alleged that petitioner Teodulo R. Dino Member
temporarily suspended its business operations in order to evade its legal
obligations to them and that private respondents were willing to post an 3. Corporate Officers
indemnity bond to answer for any damages which petitioner and HPPI may
Antonio W. Lim President
suffer because of the issuance of the break-open order.
Dennis S. Cuyegkeng Assistant to the President
In support of their claim against HPPI, private respondents presented duly
certified copies of the General Informations Sheet, dated May 15, 1987, Elisa O. Lim Treasurer
submitted by petitioner to the Securities and Exchange Commission (SEC)
and the General Information Sheet, dated May 15, 1987, submitted by HPPI Virgilio O. Casino Corporate Secretary
to the Securities and Exchange Commission.
4. Principal Office
The General Information Sheet submitted by the petitioner1 revealed the
following: 355 Maysan Road, Valenzuela, Metro Manila.6

1. Breakdown of Subscribed Capital On February 1, 1990, HPPI filed an Opposition to private respondents motion
for issuance of a break-open order, contending that HPPI is a corporation
Name of Stockholder Amount Subscribed which is separate and distinct from petitioner. HPPI also alleged that the two
corporations are engaged in two different kinds of businesses, i.e., HPPI is a
HPPI P6,999,500.00 manufacturing firm while petitioner was then engaged in construction.
Antonio W. Lim 2,900,000.00 On March 2, 1990, the Labor Arbiter issued an Order which denied private
respondents motion for break-open order.
Dennis S. Cuyegkeng 300.00
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC
Elisa C. Lim 100,000.00
set aside the order of the Labor Arbiter, issued a break-open order and
Teodulo R. Dino 100.00 directed private respondents to file a bond. Thereafter, it directed the sheriff to
proceed with the auction sale of the properties already levied upon. It
Virgilio O. Casino 100.00 dismissed the third-party claim for lack of merit.
2. Board of Directors Petitioner moved for reconsideration but the motion was denied by the NLRC
in a Resolution, dated December 3, 1992.
Antonio W. Lim Chairman
Hence, the resort to the present petition.
Dennis S. Cuyegkeng Member
Petitioner alleges that the NLRC committed grave abuse of discretion when it
Elisa C. Lim Member
ordered the execution of its decision despite a third-party claim on the levied
Teodulo R. Dino Member property. Petitioner further contends, that the doctrine of piercing the corporate
veil should not have been applied, in this case, in the absence of any showing
Virgilio O. Casino Member that it created HPPI in order to evade its liability to private respondents. It also
contends that HPPI is engaged in the manufacture and sale of steel, concrete
3. Corporate Officers and iron pipes, a business which is distinct and separate from petitioners
construction business. Hence, it is of no consequence that petitioner and HPPI
Antonio W. Lim President
shared the same premises, the same President and the same set of officers
Dennis S. Cuyegkeng Assistant to the President and subscribers.7

Elisa 0. Lim Treasurer We find petitioners contention to be unmeritorious.

Virgilio O. Casino Corporate Secretary It is a fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporations to
4. Principal Office which it may be connected.8 But, this separate and distinct personality of a
corporation is merely a fiction created by law for convenience and to promote
355 Maysan Road
justice.9 So, when the notion of separate juridical personality is used to defeat
Valenzuela, Metro Manila.5 public convenience, justify wrong, protect fraud or defend crime, or is used as
a device to defeat the labor laws,10 this separate personality of the corporation
On the other hand, the General Information Sheet of HPPI revealed the may be disregarded or the veil of corporate fiction pierced.11 This is true
following: likewise when the corporation is merely an adjunct, a business conduit or an
alter ego of another corporation.12
1. Breakdown of Subscribed Capital
The conditions under which the juridical entity may be disregarded vary
Name of Stockholder Amount Subscribed according to the peculiar facts and circumstances of each case. No hard and
fast rule can be accurately laid down, but certainly, there are some probative
Antonio W. Lim P400,000.00
factors of identity that will justify the application of the doctrine of piercing the
Elisa C. Lim 57,700.00 corporate veil, to wit:

AWL Trading 455,000.00 1. Stock ownership by one or common ownership of both corporations.

Dennis S. Cuyegkeng 40,100.00 2. Identity of directors and officers.

Teodulo R. Dino 100.00 3. The manner of keeping corporate books and records.

Virgilio O. Casino 100.00 4. Methods of conducting the business.13

2. Board of Directors
The SEC en banc explained the instrumentality rule which the courts have It is very obvious that the second corporation seeks the protective shield of a
applied in disregarding the separate juridical personality of corporations as corporate fiction whose veil in the present case could, and should, be pierced
follows: as it was deliberately and maliciously designed to evade its financial obligation
to its employees.
Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other, In view of the failure of the sheriff, in the case at bar, to effect a levy upon the
the fiction of the corporate entity of the instrumentality may be property subject of the execution, private respondents had no other recourse
disregarded. The control necessary to invoke the rule is not majority or even but to apply for a break-open order after the third-party claim of HPPI was
complete stock control but such domination of finances, policies and practices dismissed for lack of merit by the NLRC. This is in consonance with Section 3,
that the controlled corporation has, so to speak, no separate mind, will or Rule VII of the NLRC Manual of Execution of Judgment which provides that:
existence of its own, and is but a conduit for its principal. It must be kept in
mind that the control must be shown to have been exercised at the time the Should the losing party, his agent or representative, refuse or prohibit the
acts complained of took place. Moreover, the control and breach of duty must Sheriff or his representative entry to the place where the property subject of
proximately cause the injury or unjust loss for which the complaint is made. execution is located or kept, the judgment creditor may apply to the
Commission or Labor Arbiter concerned for a break-open order.
The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows: Furthermore, our perusal of the records shows that the twin requirements of
due notice and hearing were complied with. Petitioner and the third-party
1. Control, not mere majority or complete stock control, but complete claimant were given the opportunity to submit evidence in support of their
domination, not only of finances but of policy and business practice in respect claim.
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; Hence, the NLRC did not commit any grave abuse of discretion when it
affirmed the break-open order issued by the Labor Arbiter.
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 Finally, we do not find any reason to disturb the rule that factual findings of
dishonest and unjust act in contravention of plaintiffs legal rights; and quasi-judicial agencies supported by substantial evidence are binding on this
Court and are entitled to great respect, in the absence of showing of grave
3. The aforesaid control and breach of duty must proximately cause the injury abuse of a discretion.18
or unjust loss complained of.
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the
The absence of any one of these elements prevents piercing the corporate NLRC, dated April 23, 1992 and December 3, 1992, are AFFIRMED.
veil. in applying the instrumentality or alter ego doctrine, the courts are
concerned with reality and not form, with how the corporation operated and SO ORDERED.
the individual defendants relationship to that operation. 14
Padilla (Chairman), Bellosillo, Vitug, and Kapunan, JJ., concur.
Thus, the question of whether a corporation is a mere alter ego, a mere sheet
G.R. No. L-23893 October 29, 1968
or paper corporation, a sham or a subterfuge is purely one of fact.15
VILLA REY TRANSIT, INC., plaintiff-appellant,
In this case, the NLRC noted that, while petitioner claimed that it ceased its
vs.
business operations on April 29, 1986, it filed an Information Sheet with the
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and
Securities and Exchange Commission on May 15, 1987, stating that its office
PUBLIC SERVICE COMMISSION,defendants.
address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand,
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO.,
HPPI, the third-party claimant, submitted on the same day, a similar
INC., defendants-appellants.
information sheet stating that its office address is at 355 Maysan Road,
Valenzuela, Metro Manila. PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant,
vs.
Furthermore, the NLRC stated that:
JOSE M. VILLARAMA, third-party defendant-appellee.
Both information sheets were filed by the same Virgilio O. Casino as the
ANGELES, J.:
corporate secretary of both corporations. It would also not be amiss to note
that both corporations had the same president, the same board of directors, This is a tri-party appeal from the decision of the Court of First Instance of
the same corporate officers, and substantially the same subscribers. Manila, Civil Case No. 41845, declaring null and void the sheriff's sale
of two certificates of public convenience in favor of defendant Eusebio E.
From the foregoing, it appears that, among other things, the respondent
Ferrer and the subsequent sale thereof by the latter to defendant Pangasinan
(herein petitioner) and the third-party claimant shared the same address
Transportation Co., Inc.; declaring the plaintiff Villa Rey Transit, Inc., to be the
and/or premises. Under this circumstances, (sic) it cannot be said that the
lawful owner of the said certificates of public convenience; and ordering the
property levied upon by the sheriff were not of respondents.16
private defendants, jointly and severally, to pay to the plaintiff, the sum of
Clearly, petitioner ceased its business operations in order to evade the P5,000.00 as and for attorney's fees. The case against the PSC was
payment to private respondents of backwages and to bar their reinstatement dismissed.
to their former positions. HPPI is obviously a business conduit of petitioner
The rather ramified circumstances of the instant case can best be understood
corporation and its emergence was skillfully orchestrated to avoid the financial
by a chronological narration of the essential facts, to wit:
liability that already attached to petitioner corporation.
Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under
The facts in this case are analogous to Claparols v. Court of Industrial
the business name of Villa Rey Transit, pursuant to certificates of public
Relations17 where we had the occasion to rule:
convenience granted him by the Public Service Commission (PSC, for short)
Respondent courts findings that indeed the Claparols Steel and Nail Plant, in Cases Nos. 44213 and 104651, which authorized him to operate a total of
which ceased operation of June 30, 1957, was SUCCEEDED by the Claparols thirty-two (32) units on various routes or lines from Pangasinan to Manila, and
Steel Corporation effective the next day, July 1, 1957, up to December 7, 1962, vice-versa. On January 8, 1959, he sold the aforementioned two certificates
when the latter finally ceased to operate, were not disputed by petitioner. it is of public convenience to the Pangasinan Transportation Company, Inc.
very clear that the latter corporation was a continuation and successor of the (otherwise known as Pantranco), for P350,000.00 with the condition, among
first entity x x x. Both predecessors and successor were owned and controlled others, that the seller (Villarama) "shall not for a period of 10 years from the
by petitioner Eduardo Claparols and there was no break in the succession and date of this sale, apply for any TPU service identical or competing with the
continuity of the same business. This avoiding-the-liability scheme is very buyer."
patent, considering that 90% of the subscribed shares of stock of the Claparols
Barely three months thereafter, or on March 6, 1959: a corporation called Villa
Steel Corporation (the second corporation) was owned by respondent x x x
Rey Transit, Inc. (which shall be referred to hereafter as the Corporation) was
Claparols himself, and all the assets of the dissolved Claparols Steel and Nail
organized with a capital stock of P500,000.00 divided into 5,000 shares of the
Plant were turned over to the emerging Claparols Steel Corporation.
par value of P100.00 each; P200,000.00 was the subscribed stock; Natividad
R. Villarama (wife of Jose M. Villarama) was one of the incorporators, and she
subscribed for P1,000.00; the balance of P199,000.00 was subscribed by the
brother and sister-in-law of Jose M. Villarama; of the subscribed capital stock, As stated at the beginning, all the parties involved have appealed from the
P105,000.00 was paid to the treasurer of the corporation, who was Natividad decision. They submitted a joint record on appeal.
R. Villarama.
Pantranco disputes the correctness of the decision insofar as it holds that Villa
In less than a month after its registration with the Securities and Exchange Rey Transit, Inc. (Corporation) is a distinct and separate entity from Jose M.
Commission (March 10, 1959), the Corporation, on April 7, 1959, Villarama; that the restriction clause in the contract of January 8, 1959
bought five certificates of public convenience, forty-nine buses, tools and between Pantranco and Villarama is null and void; that the Sheriff's sale of
equipment from one Valentin Fernando, for the sum of P249,000.00, of which July 16, 1959, is likewise null and void; and the failure to award damages in
P100,000.00 was paid upon the signing of the contract; P50,000.00 was its favor and against Villarama.
payable upon the final approval of the sale by the PSC; P49,500.00 one year
after the final approval of the sale; and the balance of P50,000.00 "shall be Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's
paid by the BUYER to the different suppliers of the SELLER." sale is null and void; and the sale of the two certificates in question by Valentin
Fernando to the Corporation, is valid. He also assails the award of P5,000.00
The very same day that the aforementioned contract of sale was executed, as attorney's fees in favor of the Corporation, and the failure to award moral
the parties thereto immediately applied with the PSC for its approval, with a damages to him as prayed for in his counterclaim.
prayer for the issuance of a provisional authority in favor of the vendee
Corporation to operate the service therein involved.1 On May 19, 1959, the The Corporation, on the other hand, prays for a review of that portion of the
PSC granted the provisional permit prayed for, upon the condition that "it may decision awarding only P5,000.00 as attorney's fees, and insisting that it is
be modified or revoked by the Commission at any time, shall be subject to entitled to an award of P100,000.00 by way of exemplary damages.
whatever action that may be taken on the basic application and shall be valid
After a careful study of the facts obtaining in the case, the vital issues to be
only during the pendency of said application." Before the PSC could take final
resolved are: (1) Does the stipulation between Villarama and Pantranco, as
action on said application for approval of sale, however, the Sheriff of Manila,
contained in the deed of sale, that the former "SHALL NOT FOR A PERIOD
on July 7, 1959, levied on two of the five certificates of public
OF 10 YEARS FROM THE DATE OF THIS SALE, APPLY FOR ANY TPU
convenience involved therein, namely, those issued under PSC cases Nos.
SERVICE IDENTICAL OR COMPETING WITH THE BUYER," apply to new
59494 and 63780, pursuant to a writ of execution issued by the Court of First
lines only or does it include existing lines?; (2) Assuming that said stipulation
Instance of Pangasinan in Civil Case No. 13798, in favor of Eusebio Ferrer,
covers all kinds of lines, is such stipulation valid and enforceable?; (3) In the
plaintiff, judgment creditor, against Valentin Fernando, defendant, judgment
affirmative, that said stipulation is valid, did it bind the Corporation?
debtor. The Sheriff made and entered the levy in the records of the PSC. On
July 16, 1959, a public sale was conducted by the Sheriff of the For convenience, We propose to discuss the foregoing issues by starting with
said two certificates of public convenience. Ferrer was the highest bidder, and the last proposition.
a certificate of sale was issued in his name.
The evidence has disclosed that Villarama, albeit was not an incorporator or
Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, stockholder of the Corporation, alleging that he did not become such, because
and jointly submitted for approval their corresponding contract of sale to the he did not have sufficient funds to invest, his wife, however, was an
PSC.2 Pantranco therein prayed that it be authorized provisionally to operate incorporator with the least subscribed number of shares, and was elected
the service involved in the said two certificates. treasurer of the Corporation. The finances of the Corporation which, under all
concepts in the law, are supposed to be under the control and administration
The applications for approval of sale, filed before the PSC, by Fernando and
of the treasurer keeping them as trust fund for the Corporation, were,
the Corporation, Case No. 124057, and that of Ferrer and Pantranco, Case
nonetheless, manipulated and disbursed as if they were the private funds of
No. 126278, were scheduled for a joint hearing. In the meantime, to wit, on
Villarama, in such a way and extent that Villarama appeared to be the actual
July 22, 1959, the PSC issued an order disposing that during the pendency of
owner-treasurer of the business without regard to the rights of the
the cases and before a final resolution on the aforesaid applications, the
stockholders. The following testimony of Villarama,4together with the other
Pantranco shall be the one to operate provisionally the service under
evidence on record, attests to that effect:
the twocertificates embraced in the contract between Ferrer and Pantranco.
The Corporation took issue with this particular ruling of the PSC and elevated Q. Doctor, I want to go back again to the incorporation of the Villa Rey
the matter to the Supreme Court,3 which decreed, after deliberation, that until Transit, Inc. You heard the testimony presented here by the bank regarding
the issue on the ownership of the disputed certificates shall have been finally the initial opening deposit of ONE HUNDRED FIVE THOUSAND PESOS, of
settled by the proper court, the Corporation should be the one to operate the which amount Eighty-Five Thousand Pesos was a check drawn by yourself
lines provisionally. personally. In the direct examination you told the Court that the reason you
drew a check for Eighty-Five Thousand Pesos was because you and your wife,
On November 4, 1959, the Corporation filed in the Court of First Instance of
or your wife, had spent the money of the stockholders given to her for
Manila, a complaint for the annulment of the sheriff's sale of the
incorporation. Will you please tell the Honorable Court if you knew at the time
aforesaid two certificates of public convenience (PSC Cases Nos. 59494 and
your wife was spending the money to pay debts, you personally knew she was
63780) in favor of the defendant Ferrer, and the subsequent sale thereof by
spending the money of the incorporators?
the latter to Pantranco, against Ferrer, Pantranco and the PSC. The plaintiff
Corporation prayed therein that all the orders of the PSC relative to the parties' A. You know my money and my wife's money are one. We never talk about
dispute over the said certificates be annulled. those things.
In separate answers, the defendants Ferrer and Pantranco averred that the Q. Doctor, your answer then is that since your money and your wife's
plaintiff Corporation had no valid title to the certificates in question because money are one money and you did not know when your wife was paying debts
the contract pursuant to which it acquired them from Fernando was subject to with the incorporator's money?
a suspensive condition the approval of the PSC which has not yet been
fulfilled, and, therefore, the Sheriff's levy and the consequent sale at public A. Because sometimes she uses my money, and sometimes the money
auction of the certificates referred to, as well as the sale of the same by Ferrer given to her she gives to me and I deposit the money.
to Pantranco, were valid and regular, and vested unto Pantranco, a superior
Q. Actually, aside from your wife, you were also the custodian of some of
right thereto.
the incorporators here, in the beginning?
Pantranco, on its part, filed a third-party complaint against Jose M. Villarama,
A. Not necessarily, they give to my wife and when my wife hands to me I
alleging that Villarama and the Corporation, are one and the same; that
did not know it belonged to the incorporators.
Villarama and/or the Corporation was disqualified from operating the two
certificates in question by virtue of the aforementioned agreement between Q. It supposes then your wife gives you some of the money received by
said Villarama and Pantranco, which stipulated that Villarama "shall not for a her in her capacity as treasurer of the corporation?
period of 10 years from the date of this sale, apply for any TPU service
identical or competing with the buyer." A. Maybe.

Upon the joinder of the issues in both the complaint and third-party complaint, Q. What did you do with the money, deposit in a regular account?
the case was tried, and thereafter decision was rendered in the terms, as
above stated. A. Deposit in my account.

Q. Of all the money given to your wife, she did not receive any check?
A. I do not remember. evidence rule is "when the original has been lost, destroyed, or cannot be
produced in court."15 The originals of the vouchers in question must be
Q. Is it usual for you, Doctor, to be given Fifty Thousand Pesos without deemed to have been lost, as even the Corporation admits such loss. Viewed
even asking what is this? upon this light, there can be no doubt as to the admissibility in evidence of
Exhibits 6 to 19 and 22.
xxx xxx xxx
Taking account of the foregoing evidence, together with Celso Rivera's
JUDGE: Reform the question.
testimony,16 it would appear that: Villarama supplied the organization
Q. The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two expenses and the assets of the Corporation, such as trucks and
Thousand Pesos, did your wife give you Fifty-two Thousand Pesos? equipment;17 there was no actual payment by the original subscribers of the
amounts of P95,000.00 and P100,000.00 as appearing in the
A. I have testified before that sometimes my wife gives me money and I books;18 Villarama made use of the money of the Corporation and deposited
do not know exactly for what. them to his private accounts;19 and the Corporation paid his personal
accounts.20
The evidence further shows that the initial cash capitalization of the
corporation of P105,000.00 was mostly financed by Villarama. Of the Villarama himself admitted that he mingled the corporate funds with his own
P105,000.00 deposited in the First National City Bank of New York, money.21 He also admitted that gasoline purchases of the Corporation were
representing the initial paid-up capital of the Corporation, P85,000.00 was made in his name22 because "he had existing account with Stanvac which was
covered by Villarama's personal check. The deposit slip for the said amount properly secured and he wanted the Corporation to benefit from the rebates
of P105,000.00 was admitted in evidence as Exh. 23, which shows on its face that he received."23
that P20,000.00 was paid in cash and P85,000.00 thereof was covered by
Check No. F-50271 of the First National City Bank of New York. The The foregoing circumstances are strong persuasive evidence showing that
testimonies of Alfonso Sancho5 and Joaquin Amansec,6 both employees of Villarama has been too much involved in the affairs of the Corporation to
said bank, have proved that the drawer of the check was Jose Villarama altogether negative the claim that he was only a part-time general manager.
himself. They show beyond doubt that the Corporation is his alter ego.

Another witness, Celso Rivera, accountant of the Corporation, testified that It is significant that not a single one of the acts enumerated above as proof of
while in the books of the corporation there appears an entry that the treasurer Villarama's oneness with the Corporation has been denied by him. On the
received P95,000.00 as second installment of the paid-in subscriptions, and, contrary, he has admitted them with offered excuses.
subsequently, also P100,000.00 as the first installment of the offer for second
Villarama has admitted, for instance, having paid P85,000.00 of the initial
subscriptions worth P200,000.00 from the original subscribers, yet Villarama
capital of the Corporation with the lame excuse that "his wife had requested
directed him (Rivera) to make vouchers liquidating the sums.7 Thus, it was
him to reimburse the amount entrusted to her by the incorporators and which
made to appear that the P95,000.00 was delivered to Villarama in payment for
she had used to pay the obligations of Dr. Villarama (her husband) incurred
equipment purchased from him, and the P100,000.00 was loaned as
while he was still the owner of Villa Rey Transit, a single proprietorship." But
advances to the stockholders. The said accountant, however, testified that he
with his admission that he had received P350,000.00 from Pantranco for the
was not aware of any amount of money that had actually passed hands among
sale of the two certificates and one unit,24 it becomes difficult to accept
the parties involved,8 and actually the only money of the corporation was the
Villarama's explanation that he and his wife, after consultation,25 spent the
P105,000.00 covered by the deposit slip Exh. 23, of which as mentioned
money of their relatives (the stockholders) when they were supposed to have
above, P85,000.00 was paid by Villarama's personal check.
their own money. Even if Pantranco paid the P350,000.00 in check to him, as
Further, the evidence shows that when the Corporation was in its initial months claimed, it could have been easy for Villarama to have deposited said check
of operation, Villarama purchased and paid with his personal checks Ford in his account and issued his own check to pay his obligations. And there is
trucks for the Corporation. Exhibits 20 and 21 disclose that the said purchases no evidence adduced that the said amount of P350,000.00 was all spent or
were paid by Philippine Bank of Commerce Checks Nos. 992618-B and was insufficient to settle his prior obligations in his business, and in the light of
993621-B, respectively. These checks have been sufficiently established by the stipulation in the deed of sale between Villarama and Pantranco that
Fausto Abad, Assistant Accountant of Manila Trading & Supply Co., from P50,000.00 of the selling price was earmarked for the payments of accounts
which the trucks were purchased9 and Aristedes Solano, an employee of the due to his creditors, the excuse appears unbelievable.
Philippine Bank of Commerce,10as having been drawn by Villarama.
On his having paid for purchases by the Corporation of trucks from the Manila
Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries Trading & Supply Co. with his personal checks, his reason was that he was
and vouchers showing that Villarama had co-mingled his personal funds and only sharing with the Corporation his credit with some companies. And his
transactions with those made in the name of the Corporation, are very main reason for mingling his funds with that of the Corporation and for the
illuminating evidence. Villarama has assailed the admissibility of these latter's paying his private bills is that it would be more convenient that he kept
exhibits, contending that no evidentiary value whatsoever should be given to the money to be used in paying the registration fees on time, and since he had
them since "they were merely photostatic copies of the originals, the best loaned money to the Corporation, this would be set off by the latter's paying
evidence being the originals themselves." According to him, at the time his bills. Villarama admitted, however, that the corporate funds in his
Pantranco offered the said exhibits, it was the most likely possessor of the possession were not only for registration fees but for other important
originals thereof because they were stolen from the files of the Corporation obligations which were not specified.26
and only Pantranco was able to produce the alleged photostat copies thereof.
Indeed, while Villarama was not the Treasurer of the Corporation but was,
Section 5 of Rule 130 of the Rules of Court provides for the requisites for the allegedly, only a part-time manager,27 he admitted not only having held the
admissibility of secondary evidence when the original is in the custody of the corporate money but that he advanced and lent funds for the Corporation, and
adverse party, thus: (1) opponent's possession of the original; (2) reasonable yet there was no Board Resolution allowing it.28
notice to opponent to produce the original; (3) satisfactory proof of its
Villarama's explanation on the matter of his involvement with the corporate
existence; and (4) failure or refusal of opponent to produce the original in
affairs of the Corporation only renders more credible Pantranco's claim that
court.11 Villarama has practically admitted the second and fourth
his control over the corporation, especially in the management and disposition
requisites.12As to the third, he admitted their previous existence in the files of
of its funds, was so extensive and intimate that it is impossible to segregate
the Corporation and also that he had seen some of them.13 Regarding the first
and identify which money belonged to whom. The interference of Villarama in
element, Villarama's theory is that since even at the time of the issuance of
the complex affairs of the corporation, and particularly its finances, are much
the subpoena duces tecum, the originals were already missing, therefore, the
too inconsistent with the ends and purposes of the Corporation law, which,
Corporation was no longer in possession of the same. However, it is not
precisely, seeks to separate personal responsibilities from corporate
necessary for a party seeking to introduce secondary evidence to show that
undertakings. It is the very essence of incorporation that the acts and conduct
the original is in the actual possession of his adversary. It is enough that the
of the corporation be carried out in its own corporate name because it has its
circumstances are such as to indicate that the writing is in his possession or
own personality.
under his control. Neither is it required that the party entitled to the custody of
the instrument should, on being notified to produce it, admit having it in his The doctrine that a corporation is a legal entity distinct and separate from the
possession.14 Hence, secondary evidence is admissible where he denies members and stockholders who compose it is recognized and respected in all
having it in his possession. The party calling for such evidence may introduce cases which are within reason and the law.29 When the fiction is urged as a
a copy thereof as in the case of loss. For, among the exceptions to the best means of perpetrating a fraud or an illegal act or as a vehicle for the evasion
of an existing obligation, the circumvention of statutes, the achievement or The law concerning contracts which tend to restrain business or trade has
perfection of a monopoly or generally the perpetration of knavery or gone through a long series of changes from time to time with the changing
crime,30 the veil with which the law covers and isolates the corporation from condition of trade and commerce. With trifling exceptions, said changes have
the members or stockholders who compose it will be lifted to allow for its been a continuous development of a general rule. The early cases show
consideration merely as an aggregation of individuals. plainly a disposition to avoid and annul all contract which prohibited or
restrained any one from using a lawful trade "at any time or at any place," as
Upon the foregoing considerations, We are of the opinion, and so hold, that being against the benefit of the state. Later, however, the rule became well
the preponderance of evidence have shown that the Villa Rey Transit, Inc. is established that if the restraint was limited to "a certain time" and within "a
an alter ego of Jose M. Villarama, and that the restrictive clause in the contract certain place," such contracts were valid and not "against the benefit of the
entered into by the latter and Pantranco is also enforceable and binding state." Later cases, and we think the rule is now well established, have held
against the said Corporation. For the rule is that a seller or promisor may not that a contract in restraint of trade is valid providing there is a limitation upon
make use of a corporate entity as a means of evading the obligation of his either time or place. A contract, however, which restrains a man from entering
covenant.31 Where the Corporation is substantially the alter ego of the into business or trade without either a limitation as to time or place, will be held
covenantor to the restrictive agreement, it can be enjoined from competing invalid.
with the covenantee.32
The public welfare of course must always be considered and if it be not
The Corporation contends that even on the supposition that Villa Rey Transit, involved and the restraint upon one party is not greater than protection to the
Inc. and Villarama are one and the same, the restrictive clause in the contract other requires, contracts like the one we are discussing will be sustained. The
between Villarama and Pantranco does not include the purchase of existing general tendency, we believe, of modern authority, is to make the test whether
lines but it only applies to application for the new lines. The clause in dispute the restraint is reasonably necessary for the protection of the contracting
reads thus: parties. If the contract is reasonably necessary to protect the interest of the
parties, it will be upheld. (Emphasis supplied.)
(4) The SELLER shall not, for a period of ten (10) years from the date of this
sale apply for any TPU service identical or competing with the BUYER. Analyzing the characteristics of the questioned stipulation, We find that
(Emphasis supplied) although it is in the nature of an agreement suppressing competition, it is,
however, merely ancillary or incidental to the main agreement which is that of
As We read the disputed clause, it is evident from the context thereof that the
sale. The suppression or restraint is only partial or limited: first, in scope, it
intention of the parties was to eliminate the seller as a competitor of the buyer
refers only to application for TPU by the seller in competition with the lines sold
for ten years along the lines of operation covered by the certificates of public
to the buyer; second, in duration, it is only for ten (10) years; and third, with
convenience subject of their transaction. The word "apply" as broadly used
respect to situs or territory, the restraint is only along the lines covered by the
has for frame of reference, a service by the seller on lines or routes that would
certificates sold. In view of these limitations, coupled with the consideration of
compete with the buyer along the routes acquired by the latter. In this
P350,000.00 for just two certificates of public convenience, and considering,
jurisdiction, prior authorization is needed before anyone can operate a TPU
furthermore, that the disputed stipulation is only incidental to a main
service,33whether the service consists in a new line or an old one acquired
agreement, the same is reasonable and it is not harmful nor obnoxious to
from a previous operator. The clear intention of the parties was to prevent the
public service.38 It does not appear that the ultimate result of the clause or
seller from conducting any competitive line for 10 years since, anyway, he has
stipulation would be to leave solely to Pantranco the right to operate along the
bound himself not to apply for authorization to operate along such lines for the
lines in question, thereby establishing monopoly or predominance
duration of such period.34
approximating thereto. We believe the main purpose of the restraint was to
If the prohibition is to be applied only to the acquisition of new certificates of protect for a limited time the business of the buyer.
public convenience thru an application with the Public Service Commission,
Indeed, the evils of monopoly are farfetched here. There can be no danger of
this would, in effect, allow the seller just the same to compete with the buyer
price controls or deterioration of the service because of the close supervision
as long as his authority to operate is only acquired thru transfer or sale from a
of the Public Service Commission.39 This Court had stated long ago,40that
previous operator, thus defeating the intention of the parties. For what would
"when one devotes his property to a use in which the public has an interest,
prevent the seller, under the circumstances, from having a representative or
he virtually grants to the public an interest in that use and submits it to such
dummy apply in the latter's name and then later on transferring the same by
public use under reasonable rules and regulations to be fixed by the Public
sale to the seller? Since stipulations in a contract is the law between the
Utility Commission."
contracting parties,
Regarding that aspect of the clause that it is merely ancillary or incidental to a
Every person must, in the exercise of his rights and in the performance of his
lawful agreement, the underlying reason sustaining its validity is well explained
duties, act with justice, give everyone his due, and observe honesty and good
in 36 Am. Jur. 537-539, to wit:
faith. (Art. 19, New Civil Code.)
... Numerous authorities hold that a covenant which is incidental to the sale
We are not impressed of Villarama's contention that the re-wording of the two
and transfer of a trade or business, and which purports to bind the seller not
previous drafts of the contract of sale between Villarama and Pantranco is
to engage in the same business in competition with the purchaser, is lawful
significant in that as it now appears, the parties intended to effect the least
and enforceable. While such covenants are designed to prevent competition
restriction. We are persuaded, after an examination of the supposed drafts,
on the part of the seller, it is ordinarily neither their purpose nor effect to stifle
that the scope of the final stipulation, while not as long and prolix as those in
competition generally in the locality, nor to prevent it at all in a way or to an
the drafts, is just as broad and comprehensive. At most, it can be said that the
extent injurious to the public. The business in the hands of the purchaser is
re-wording was done merely for brevity and simplicity.
carried on just as it was in the hands of the seller; the former merely takes the
The evident intention behind the restriction was to eliminate the sellers as a place of the latter; the commodities of the trade are as open to the public as
competitor, and this must be, considering such factors as the good will 35 that they were before; the same competition exists as existed before; there is the
the seller had already gained from the riding public and his adeptness and same employment furnished to others after as before; the profits of the
proficiency in the trade. On this matter, Corbin, an authority on Contracts has business go as they did before to swell the sum of public wealth; the public
this to say.36 has the same opportunities of purchasing, if it is a mercantile business; and
production is not lessened if it is a manufacturing plant.
When one buys the business of another as a going concern, he usually wishes
to keep it going; he wishes to get the location, the building, the stock in trade, The reliance by the lower court on tile case of Red Line Transportation Co. v.
and the customers. He wishes to step into the seller's shoes and to enjoy the Bachrach41 and finding that the stipulation is illegal and void seems misplaced.
same business relations with other men. He is willing to pay much more if he In the said Red Line case, the agreement therein sought to be enforced was
can get the "good will" of the business, meaning by this the good will of the virtually a division of territory between two operators, each company imposing
customers, that they may continue to tread the old footpath to his door and upon itself an obligation not to operate in any territory covered by the routes
maintain with him the business relations enjoyed by the seller. of the other. Restraints of this type, among common carriers have always been
covered by the general rule invalidating agreements in restraint of trade. 42
... In order to be well assured of this, he obtains and pays for the seller's
promise not to reopen business in competition with the business sold. Neither are the other cases relied upon by the plaintiff-appellee applicable to
the instant case. In Pampanga Bus Co., Inc. v. Enriquez,43the undertaking of
As to whether or not such a stipulation in restraint of trade is valid, our the applicant therein not to apply for the lifting of restrictions imposed on his
jurisprudence on the matter37says: certificates of public convenience was not an ancillary or incidental agreement.
The restraint was the principal objective. On the other hand, in Red Line Eusebio Ferrer's charge that by reason of the filing of the action to annul the
Transportation Co., Inc. v. Gonzaga,44 the restraint there in question not to ask sheriff's sale, he had suffered and should be awarded moral, exemplary
for extension of the line, or trips, or increase of equipment was not an damages and attorney's fees, cannot be entertained, in view of the conclusion
agreement between the parties but a condition imposed in the certificate of herein reached that the sale by Fernando to the Corporation was valid.
public convenience itself.
Pantranco, on the other hand, justifies its claim for damages with the allegation
Upon the foregoing considerations, Our conclusion is that the stipulation that when it purchased ViIlarama's business for P350,000.00, it intended to
prohibiting Villarama for a period of 10 years to "apply" for TPU service along build up the traffic along the lines covered by the certificates but it was rot
the lines covered by the certificates of public convenience sold by him to afforded an opportunity to do so since barely three months had elapsed when
Pantranco is valid and reasonable. Having arrived at this conclusion, and the contract was violated by Villarama operating along the same lines in the
considering that the preponderance of the evidence have shown that Villa Rey name of Villa Rey Transit, Inc. It is further claimed by Pantranco that the
Transit, Inc. is itself the alter ego of Villarama, We hold, as prayed for in underhanded manner in which Villarama violated the contract is pertinent in
Pantranco's third party complaint, that the said Corporation should, until the establishing punitive or moral damages. Its contention as to the proper
expiration of the 1-year period abovementioned, be enjoined from operating measure of damages is that it should be the purchase price of P350,000.00
the line subject of the prohibition. that it paid to Villarama. While We are fully in accord with Pantranco's claim of
entitlement to damages it suffered as a result of Villarama's breach of his
To avoid any misunderstanding, it is here to be emphasized that the 10-year contract with it, the record does not sufficiently supply the necessary
prohibition upon Villarama is not against his application for, or purchase of, evidentiary materials upon which to base the award and there is need for
certificates of public convenience, but merely the operation of TPU along the further proceedings in the lower court to ascertain the proper amount.
lines covered by the certificates sold by him to Pantranco. Consequently, the
sale between Fernando and the Corporation is valid, such that the rightful PREMISES CONSIDERED, the judgment appealed from is hereby modified
ownership of the disputed certificates still belongs to the plaintiff being the prior as follows:
purchaser in good faith and for value thereof. In view of the ancient rule
of caveat emptor prevailing in this jurisdiction, what was acquired by Ferrer in 1. The sale of the two certificates of public convenience in question by Valentin
the sheriff's sale was only the right which Fernando, judgment debtor, had in Fernando to Villa Rey Transit, Inc. is declared preferred over that made by the
the certificates of public convenience on the day of the sale.45 Sheriff at public auction of the aforesaid certificate of public convenience in
favor of Eusebio Ferrer;
Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of
Public Service was notified that "by virtue of an Order of Execution issued by 2. Reversed, insofar as it dismisses the third-party complaint filed by
the Court of First Instance of Pangasinan, the rights, interests, or participation Pangasinan Transportation Co. against Jose M. Villarama, holding that Villa
which the defendant, VALENTIN A. FERNANDO in the above entitled case Rey Transit, Inc. is an entity distinct and separate from the personality of Jose
may have in the following realty/personalty is attached or levied upon, to wit: M. Villarama, and insofar as it awards the sum of P5,000.00 as attorney's fees
The rights, interests and participation on the Certificates of Public in favor of Villa Rey Transit, Inc.;
Convenience issued to Valentin A. Fernando, in Cases Nos. 59494, etc. ...
3. The case is remanded to the trial court for the reception of evidence in
Lines Manila to Lingayen, Dagupan, etc. vice versa." Such notice of levy
consonance with the above findings as regards the amount of damages
only shows that Ferrer, the vendee at auction of said certificates, merely
suffered by Pantranco; and
stepped into the shoes of the judgment debtor. Of the same principle is the
provision of Article 1544 of the Civil Code, that "If the same thing should have 4. On equitable considerations, without costs. So ordered.
been sold to different vendees, the ownership shall be transferred to the
person who may have first taken possession thereof in good faith, if it should [G.R. No. 160039. June 29, 2004]
be movable property."
RAYMUNDO ODANI SECOSA, EL BUENASENSO SY and DASSAD
There is no merit in Pantranco and Ferrer's theory that the sale of the WAREHOUSING and PORT SERVICES,
certificates of public convenience in question, between the Corporation and INCORPORATED, petitioners, vs. HEIRS OF ERWIN SUAREZ
Fernando, was not consummated, it being only a conditional sale subject to FRANCISCO, respondents.
the suspensive condition of its approval by the Public Service Commission.
DECISION
While section 20(g) of the Public Service Act provides that "subject to
established limitation and exceptions and saving provisions to the contrary, it YNARES-SANTIAGO, J.:
shall be unlawful for any public service or for the owner, lessee or operator
thereof, without the approval and authorization of the Commission previously This is a petition for review under Rule 45 of the Rules of Court seeking the
had ... to sell, alienate, mortgage, encumber or lease its property, franchise, reversal of the decision[1] of the Court of Appeals dated February 27, 2003 in
certificates, privileges, or rights or any part thereof, ...," the same section also CA-G.R. CV No. 61868, which affirmed in toto the June 19, 1998 decision[2] of
provides: Branch 20 of the Regional Trial Court of Manila in Civil Case No. 96-79554.

... Provided, however, That nothing herein contained shall be construed to The facts are as follows:
prevent the transaction from being negotiated or completed before its approval
or to prevent the sale, alienation, or lease by any public service of any of its On June 27, 1996, at around 4:00 p.m., Erwin Suarez Francisco, an eighteen
property in the ordinary course of its business. year old third year physical therapy student of the Manila Central University,
was riding a motorcycle along Radial 10 Avenue, near the Veteran Shipyard
It is clear, therefore, that the requisite approval of the PSC is not a condition Gate in the City of Manila. At the same time, petitioner, Raymundo Odani
precedent for the validity and consummation of the sale. Secosa, was driving an Isuzu cargo truck with plate number PCU-253 on the
same road. The truck was owned by petitioner, Dassad Warehousing and Port
Anent the question of damages allegedly suffered by the parties, each of the Services, Inc.
appellants has its or his own version to allege.
Traveling behind the motorcycle driven by Francisco was a sand and gravel
Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants truck, which in turn was being tailed by the Isuzu truck driven by Secosa. The
(Pantranco and Ferrer) in acquiring the certificates of public convenience in three vehicles were traversing the southbound lane at a fairly high
question, despite constructive and actual knowledge on their part of a prior speed. When Secosa overtook the sand and gravel truck, he bumped the
sale executed by Fernando in favor of the said corporation, which necessitated motorcycle causing Francisco to fall. The rear wheels of the Isuzu truck then
the latter to file the action to annul the sheriff's sale to Ferrer and the ran over Francisco, which resulted in his instantaneous death. Fearing for his
subsequent transfer to Pantranco, it is entitled to collect actual and life, petitioner Secosa left his truck and fled the scene of the collision.[3]
compensatory damages, and attorney's fees in the amount of P25,000.00. The
evidence on record, however, does not clearly show that said defendants Respondents, the parents of Erwin Francisco, thus filed an action for damages
acted in bad faith in their acquisition of the certificates in question. They against Raymond Odani Secosa, Dassad Warehousing and Port Services,
believed that because the bill of sale has yet to be approved by the Public Inc. and Dassads president, El Buenasucenso Sy. The complaint was
Service Commission, the transaction was not a consummated sale, and, docketed as Civil Case No. 96-79554 of the RTC of Manila, Branch 20.
therefore, the title to or ownership of the certificates was still with the seller.
The award by the lower court of attorney's fees of P5,000.00 in favor of Villa On June 19, 1998, after a full-blown trial, the court a quo rendered a decision
Rey Transit, Inc. is, therefore, without basis and should be set aside. in favor of herein respondents, the dispositive portion of which states:
WHEREFORE, premised on the foregoing, judgment is hereby rendered in How does an employer prove that he indeed exercised the diligence of a good
favor of the plaintiffs ordering the defendants to pay plaintiffs jointly and father of a family in the selection and supervision of his employee? The case
severally: of Metro Manila Transit Corporation v. Court of Appeals[7] is instructive:

1. The sum of P55,000.00 as actual and compensatory damages; In fine, the party, whether plaintiff or defendant, who asserts the affirmative of
the issue has the burden of presenting at the trial such amount of evidence
2. The sum of P20,000.00 for the repair of the motorcycle; required by law to obtain a favorable judgment[8] . . . In making proof in its or
his case, it is paramount that the best and most complete evidence is formally
3. The sum of P100,000.00 for the loss of earning capacity;
entered.[9]
4. The sum of P500,000.00 as moral damages;
Coming now to the case at bar, while there is no rule which requires that
5. The sum of P50,000.00 as exemplary damages; testimonial evidence, to hold sway, must be corroborated by documentary
evidence, inasmuch as the witnesses testimonies dwelt on mere generalities,
6. The sum of P50,000.00 as attorneys fees plus cost of suit. we cannot consider the same as sufficiently persuasive proof that there was
observance of due diligence in the selection and supervision of employees.
SO ORDERED.
Petitioners attempt to prove its deligentissimi patris familias in the selection
Petitioners appealed the decision to the Court of Appeals, which affirmed the and supervision of employees through oral evidence must fail as it was unable
appealed decision in toto.[4] to buttress the same with any other evidence, object or documentary, which
might obviate the apparent biased nature of the testimony.[10]
Hence the present petition, based on the following arguments:
Our view that the evidence for petitioner MMTC falls short of the required
I. evidentiary quantum as would convincingly and undoubtedly prove its
observance of the diligence of a good father of a family has its precursor in the
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE underlying rationale pronounced in the earlier case of Central Taxicab Corp.
DECISION OF THE TRIAL COURT THAT PETITIONER DASSAD DID NOT vs. Ex-Meralco Employees Transportation Co., et al.,[11] set amidst an almost
EXERCISE THE DILIGENCE OF A GOOD FATHER OF A FAMILY IN THE identical factual setting, where we held that:
SELECTION AND SUPERVISION OF ITS EMPLOYEES WHICH IS NOT IN
ACCORDANCE WITH ARTICLE 2180 OF THE NEW CIVIL CODE AND The failure of the defendant company to produce in court any record or other
RELATED JURISPRUDENCE ON THE MATTER. documentary proof tending to establish that it had exercised all the diligence
of a good father of a family in the selection and supervision of its drivers and
II. buses, notwithstanding the calls therefor by both the trial court and the
opposing counsel, argues strongly against its pretensions.
THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT AFFIRMED THE
DECISION OF THE TRIAL COURT IN HOLDING PETITIONER EL We are fully aware that there is no hard-and-fast rule on the quantum of
BUENASENSO SY SOLIDARILY LIABLE WITH PETITIONERS DASSAD evidence needed to prove due observance of all the diligence of a good father
AND SECOSA IN VIOLATION OF THE CORPORATION LAW AND of a family as would constitute a valid defense to the legal presumption of
RELATED JURISPRUDENCE ON THE MATTER. negligence on the part of an employer or master whose employee has by his
negligence, caused damage to another. x x x (R)educing the testimony of
III.
Albert to its proper proportion, we do not have enough trustworthy evidence
THE JUDGMENT OF THE TRIAL COURT AS AFFIRMED BY THE COURT left to go by. We are of the considered opinion, therefore, that the believable
OF APPEALS AWARDING P500,000.00 AS MORAL DAMAGES IS evidence on the degree of care and diligence that has been exercised in the
MANIFESTLY ABSURD, MISTAKEN AND UNJUST.[5] selection and supervision of Roberto Leon y Salazar, is not legally sufficient to
overcome the presumption of negligence against the defendant company.
The petition is partly impressed with merit.
The above-quoted ruling was reiterated in a recent case again involving the
On the issue of whether petitioner Dassad Warehousing and Port Services, Metro Manila Transit Corporation,[12] thus:
Inc. exercised the diligence of a good father of a family in the selection and
supervision of its employees, we find the assailed decision to be in full accord In the selection of prospective employees, employers are required to examine
with pertinent provisions of law and established jurisprudence. them as to their qualifications, experience, and service records.[13] On the
other hand, with respect to the supervision of employees, employers should
Article 2176 of the Civil Code provides: formulate standard operating procedures, monitor their implementation, and
impose disciplinary measures for breaches thereof. To establish these factors
Whoever by act or omission causes damage to another, there being fault or in a trial involving the issue of vicarious liability, employers must submit
negligence, is obliged to pay for the damage done. Such fault or negligence, concrete proof, including documentary evidence.
if there is no pre-existing contractual relation between the parties, is called a
quasi-delict and is governed by the provisions of this Chapter. In this case, MMTC sought to prove that it exercised the diligence of a good
father of a family with respect to the selection of employees by presenting
On the other hand, Article 2180, in pertinent part, states: mainly testimonial evidence on its hiring procedure. According to MMTC,
The obligation imposed by article 2176 is demandable not only for ones own applicants are required to submit professional driving licenses, certifications of
acts or omissions, but also for those of persons for whom one is responsible x work experience, and clearances from the National Bureau of Investigation; to
x x. undergo tests of their driving skills, concentration, reflexes, and vision; and, to
complete training programs on traffic rules, vehicle maintenance, and standard
Employers shall be liable for the damages caused by their employees and operating procedures during emergency cases.
household helpers acting within the scope of their assigned tasks, even though
the former are not engaged in any business or industry x x x. xxxxxxxxx

The responsibility treated of in this article shall cease when the persons herein Although testimonies were offered that in the case of Pedro Musa all these
mentioned prove that they observed all the diligence of a good father of a precautions were followed, the records of his interview, of the results of his
family to prevent damage. examinations, and of his service were not presented. . . [T]here is no record
that Musa attended such training programs and passed the said examinations
Based on the foregoing provisions, when an injury is caused by the negligence before he was employed. No proof was presented that Musa did not have any
of an employee, there instantly arises a presumption that there was negligence record of traffic violations. Nor were records of daily inspections, allegedly
on the part of the employer either in the selection of his employee or in the conducted by supervisors, ever presented. . . The failure of MMTC to present
supervision over him after such selection. The presumption, however, may be such documentary proof puts in doubt the credibility of its witnesses.
rebutted by a clear showing on the part of the employer that it exercised the
care and diligence of a good father of a family in the selection and supervision Jurisprudentially, therefore, the employer must not merely present testimonial
of his employee. Hence, to evade solidary liability for quasi-delict committed evidence to prove that he observed the diligence of a good father of a family
by an employee, the employer must adduce sufficient proof that it exercised in the selection and supervision of his employee, but he must also support
such degree of care.[6] such testimonial evidence with concrete or documentary evidence. The reason
for this is to obviate the biased nature of the employers testimony or that of his by the relatives of the victim is proportionate to the intensity of affection for him
witnesses.[14] and bears no relation whatsoever with the wealth or means of the offender.[22]

Applying the foregoing doctrines to the present case, we hold that petitioner In the instant case, the spouses Francisco presented evidence of the searing
Dassad Warehousing and Port Services, Inc. failed to conclusively prove that pain that they felt when the premature loss of their son was relayed to them.
it had exercised the requisite diligence of a good father of a family in the That pain was highly evident in the testimony of the father who was forever
selection and supervision of its employees. deprived of a son, a son whose untimely death came at that point when the
latter was nearing the culmination of every parents wish to educate their
Edilberto Duerme, the lone witness presented by Dassad Warehousing and children. The death of Francis has indeed left a void in the lives of the
Port Services, Inc. to support its position that it had exercised the diligence of respondents. Antonio Francisco testified on the effect of the death of his son,
a good father of a family in the selection and supervision of its employees, Francis, in this manner:
testified that he was the one who recommended petitioner Raymundo Secosa
as a driver to Dassad Warehousing and Port Services, Inc.; that it was his duty Q: (Atty. Balanag): What did you do when you learned that your son was killed
to scrutinize the capabilities of drivers; and that he believed petitioner to be on June 27, 1996?
physically and mentally fit for he had undergone rigid training and attended the
PPA safety seminar.[15] A: (ANTONIO FRANCISCO): I boxed the door and pushed the image of St.
Nio telling why this happened to us.
Petitioner Dassad Warehousing and Port Services, Inc. failed to support the
testimony of its lone witness with documentary evidence which would have Q: Mr. Witness, how did you feel when you learned of the untimely death of
strengthened its claim of due diligence in the selection and supervision of its your son, Erwin Suares (sic)?
employees. Such an omission is fatal to its position, on account of which,
A: Masakit po ang mawalan ng anak. Its really hard for me, the thought that
Dassad can be rightfully held solidarily liable with its co-petitioner Raymundo
my son is dead.
Secosa for the damages suffered by the heirs of Erwin Francisco.
xxxxxxxxx
However, we find that petitioner El Buenasenso Sy cannot be held solidarily
liable with his co-petitioners. While it may be true that Sy is the president of Q: How did your family react to the death of Erwin Suarez Francisco?
petitioner Dassad Warehousing and Port Services, Inc., such fact is not by
itself sufficient to hold him solidarily liable for the liabilities adjudged against A: All of my family and relatives were felt (sic) sorrow because they knew that
his co-petitioners. my son is (sic) good.

It is a settled precept in this jurisdiction that a corporation is invested by law Q: We know that it is impossible to put money terms(s) [on] the life of [a]
with a personality separate from that of its stockholders or members.[16] It has human, but since you are now in court and if you were to ask this court how
a personality separate and distinct from those of the persons composing it as much would you and your family compensate? (sic)
well as from that of any other entity to which it may be related. Mere ownership
A: Even if they pay me millions, they cannot remove the anguish of my son
by a single stockholder or by another corporation of all or nearly all of the
(sic).[23]
capital stock of a corporation is not in itself sufficient ground for disregarding
the separate corporate personality.[17] A corporations authority to act and its Moral damages are emphatically not intended to enrich a plaintiff at the
liability for its actions are separate and apart from the individuals who own it.[18] expense of the defendant. They are awarded to allow the former to obtain
means, diversion or amusements that will serve to alleviate the moral suffering
The so-called veil of corporation fiction treats as separate and distinct the
he has undergone due to the defendants culpable action and must, perforce,
affairs of a corporation and its officers and stockholders. As a general rule, a
be proportional to the suffering inflicted.[24] We have previously held as proper
corporation will be looked upon as a legal entity, unless and until sufficient
an award of P500,000.00 as moral damages to the heirs of a deceased family
reason to the contrary appears. When the notion of legal entity is used to
member who died in a vehicular accident. In our 2002 decision in Metro Manila
defeat public convenience, justify wrong, protect fraud, or defend crime, the
Transit Corporation v. Court of Appeals, et al.,[25] we affirmed the award of
law will regard the corporation as an association of persons.[19] Also, the
moral damages of P500,000.00 to the heirs of the victim, a mother, who died
corporate entity may be disregarded in the interest of justice in such cases as
from injuries she sustained when a bus driven by an employee of the petitioner
fraud that may work inequities among members of the corporation internally,
hit her. In the case at bar, we likewise affirm the portion of the assailed
involving no rights of the public or third persons. In both instances, there must
decision awarding the moral damages.
have been fraud and proof of it. For the separate juridical personality of a
corporation to be disregarded, the wrongdoing must be clearly and Since the petitioners did not question the other damages adjudged against
convincingly established.[20] It cannot be presumed.[21] them by the court a quo, we affirm the award of these damages to the
respondents.
The records of this case are bereft of any evidence tending to show the
presence of any grounds enumerated above that will justify the piercing of the WHEREFORE, the petition is DENIED. The assailed decision is AFFIRMED
veil of corporate fiction such as to hold the president of Dassad Warehousing with the MODIFICATION that petitioner El Buenasenso Sy
and Port Services, Inc. solidarily liable with it. is ABSOLVED from any liability adjudged against his co-petitioners in this
case.
The Isuzu cargo truck which ran over Erwin Francisco was registered in the
name of Dassad Warehousing and Port Services, Inc., and not in the name of Costs against petitioners.
El Buenasenso Sy.Raymundo Secosa is an employee of Dassad
Warehousing and Port Services, Inc. and not of El Buenasenso Sy. All these SO ORDERED.
things, when taken collectively, point toward El Buenasenso Sys exclusion
from liability for damages arising from the death of Erwin Francisco. G.R. Nos. 111810-11 June 16, 1995

Having both found Raymundo Secosa and Dassad Warehousing and Port JAMES YU and WILSON YOUNG, petitioners,
Services, Inc. liable for negligence for the death of Erwin Francisco on June vs.
27, 1996, we now consider the question of moral damages which his parents, THE NATIONAL LABOR RELATIONS COMMISSION, LABOR ARBITER
herein respondents, are entitled to recover. Petitioners assail the award of DANIEL C. CUETO, TANDUAY DISTILLERY INC., FERNANDO DURAN,
moral damages of P500,000.00 for being manifestly absurd, mistaken and EDUARDO PALIWAN, ROQUE ESTOCE AND RODRIGO
unjust. We are not persuaded. SANTOS, respondents.

Under Article 2206, the spouse, legitimate and illegitimate descendants and
ascendants of the deceased may demand moral damages for mental anguish
MELO, J.:
for the death of the deceased. The reason for the grant of moral damages has
been explained in this wise: Before us is a petition for certiorari assailing the decision of public respondent
National Labor Relations Commission (NLRC) promulgated on August 25,
. . . the award of moral damages is aimed at a restoration, within the limits
1993 in the cases of Fernando Duran, et al. vs. Tanduay Distillery,
possible, of the spiritual status quo ante; and therefore, it must be
Inc., docketed as NLRC NCR Case No. 00-04-01737-88, and Rodrigo Santos
proportionate to the suffering inflicted. The intensity of the pain experienced
vs. Tanduay Distillery, Inc., docketed as NLRC NCR Case No. 00-06-02546-
88.
The relevant antecedent facts as gathered from the record are as follows: (p. 102, Rollo). TDI filed a motion for reconsideration, but the same was denied
on August 15, 1991.
Private respondents-employees Fernando Duran, Eduardo Paliwan, Roque
Estoce, and Rodrigo Santos were employees of respondent corporation Thereupon, private respondents-employees on September 16, 1991 filed a
Tanduay Distillery, Inc, (TDI). motion for execution (Annex Q, pp. 103-106, Rollo) praying that NLRC through
the labor arbiter, "[i]ssue the necessary writ for the execution of the entire
On March 29, 1988, 22 employees of TDI, including private respondents decision dated May 24, 1989, including the actual reinstatement of the
employees, received a memorandum from TDI terminating their services. for complainants to their former position without loss of seniority and benefits
reasons of retrenchment, effective 30 days from receipt thereof or not later against Tanduay Distillery, Inc., and/or Tanduay Distillers, James Yu and
than the close of business hours on April 28, 1988. Wilson Young."
On April 26, 1988, all 22 employees of TDI filed an application for the issuance On September 24, 1993, petitioners filed an opposition (Annex R, pp. 108-
of a temporary restraining order against their retrenchment. The labor arbiter 110, Rollo) to the motion for execution on the ground that "the Motion for
issued the restraining order the following day. However, due to the 20-day Execution is without any basis in so far as it prays for the issuance of a writ of
lifetime of the temporary restraining order, and because of the on-going execution against respondent Tanduay Distillers, which is an entity separate
negotiations for the sale of TDI the retrenchment pushed through. and distinct from respondent Tanduay Distillery, Inc., and respondents James
Parenthetically, it should be mentioned that although all 22 employees were Yu and Wilson Young." Respondents-employees filed their reply thereto
retrenched, the instant petition involves only the 4 individual respondents (Annex S, pp. 111-115, Rollo), and in turn petitioners filed their rejoinder
herein, namely, Fernando Duran, Eduardo Paliwan, Roque Estoce, and (Annex T, pp. 116-118, Rollo), to which private respondents filed their sur-
Rodrigo Santos. rejoinder (Annex U, pp. 119-122, Rollo). On December 18, 1991, respondent
TDI filed its comment on the motion for execution (Annex V, pp. 124-
On June 14, 1988, the First Pacific Metro Corporation moved that it be dropped
129, Rollo), while petitioners on January 10, 1992, filed a joint comment
as a party to the case on the ground that its projected purchase of the assets
(Annex W, pp. 130-132, Rollo) to private respondents' sur-rejoinder as well to
of TDI was not consummated. The participation of First Pacific was later in
the comment filed by respondent TDI.
effect held to be irrelevant (decision dated May 24, 1989; Annex G, pp. 50-
58, Rollo). On June 1, 1988, or after respondents-employees had ceased as Subsequently, TDI filed a manifestation dated April 24, 1992 (Annex X, pp.
such employees, a new buyer of TDI's assets, Twin Ace Holdings, Inc. took 133-135, Rollo), stating
over the business. Twin Ace assumed the business name Tanduay Distillers.
2. At the hearing held on March 23, 1992, individual complainants, assisted by
On August 8, 1988, the employees filed a motion to implead herein petitioners their counsel, Atty. Noel Cruz, agreed to be paid the total amount of
James Yu and Wilson Young, doing business under the name and style of P86,049.83, in full satisfaction of the Company's liability as stated in the
Tanduay Distillers, as party respondents in said cases. Petitioners filed an dispositive portion of Labor Arbiter Barcelona's decision promulgated on May
opposition thereto, asserting that they are representatives of Tanduay 24, 1989 and affirmed by the Second Division of the NLRC on June 18, 1991,
Distillers an entity distinct and separate from TDI, the previous owner, and that which reads as follows:
there is no employer-employee relationship between Tanduay Distillers and
private respondents. Respondents-employees filed a reply to the opposition WHEREFORE, judgment is hereby rendered declaring that the retrenchment
stating that petitioner James Yu as officer-in-charge of Tanduay Distillers had is illegal thereby ordering respondent Tanduay Distillery, Inc. to reinstate the
informed the president of TDI labor union of Tanduay Distillers' decision to hire complainants to their former position with backwages up to the time of the
everybody with a clean slate on a probation basis. change of ownership, if one has taken place.

On November 16, 1988, private respondents filed a motion for leave to file an That in the event of change in management it (Tanduay Distillery, Inc.( is
amended complaint impleading petitioners as respondents. Petitioners filed an hereby ordered to pay the complainants their respective separation benefits
opposition thereto reiterating the grounds they relied upon in their opposition computed at the rate of one (1) month of every year of service. This is without
to private respondents' motion to implead. A reply was filed by private prejudice to the letter of Mr. James Yu as officer-in-charge of Tanduay
respondents, and a rejoinder was then filed by petitioners. In turn, private Distillers dated June 17, 1988 to the President of the Tanduay Distillery, Inc.,
respondents filed a sub-rejoinder. Labor Union.

Subsequently, an amended complaint was filed by private respondents No Costs.


against TDI and petitioners Yu and Young "doing business under the name
and style of Tanduay Distillers". SO ORDERED.

In her decision dated May 24, 1989, Labor Arbiter Daisy Cauton-Barcelona 1. In accordance with the aforequoted decision,
held: complainants shall be paid the amounts appearing
opposite their respective names:
In treating the motion to implead a motion to admit amended complaint with
leave, the same [is] hereby given due course and all pleadings filed by Rodrigo F. Santos P20,282.03
respondents James Yu and Wilson Young are hereby treated as their
responsive pleadings in the light of speedy disposition of justice and the basic Roque Estoce 20,092.50
rule that administrative fora, such as this office, are not governed by technical
rules of proceedings. Eduardo Daliwan 19,973.40

(p. 52, Rollo). Fernando A. Duran 25,702.00

In the same decision, it was disposed:


WHEREFORE, judgment is hereby rendered and declaring that the
retrenchment is illegal thereby ordering respondent Tanduay Distillery, Inc., to Total P86,049.83
reinstate the complainants to their former position with backwages up to the
time of change of ownership, if one has taken place. =========

That in the event of change in management it (Tanduay Distillery, Inc.,) is 4. The foregoing amounts shall be satisfied out of the cash bond deposited by
hereby ordered to pay the complainants their respective separation benefits the Company with the Cashier of the NLRC. The excess amounting to
computed at the rate of one (1) month for every year of service. This is without P7,076.44 must revert to the Company.
prejudice to the letter of Mr. James Yu as officer-in-charge of Tanduay
(pp. 134-135, Rollo.)
Distillers dated June 17, 1988 to the President of the Tanduay Distillery, Inc.,
Labor Union. On November 17, 1992, respondent NLRC, through Labor Arbiter Daniel C.
Cueto, issued an order (Annex Z, pp. 139-145, Rollo), resolving the motion for
(pp. 57-58, Rollo.)
execution as follows:
Only TDI appealed said decision to the National Labor Relations Commission,
Based on the foregoing considerations, this Branch finds the Motion for Writ
but on June 18, 1991, said commission promulgated an affirmance decision
of Execution filed by the complainants meritorious and in order. Accordingly,
let a Writ of Execution be issued against Tanduay Distiller, Inc., Wilson Young Distillers dated June 17, 1988 to the President of the Tanduay Distillery, Inc.,
and James Yu to immediately reinstate complainants Fernando Duran, Labor Union.
Rodrigo Santos, Roque Estoce and Eduardo Daliwan to their respective
positions. (pp. 57-58, Rollo.)

(p 145, Rollo.) We hold that petitioners, for a number of reasons which we shall discuss
below, may not be held answerable and liable under the final judgment of
Consequently, a writ of execution was issued by Labor Arbiter Cueto on Labor Arbiter Cauton-Barcelona.
December 16, 1992.
1. Admittedly, the decision dated May 24, 1989 is now final and executory, as
To stop the implementation of the writ of execution, petitioners filed a petition only respondent TDI appealed said decision and its appeal was later
for certiorari (Annex AA, pp. 146-158, Rollo before respondent NLRC, praying dismissed by respondent NLRC. It is fundamental that a final and executory
that decision cannot be amended or corrected (First Integrated Bonding and
Insurance Company, Inc, vs. Hernando, 199 SCRA 796 [1991]) except for
1. Immediately upon filing of the instant case, a temporary restraining order he clerical errors or mistakes (Maramba vs. Lozano, 20 SCRA 474 [1967]); Reyes
issued, to wit. vs. Court of Appeals, 189 SCRA 46 [1990]). A definitive judgment is no longer
subject to change, revision, amendment, or reversal (Miranda vs. Court of
a) Enjoining and restraining the respondents from implementing the Order
Appeals, 71 SCRA 295 [1976], and the court loses jurisdiction over it, except
dated November 17, 1992;
to order its execution (PY Eng Chong vs. Herrera, 70 SCRA 130 (1976]).
b.) Commanding the public respondent to desist from acting on the Order,
An examination of the aforequoted dispositive portion of the decision shows
c.) Commanding the respondents to desist from committing any other act that the same does not in any manner obligate Tanduay Distillers, or even
judicial to the petitioners/appellants. petitioners Yu and Young for that matter, to reinstate respondents. Only TDI
was held liable to reinstate respondents up to the time of change of ownership,
2. After the appropriate proceedings, a writ of preliminary injunction be issued and for separation benefits.
so enjoining the respondents;
However, Labor Arbiter Cueto went beyond what was disposed by the decision
3. After hearing on the merits, the Order dated November 17, 1992 be set and issued an order dated November 17, 1992 (Annex Z, Petition, pp. 139-
aside and an injunction be issued permanently enjoining the respondents from 145, Rollo) which required
committing the aforesaid acts and to comply strictly with terms of the Decision
and the NLRC; . . . Tanduay Distillers, Inc., Wilson Young and James Yu to immediately
reinstate complainants Fernando Duran, Rodrigo Santos, Roque Estoce and
4. Ordering the respondents, jointly and severally, to pay petitioner's fees in Eduardo Daliwan to heir respective positions.
the amount of P100,000.00 and to pay the cost of suit.
(p. 145, Rollo.)
On August 25, 1993, respondent NLRC promulgated its decision, the
dispositive portion of which reads: Subsequently, a writ of execution was issued on December 16, 1992 pursuant
to the order of November 17, 1992.
In view of the foregoing premises, the petition/appeal with prayer for
preliminary injunction is hereby dismissed for lack of merit. The order of execution dated November 17, 1992 in effect amended the
decision dated May 24, 1989 for the former orders petitioners and Tanduay
The petitioners respondents are hereby directed to re re-employ/re-hire Distillers to reinstate private respondents employees whereas the decision
respondents-complainants immediately upon receipt of this decision. dated May 24, 1989, as we have discussed above, does not so decree, This
cannot be done. It is beyond the power and competence of Labor Arbiter Cueto
(p. 36, Rollo.)
to amend a final decision, The writ of execution must not go beyond the scope
Thus, the present petition where petitioners pray that of the judgment.

1. Immediately upon filing of the instant case, a temporary restraining order be As Chief Justice Moran opined: "The writ of execution must conform to the
issued, to wit: judgment which is to be executed as it may not vary the terms of the judgment
it seeks to enforce. Nor may it go beyond the terms of the judgment, sought to
a) Restraining and prohibiting the respondents form implementing the ORDER be executed. Where the execution is not in harmony with the judgment which
dated November 17, 1992 and the NLRC Certiorari Decision. gives it life and exceeds it, it has pro tanto no validity. To maintain otherwise
would be to ignore the constitutional provision against depriving a person of
b) Commanding the respondents to desist from committing any other act his property without due process of law" (Moran, Comments on the Rules of
prejudicial to the petitioners. Court, Vol. I 1952 Ed., p. 809; cited in Villoria vs. Piccio, supra).
2. After the appropriate proceedings, a writ of preliminary injunction be issued (Gamboa's Incorporated vs. Court of
so enjoining the respondents; Appeals, 72 SCRA 131, 137-138 [1976])
3. After appropriate proceedings, the ORDER dated November 17, 1992 and The order of execution and the writ of execution ordering petitioners and
the NLRC CertiorariDecision be set aside and a injunction be issued Tanduay Distillers to reinstate private respondents employees are, therefore,
permanently enjoining the respondents from committing the aforesaid acts and null and void.
to comply strictly with the terms of the Arbiter Decision and the NLRC Decision;
2. Neither may be said that petitioners and Tanduay Distillers are one and the
4. Ordering the respondents, jointly and severally, to pay petitioners' attorney's same as TDI, as seems to be the impression of respondents when they
fees in the amount of P100,000.00 and to pay the costs of suit. impleaded petitioners as party respondents in their compliant for unfair labor
practice, illegal lay off, and separation benefits.
(pp. 26-27, Rollo.)
Such a stance is not supported by the facts. The name of the company for
The issue posed by the present petition is whether respondent NLRC
whom the petitioners are working is Twin Ace Holdings Corporation, As stated
committed grave abuse of discretion in holding petitioners Yu and Young liable
by the Solicitor General, Twin Ace is part of the Allied Bank Group although it
under the decision dated May 24, 1989 which decreed that:
conducts the rum business under the name of Tanduay Distillers. The use of
WHEREFORE, judgment is hereby rendered declaring that the retrenchment a similar sounding or almost identical name is an obvious device to capitalize
is illegal thereby ordering respondent Tanduay Distillery Inc., to reinstate the on the goodwill which Tanduay Rum has built over the years. Twin Ace or
complainants to their former position with backwages up to the time of the Tanduay Distillers, on one hand, and Tanduay Distillery Inc. (TDI), on the
change ownership, if one has taken place. other, are distinct and separate corporations. There is nothing to suggest that
the owners of TDI, have any common relationship as to identify it with Allied
That in the event of change in management it (Tanduay Distillery, Inc.) is Bank Group which runs Tanduay Distillers. The dissertation of the Court in
hereby ordered to pay the complainants their respective separation benefits Diatagon Labor Federation Local 110 of the ULGWP vs. Ople, et al. (101
corrupted at the rate of one (1) month for every year of service. This is without SCRA 534 [1980]) is worthy of restatement, thusly:
prejudice to the letter of Mr. James Yu as officer-in-charge of Tanduay
We hold that the director of labor Relations acted with grave abuse of In Claparols vs. Court of Industrial Relations (65 SCRA 613 (1975]), the
discretion in treating the two companies as a single bargaining unit. The ruling Claparols Steel and Nail Plant, which was ordered to pay its workers
is arbitrary and untenable because the two companies are indubitably distinct backwages, ceased operations on June 30, 1956 and was succeeded on the
entities with separate juridical personalities. very next day, July 1, 1957, by the Claparols Steel Corporation. Both
corporations were substantially owned and controlled by the same person and
The fact that their businesses are related and that the 236 employees of there was no break or cessation in operations. Moreover, all the assets of the
Georgia Pacific International Corporation were originally employees of Lianga steel and nail plant were transferred to the new corporation.
Bay Logging Co., Inc, is not a justification for disregarding their separate
personalities. Hence, the 236 employees, who are now attached to Georgia In fine, the fiction of separate and distinct corporate entities cannot, in the
Pacific International should not be allowed to vote in the certification election instant case, be disregarded and brushed aside, there being not the least
at the Lianga Bay Logging Co., Inc. They should vote at a separate certification indication that the second corporation is a dummy or serves as a client of the
election to determine the collective bargaining representative of the first corporate entity.
employees of Georgia Pacific International Corporation.
In the case at bench, since TDI and Twin Ace or Tanduay Distillers are two
(at pp. 540-541.) separate and distinct entities, the order for Tanduay Distillers (and petitioners)
to reinstate respondents-employees is obviously without legal and factual
It is basic that a corporation is invested by law with a personality separate and basis.
distinct from those of the persons composing it as well as from that of any
other legal entity to which it may be related (Palay, Inc. et al. vs. Clave, et al., 3. Nor could the order and writ to reinstate be anchored on the vague and
124 SCRA 641 [1983]). seemingly uncalled for alternative disposition in the Barcelona decision that

The genuine nature of the sale to Twin Ace is evidenced by the fact that Twin . . . This is without prejudice to the letter of Mr. James Yu as officer-in-charge
Ace was only a subsequent interested buyer. At the time when termination of Tanduay Distillers dated June 16, 1988 to the President of the Tanduay
notices were sent to its employees, TDI was negotiating with the First Pacific Distillery, Inc. labor Union.
Metro Corporation for the sale of its assets. Only after First Pacific gave up its
efforts to acquire the assets did Twin Ace or Tanduay Distillers come into the The June 11, 1988 letter referred to was addressed to Benjamin C. Agaloos,
picture. Respondents-employees have not presented any proof as to president of the Tanduay Distillery Labor Union by James Yu in his capacity
communality of ownership and management to support their contention that as officer-in-charge of Tanduay Distillers.
the two companies are one firm or closely related. The doctrine of piercing the
It pertinently reads:
veil of corporate entity applies when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud, or defend crime or where a Please be informed that our company stands firm on its decision to hire
corporation is the mere alter ego or business conduit of a person (Indophil everybody with a clean slate effective June 1, 1988 on a probationary basis
Textile Mill Workers Union vs. Calica, 205 SCRA 697, 703 (1992]). To while those currently casual or contractual employees shall retain the same
disregard the separate juridical personality of a corporation, the wrong-doing employment status. In the same manner that the new company stood firm on
must be clearly and convincingly established. It cannot be presumed (Del its decision to grant a 10% across-the-board increase to all employees, which
Rosario vs. NLRC, 187 SCRA 777, 7809 [1990]). in fact has been received by employees concerned.
The complaint for unfair labor practice, illegal lay off, and separation benefits (p. 88, Rollo.)
was filed against TDI. Only later when the manufacture and sale of Tanduay
products was taken over by Twin Ace or Tanduay Distillers were James Yu We do not find in the decision of Labor Arbiter Cauton Barcelona or in the letter
and Wilson Young impleaded. of James Yu what the respondents are trying to read into it. Labor Arbiter
Cauton-Barcelona found the retrenchment effected by TDI illegal and ordered
The corporation itself Twin Ace or Tanduay Distillers was never made a TDI to reinstate the complainants and that if there is a change of management,
party to the case. then separation benefits would be paid. There is, however, no order in the
decision directing Twin Ace or Tanduay Distillers to hire or reinstate herein
Another factor to consider is that TDI as a corporation or its shares of stock
four individual respondents.
were not purchased by Twin Ace. The buyer limited itself to purchasing most
of the assets, equipment, and machinery of TDI. Thus, Twin Ace or Tanduay The letter of James Yu does not mention any reinstatement. It assures the
Distillers did not take over the corporate personality of DTI although they president of the labor union that Tanduay Distillers stood firm on its decision
manufacture the same product at the same plant with the same equipment to hire employees with a clean slate on a probationary basis. The fact that the
and machinery. Obviously, the trade name "Tanduay" went with the sale employees of the former employer (TDI) would be hired on a probationary
because the new firm does business as Tanduay Distillers and its main basis shows that there was no employer-employee relationship between
product of rum is sold as Tanduay Rum. There is no showing, however, that individual respondents and Twin Ace. Any one who joins the buyer corporation
TDI itself was absorbed by Twin Ace or that it ceased to exist as a separate comes in as an outsider who is newly hired and who starts on a probationary
corporation, In point of fact TDI is now herein a party respondent represented basis until he proves he deserves to be on a permanent status. His application
by its own counsel. can be rejected in the exercise of the hiring authority's discretion.
Significantly, TDI in the petition at hand has taken the side of its former There is thus no legal basis for Labor Arbiter Cueto or the NLRC to compel
employees and argues against Tanduay Distillers. In its memorandum filed on Twin Ace or Tanduay Distillers, or petitioners to "reinstate" the four individual
January 9, 1995, TDI argues that it was not alone its liability which arbiter respondents. The letter of James Yu to the union president was a unilateral
recognized "but also of James Yu and Wilson Young representatives of Twin and gratuitous offer with no consideration. It refers to people who still have to
Ace and/or the Allied Bank Group doing business under the name "TANDUAY be hired. New hires had to be investigated or evaluated if they have "clean
DISTILLERS," to whom the business and assets of TDI were sold." If TDI and slates." Twin Ace or Tanduay Distillers and petitioners are being compelled by
Tanduay, Distillers are one and the same group or one is a continuation of the public respondents to reinstate workers who were never their employees.
other, the two would not be fighting each other in this case. TDI would not There is no showing that the sale of assets by TDI to Tanduay Distillers
argue strongly "that the petition for certiorari filed by James Yu and Wilson included a condition that employees of the former would be absorbed by the
Young be dismissed for lack of merit." It is obvious that the second corporation, latter.
Twin Ace or Tanduay Distillers, is an entity separate and distinct, from the first
corporation, TDI. The circumstances of this case are different from the earlier Employees of TDI had been terminated in their employment as of April 28,
decisions of the Court in labor cases where the veil of corporate fiction was 1988. Petitioners state that Twin Ace bought the assets of TDI after the
pierced. employment of the individual respondents had been terminated. True, Labor
Arbiter Cauton-Barcelona declared the retrenchment program of TDI as illegal.
In La Campana Coffee Factory. Inc. vs. Kaisahan ng Mangagawa sa La This decision, however, did not convert the individual respondents into
Campana (KKM), (93 Phil, 160 [1953]), La Campana Coffee Factory, Inc. and employees of the firm which purchased the assets of the former employer. It
La Campana Gaugau Packing were substantially owned by the same person. merely held TDI liable for the consequences of the illegal retrenchment.
They had one office, one management, and a single payroll for both
businesses. The laborers of the gaugau factory and the coffee factory were Labor Arbiter Cueto and the NLRC, therefore, committed grave abuse of
also interchangeable, the workers in one factory worked also in the other discretion when they read into the decision of Labor Arbiter Cauton- Barcelona
factory. something which did not appear therein. And even assuming that Labor Arbiter
Cauton-Barcelona formally included an order for the petitioners to hire the
individual respondents, there would be no factual or legal basis for such an After trial, the Court of First Instance of Bulacan ruled in favor of the plaintiff.
order. An employer-employee relation is created by contract, and can not be The dispositive portion of the decision reads:
forced upon either party simply upon order of a labor arbiter. The hiring of
employees is one of the recognized prerogatives of management. ACCORDINGLY, the judgment is hereby rendered declaring the valid
existence of the plaintiffs preferential right to acquire the subject property (right
4. Another factor which militates against the claim for reinstatement of the of first refusal) and ordering the defendants and all persons deriving rights
individual respondents is their having received separation pay as part of a therefrom to convey the said property to plaintiff who may offer to acquire the
compromise agreement in the course of their litigation with TDI. Rodrigo F. same at the rate of P14.00 per square meter, more or less, for Lot 1095 whose
Santos received P20,282.03; Roque Estoce, P20,092.50; Eduardo Daliwan, area is 27,169 square meters only. Without pronouncement as to attorney's
P19,973.40; and Fernando A. Duran, P25,702.00. These amounts correspond fees and costs. (Appendix I; Rec., pp. 246- 247). (Appellant's Brief, pp. 1-2; p.
to their entitlement to separation benefits. Having received separation pay 134, Rollo)
from a former employer, how can they compel, as a matter of right, another
company to hire them on a supposed "reinstatement" basis? The orders The lower court's decision was affirmed on appeal by the Intermediate
executing the earlier decision of Labor Arbiter Cauton-Barcelona and directing Appellate Court.
petitioners to immediately reinstate the four individual respondents to their
The defendants-appellants, now the petitioners, filed a petition for certiorari to
former positions are, thus, characterized by grave abuse of discretion. There
review the appellate court's decision.
are no "former positions" to which individual respondents may be reinstated
because they never hired by Twin Ace/Tanduay Distillers and had never We initially denied the petition but upon motion for reconsideration, we set
worked for it. aside the resolution denying the petition and gave it due course.
WHEREFORE, the petition is hereby GRANTED, The questioned Order of the The petitioners allege that:
Labor Arbiter Daniel C. Cueto dated November 17, 1992 and the decision of
the National Labor Relations Commission upholding said order are set aside The denial of the petition will work great injustice to the petitioners, in that:
as null and void. No special pronouncement is made as to costs.
1. Respondent Hydro Pipes Philippines, Inc, ("private respondent") will acquire
SO ORDERED. from petitioners a parcel of industrial land consisting of 27,169 square meters
or 2.7 hectares (located right after the Valenzuela, Bulacan exit of the toll
G.R. No. L-69259 January 26, 1988 expressway) for only P14/sq. meter, or a total of P380,366, although the
prevailing value thereof is approximately P300/sq. meter or P8.1 Million;
DELPHER TRADES CORPORATION, and DELPHIN
PACHECO, petitioners, 2. Private respondent is allowed to exercise its right of first refusal even if there
vs. is no "sale" or transfer of actual ownership interests by petitioners to third
INTERMEDIATE APPELLATE COURT and HYDRO PIPES PHILIPPINES, parties; and
INC., respondents.
3. Assuming arguendo that there has been a transfer of actual ownership
interests, private respondent will acquire the land not under "similar
conditions" by which it was transferred to petitioner Delpher Trades
GUTIERREZ, JR., J.:
Corporation, as provided in the same contractual provision invoked by private
The petitioners question the decision of the Intermediate Appellate Court respondent. (pp. 251-252, Rollo)
which sustained the private respondent's contention that the deed of exchange
The resolution of the case hinges on whether or not the "Deed of Exchange"
whereby Delfin Pacheco and Pelagia Pacheco conveyed a parcel of land to
of the properties executed by the Pachecos on the one hand and the Delpher
Delpher Trades Corporation in exchange for 2,500 shares of stock was
Trades Corporation on the other was meant to be a contract of sale which, in
actually a deed of sale which violated a right of first refusal under a lease
effect, prejudiced the private respondent's right of first refusal over the leased
contract.
property included in the "deed of exchange."
Briefly, the facts of the case are summarized as follows:
Eduardo Neria, a certified public accountant and son-in-law of the late Pelagia
In 1974, Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of Pacheco testified that Delpher Trades Corporation is a family corporation; that
27,169 square meters of real estate Identified as Lot. No. 1095, Malinta Estate, the corporation was organized by the children of the two spouses (spouses
in the Municipality of Polo (now Valenzuela), Province of Bulacan (now Metro Pelagia Pacheco and Benjamin Hernandez and spouses Delfin Pacheco and
Manila) which is covered by Transfer Certificate of Title No. T-4240 of the Pilar Angeles) who owned in common the parcel of land leased to Hydro Pipes
Bulacan land registry. Philippines in order to perpetuate their control over the property through the
corporation and to avoid taxes; that in order to accomplish this end, two pieces
On April 3, 1974, the said co-owners leased to Construction Components of real estate, including Lot No. 1095 which had been leased to Hydro Pipes
International Inc. the same property and providing that during the existence or Philippines, were transferred to the corporation; that the leased property was
after the term of this lease the lessor should he decide to sell the property transferred to the corporation by virtue of a deed of exchange of property; that
leased shall first offer the same to the lessee and the letter has the priority to in exchange for these properties, Pelagia and Delfin acquired 2,500 unissued
buy under similar conditions (Exhibits A to A-5) no par value shares of stock which are equivalent to a 55% majority in the
corporation because the other owners only owned 2,000 shares; and that at
On August 3, 1974, lessee Construction Components International, Inc. the time of incorporation, he knew all about the contract of lease of Lot. No.
assigned its rights and obligations under the contract of lease in favor of Hydro 1095 to Hydro Pipes Philippines. In the petitioners' motion for reconsideration,
Pipes Philippines, Inc. with the signed conformity and consent of lessors Delfin they refer to this scheme as "estate planning." (p. 252, Rollo)
Pacheco and Pelagia Pacheco (Exhs. B to B-6 inclusive)
Under this factual backdrop, the petitioners contend that there was actually no
The contract of lease, as well as the assignment of lease were annotated at transfer of ownership of the subject parcel of land since the Pachecos
he back of the title, as per stipulation of the parties (Exhs. A to D-3 inclusive) remained in control of the property. Thus, the petitioners allege: "Considering
that the beneficial ownership and control of petitioner corporation remained in
On January 3, 1976, a deed of exchange was executed between lessors Delfin
the hands of the original co-owners, there was no transfer of actual ownership
and Pelagia Pacheco and defendant Delpher Trades Corporation whereby the
interests over the land when the same was transferred to petitioner corporation
former conveyed to the latter the leased property (TCT No.T-4240) together
in exchange for the latter's shares of stock. The transfer of ownership, if
with another parcel of land also located in Malinta Estate, Valenzuela, Metro
anything, was merely in form but not in substance. In reality, petitioner
Manila (TCT No. 4273) for 2,500 shares of stock of defendant corporation with
corporation is a mere alter ego or conduit of the Pacheco co-owners; hence
a total value of P1,500,000.00 (Exhs. C to C-5, inclusive) (pp. 44-45, Rollo)
the corporation and the co-owners should be deemed to be the same, there
On the ground that it was not given the first option to buy the leased property being in substance and in effect an Identity of interest." (p. 254, Rollo)
pursuant to the proviso in the lease agreement, respondent Hydro Pipes
The petitioners maintain that the Pachecos did not sell the property. They
Philippines, Inc., filed an amended complaint for reconveyance of Lot. No.
argue that there was no sale and that they exchanged the land for shares of
1095 in its favor under conditions similar to those whereby Delpher Trades
stocks in their own corporation. "Hence, such transfer is not within the letter,
Corporation acquired the property from Pelagia Pacheco and Delphin
or even spirit of the contract. There is a sale when ownership is transferred for
Pacheco.
a price certain in money or its equivalent (Art. 1468, Civil Code) while there is
a barter or exchange when one thing is given in consideration of another thing Q (What do you mean by "point of view"?) What are these benefits to the
(Art. 1638, Civil Code)." (pp. 254-255, Rollo) spouses of this deed of exchange?

On the other hand, the private respondent argues that Delpher Trades A Continuous control of the property, tax exemption benefits, and other
Corporation is a corporate entity separate and distinct from the Pachecos. inherent benefits in a corporation.
Thus, it contends that it cannot be said that Delpher Trades Corporation is the
Pacheco's same alter ego or conduit; that petitioner Delfin Pacheco, having Q What are these advantages to the said spouses from the point of view of
treated Delpher Trades Corporation as such a separate and distinct corporate taxation in entering in the deed of exchange?
entity, is not a party who may allege that this separate corporate existence
A Having fulfilled the conditions in the income tax law, providing for tax free
should be disregarded. It maintains that there was actual transfer of ownership
exchange of property, they were able to execute the deed of exchange free
interests over the leased property when the same was transferred to Delpher
from income tax and acquire a corporation.
Trades Corporation in exchange for the latter's shares of stock.
Q What provision in the income tax law are you referring to?
We rule for the petitioners.
A I refer to Section 35 of the National Internal Revenue Code under par. C-
After incorporation, one becomes a stockholder of a corporation by
sub-par. (2) Exceptions regarding the provision which I quote: "No gain or loss
subscription or by purchasing stock directly from the corporation or from
shall also be recognized if a person exchanges his property for stock in a
individual owners thereof (Salmon, Dexter & Co. v. Unson, 47 Phil, 649, citing
corporation of which as a result of such exchange said person alone or
Bole v. Fulton [1912], 233 Pa., 609). In the case at bar, in exchange for their
together with others not exceeding four persons gains control of said
properties, the Pachecos acquired 2,500 original unissued no par value shares
corporation."
of stocks of the Delpher Trades Corporation. Consequently, the Pachecos
became stockholders of the corporation by subscription "The essence of the Q Did you explain to the spouses this benefit at the time you executed the
stock subscription is an agreement to take and pay for original unissued deed of exchange?
shares of a corporation, formed or to be formed." (Rohrlich 243, cited in
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the A Yes, sir
Philippines, Vol. III, 1980 Edition, p. 430) It is significant that the Pachecos
Q You also, testified during the last hearing that the decision to have no par
took no par value shares in exchange for their properties.
value share in the defendant corporation was for the purpose of flexibility. Can
A no-par value share does not purport to represent any stated proportionate you explain flexibility in connection with the ownership of the property in
interest in the capital stock measured by value, but only an aliquot part of the question?
whole number of such shares of the issuing corporation. The holder of no-par
A There is flexibility in using no par value shares as the value is determined
shares may see from the certificate itself that he is only an aliquot sharer in
by the board of directors in increasing capitalization. The board can fix the
the assets of the corporation. But this character of proportionate interest is not
value of the shares equivalent to the capital requirements of the corporation.
hidden beneath a false appearance of a given sum in money, as in the case
of par value shares. The capital stock of a corporation issuing only no-par Q Now also from the point of taxation, is there any flexibility in the holding by
value shares is not set forth by a stated amount of money, but instead is the corporation of the property in question?
expressed to be divided into a stated number of shares, such as, 1,000 shares.
This indicates that a shareholder of 100 such shares is an aliquot sharer in the A Yes, since a corporation does not die it can continue to hold on to the
assets of the corporation, no matter what value they may have, to the extent property indefinitely for a period of at least 50 years. On the other hand, if the
of 100/1,000 or 1/10. Thus, by removing the par value of shares, the attention property is held by the spouse the property will be tied up in succession
of persons interested in the financial condition of a corporation is focused upon proceedings and the consequential payments of estate and inheritance taxes
the value of assets and the amount of its debts. (Agbayani, Commentaries and when an owner dies.
Jurisprudence on the Commercial Laws of the Philippines, Vol. III, 1980
Edition, p. 107). Q Now what advantage is this continuity in relation to ownership by a particular
person of certain properties in respect to taxation?
Moreover, there was no attempt to state the true or current market value of the
real estate. Land valued at P300.00 a square meter was turned over to the A The property is not subjected to taxes on succession as the corporation does
family's corporation for only P14.00 a square meter. not die.

It is to be stressed that by their ownership of the 2,500 no par shares of stock, Q So the benefit you are talking about are inheritance taxes?
the Pachecos have control of the corporation. Their equity capital is 55% as
A Yes, sir. (pp. 3-5, tsn., December 15, 1981)
against 45% of the other stockholders, who also belong to the same family
group. The records do not point to anything wrong or objectionable about this "estate
planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer
In effect, the Delpher Trades Corporation is a business conduit of the
to decrease the amount of what otherwise could be his taxes or altogether
Pachecos. What they really did was to invest their properties and change the
avoid them, by means which the law permits, cannot be doubted." (Liddell &
nature of their ownership from unincorporated to incorporated form by
Co., Inc. v. The collector of Internal Revenue, 2 SCRA 632 citing Gregory v.
organizing Delpher Trades Corporation to take control of their properties and
Helvering, 293 U.S. 465, 7 L. ed. 596).
at the same time save on inheritance taxes.
The "Deed of Exchange" of property between the Pachecos and Delpher
As explained by Eduardo Neria:
Trades Corporation cannot be considered a contract of sale. There was no
xxx xxx xxx transfer of actual ownership interests by the Pachecos to a third party. The
Pacheco family merely changed their ownership from one form to another. The
ATTY. LINSANGAN: ownership remained in the same hands. Hence, the private respondent has
no basis for its claim of a light of first refusal under the lease contract.
Q Mr. Neria, from the point of view of taxation, is there any benefit to the
spouses Hernandez and Pacheco in connection with their execution of a deed WHEREFORE, the instant petition is hereby GRANTED, The questioned
of exchange on the properties for no par value shares of the defendant decision and resolution of the then Intermediate Appellate Court are
corporation? REVERSED and SET ASIDE. The amended complaint in Civil Case No. 885-
V-79 of the then Court of First Instance of Bulacan is DISMISSED. No costs.
A Yes, sir.
SO ORDERED.
COURT:

Q What do you mean by "point of view"?

A To take advantage for both spouses and corporation in entering in the deed
of exchange.

ATTY. LINSANGAN:
JARDINE DAVIES, INC., G.R. No. 151438 Petitioner, 3. Ordering defendants to jointly and severally pay plaintiffs P150,000.00
attorneys fees and other costs of litigation, as well as exemplary damages in
Present: PUNO, J., Chairman, AUSTRIA-MARTINEZ, an amount not less than or equal to Prayer 2 above; and
versus CALLEJO, SR., TINGA, and CHICO-NAZARIO, JJ. JRB REALTY,
INC., Respondent. Promulgated:
4. Granting plaintiff such other and further relief as shall be just and equitable
July 15, 2005 in the premises.[7]

Of the four defendants, only the petitioner filed its Answer. The court did not
acquire jurisdiction over Aircon because the latter ceased operations, as its
CALLEJO, SR., J.:
corporate life ended on December 31, 1986.[8] Upon motion, defendants
Before us is a petition for review of the Decision[1] of the Court of Appeals (CA) Fedders Air Conditioning USA and Maxim were declared in default.[9]
in CA-G.R. CV No. 54201 affirming in toto that of the Regional Trial Court
On May 17, 1996, the RTC rendered its Decision, the dispositive portion of
(RTC) in Civil Case No. 90-237 for specific performance; and the Resolution
which reads:
dated January 11, 2002 denying the motion for reconsideration thereof.
WHEREFORE, judgment is hereby rendered ordering defendants Jardine
The facts are as follows:
Davies, Inc., Fedders Air Conditioning USA, Inc. and Maxim Industrial and
Merchandising Corporation, jointly and severally:

In 1979-1980, respondent JRB Realty, Inc. built a nine-storey building, named 1. To deliver, install and place into operation the two (2) brand new
Blanco Center, on its parcel of land located at 119 Alfaro St., Salcedo Village, units of Fedders unitary packaged airconditioning units each of 10 tons
Makati City. An air conditioning system was needed for the Blanco Law Firm capacity with rotary compressors to deliver 30,000 kcal or 120,000 BTUH to
housed at the second floor of the building. On March 13, 1980, the the second floor of the Blanco Center building, or to pay plaintiff the current
respondents Executive Vice-President, Jose R. Blanco, accepted the contract price for two such units;
quotation of Mr. A.G. Morrison, President of Aircon and Refrigeration
2. To reimburse plaintiff the amount of P556,551.55 as and for the
Industries, Inc. (Aircon), for two (2) sets of Fedders Adaptomatic 30,000 kcal
unsaved electricity bills from October 21, 1981 up to April 30, 1995; and
(Code: 10-TR) air conditioning equipment with a net total selling price
another amount of P185,951.67 as and for repair costs;
of P99,586.00.[2] Thereafter, two (2) brand new packaged air conditioners of
10 tons capacity each to deliver 30,000 kcal or 120,000 BTUH[3] were installed
by Aircon. When the units with rotary compressors were installed, they could
not deliver the desired cooling temperature. Despite several adjustments and 3. To pay plaintiff P50,000.00 as and for attorneys fees; and
corrective measures, the respondent conceded that Fedders Air Conditioning
USAs technology for rotary compressors for big capacity conditioners like
those installed at the Blanco Center had not yet been perfected. The parties
4. Cost of suit.[10]
thereby agreed to replace the units with reciprocating/semi-hermetic
compressors instead. In a Letter dated March 26, 1981,[4] Aircon stated that it
would be replacing the units currently installed with new ones using rotary
compressors, at the earliest possible time. Regrettably, however, it could not The petitioner filed its notice of appeal with the CA, alleging that the trial court
specify a date when delivery could be effected. erred in holding it liable because it was not a party to the contract between
JRB Realty, Inc. and Aircon, and that it had a personality separate and distinct
TempControl Systems, Inc. (a subsidiary of Aircon until 1987) undertook the from that of Aircon.
maintenance of the units, inclusive of parts and services. In October 1987, the
respondent learned, through newspaper ads,[5] that Maxim Industrial and On March 23, 2000, the CA affirmed the trial courts ruling in toto; hence, this
Merchandising Corporation (Maxim, for short) was the new and exclusive petition.
licensee of Fedders Air Conditioning USA in the Philippines for the
manufacture, distribution, sale, installation and maintenance of Fedders air
conditioners. The respondent requested that Maxim honor the obligation of The petitioner raises the following assignment of errors:
Aircon, but the latter refused. Considering that the ten-year period of
prescription was fast approaching, to expire on March 13, 1990, the I.
respondent then instituted, on January 29, 1990, an action for specific
performance with damages against Aircon & Refrigeration Industries, Inc., THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE FOR
Fedders Air Conditioning USA, Inc., Maxim Industrial & Merchandising THE ALLEGED CONTRACTUAL BREACH OF AIRCON SOLELY BECAUSE
Corporation and petitioner Jardine Davies, Inc.[6] The latter was impleaded as THE LATTER WAS FORMERLY JARDINES SUBSIDIARY.
defendant, considering that Aircon was a subsidiary of the petitioner. The
respondent prayed that judgment be rendered, as follows:
II.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS


1. Ordering the defendants to jointly and severally at their account and
JARDINES MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT
expense deliver, install and place in operation two
DECLARING AIRCONS OBLIGATION TO DELIVER THE TWO (2)
brand new units of each 10-tons capacity Fedders unitary packaged air
AIRCONDITIONING UNITS TO JRB AS HAVING BEEN SUBSTANTIALLY
conditioners with Fedders USAs technology perfected rotary compressors to
COMPLIED WITH IN GOOD FAITH.
always deliver 30,000 kcal or 120,000 BTUH to the second floor of the Blanco
Center building at 119 Alfaro St., Salcedo Village, Makati, Metro Manila;
III.

ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS


2. Ordering defendants to jointly and severally reimburse plaintiff not only the
JARDINES MERE ALTER EGO, THE COURT OF APPEALS ERRED IN NOT
sums of P415,118.95 for unsaved electricity from 21st October 1981 to
DECLARING JRBS CAUSES OF ACTION AS HAVING BEEN BARRED BY
7th January 1990 and P99,287.77 for repair costs of the two service units from
LACHES.
7th March 1987 to 11th January 1990, with legal interest thereon from the filing
of this Complaint until fully reimbursed, but also like unsaved electricity costs IV.
and like repair costs therefrom until Prayer No. 1 above shall have been
complied with; ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS
JARDINES MERE ALTER EGO, THE COURT OF APPEALS ERRED IN
FINDING JRB ENTITLED TO RECOVER ALLEGED UNSAVED
ELECTRICITY EXPENSES.
or corporate alter ego. The petitioner is now before us, reiterating its defense
of separateness, and the fact that it is not a party to the contract.
V.

THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO PAY


ATTORNEYS FEES. We find merit in the petition.

VI.

THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO It is an elementary and fundamental principle of corporation law that a
JARDINE FOR DAMAGES.[11] corporation is an artificial being invested by law with a personality separate
and distinct from its stockholders and from other corporations to which it may
It is the well-settled rule that factual findings of the trial court, as affirmed by be connected. While a corporation is allowed to exist solely for a lawful
the CA, are accorded high respect, even finality at times. However, purpose, the law will regard it as an association of persons or in case of two
considering that the factual findings of the CA and the RTC were based on corporations, merge them into one, when this corporate legal entity is used as
speculation and conjectures, unsupported by substantial evidence, the Court a cloak for fraud or illegality.[14] This is the doctrine of piercing the veil of
finds that the instant case falls under one of the excepted instances. There is, corporate
thus, a need to correct the error. fiction which applies only when such corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime.[15] The rationale
behind piercing a corporations identity is to remove the barrier between the
The trial court ruled that Aircon was a subsidiary of the petitioner, and corporation from the persons comprising it to thwart the fraudulent and illegal
concluded, thus: schemes of those who use the corporate personality as a shield for
undertaking certain proscribed activities.[16]

Plaintiffs documentary evidence shows that at the time it contracted with


Aircon on March 13, 1980 (Exhibit D) and on the date the revised agreement While it is true that Aircon is a subsidiary of the petitioner, it does not
was reached on March 26, 1981, Aircon was a subsidiary of Jardine. The necessarily follow that Aircons corporate legal existence can just be
phrase A subsidiary of Jardine Davies, Inc. was printed on Aircons letterhead disregarded. In Velarde v. Lopez, Inc.,[17] the Court categorically held that a
of its March 13, 1980 contract with plaintiff (Exhibit D-1), as well as the Aircons subsidiary has an independent and separate juridical personality, distinct from
letterhead of Jardines Director and Senior Vice-President A.G. Morrison and that of its parent company; hence, any claim or suit against the latter does not
Aircons President in his March 26, 1981 letter to plaintiff (Exhibit J-2) bind the former, and vice versa. In applying the doctrine, the following
confirming the revised agreement. Aircons newspaper ads of April 12 and 26, requisites must be established: (1) control, not merely majority or complete
1981 and a press release on August 30, 1982 (Exhibits E, F and L) also show stock control; (2) such control must have been used by the defendant to
that defendant Jardine publicly represented Aircon to be its subsidiary. commit fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest acts in contravention of plaintiffs legal rights;
and (3) the aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of.[18]
Records from the Securities and Exchange Commission (SEC) also reveal
that as per Jardines December 31, 1986 and 1985 Financial Statements that
The company acts as general manager of its subsidiaries (Exhibit P). Jardines The records bear out that Aircon is a subsidiary of the petitioner only because
Consolidated Balance Sheet as of December 31, 1979 filed with the SEC listed the latter acquired Aircons majority of capital stock. It, however, does not
Aircon as its subsidiary by owning 94.35% of Aircon (Exhibit P-1). Also, exercise complete control over Aircon; nowhere can it be gathered that the
Aircons reportorial General Information Sheet as of April 1980 and April 1981 petitioner manages the business affairs of Aircon. Indeed, no management
filed with the SEC show that Jardine was 94.34% owner of Aircon (Exhibits Q agreement exists between the petitioner and Aircon, and the latter is an
and R) and that out of seven members of the Board of Directors of Aircon, four entirely different entity from the petitioner.[19]
(4) are also of Jardine.
Jardine Davies, Inc., incorporated as early as June 28, 1946,[20] is primarily a
Defendant Jardines witness, Atty. Fe delos Santos-Quiaoit admitted that financial and trading company. Its Articles of Incorporation states among many
defendant Aircon, renamed Aircon & Refrigeration Industries, Inc. is one of the others that the purposes for which the said corporation was formed, are as
subsidiaries of Jardine Davies (TSN, September 22, 1995, p. 12). She also follows:
testified that Jardine nominated, elected, and appointed the controlling
majority of the Board of Directors and the highest officers of Aircon (Ibid, pp. (a) To carry on the business of merchants, commission merchants, brokers,
10,13-14). factors, manufacturers, and agents;

The foregoing circumstances provide justifiable basis for this Court to (b) Upon complying with the requirements of law applicable thereto, to act as
disregard the fiction of corporate entity and treat defendant Aircon as part of agents of companies and underwriters doing and engaging in any and all kinds
the instrumentality of co-defendant Jardine.[12] of insurance business.[21]

The respondent court arrived at the same conclusion basing its ruling on the On the other hand, Aircon, incorporated on December 27, 1952,[22] is a
following documents, to wit: manufacturing firm. Its Articles of Incorporation states that its purpose is mainly

(a) Contract/Quotation #78-No. 80-1639 dated March 03, 1980 (Exh. D-1); To carry on the business of manufacturers of commercial and household
appliances and accessories of any form, particularly to manufacture,
(b) Newspaper Advertisements (Exhs. E-1 and F-1); purchase, sell or deal in air conditioning and refrigeration products of every
class and description as well as accessories and parts thereof, or other
(c) Letter dated March 26, 1981 of A.G. Morrison, President of Aircon, to Atty.
kindred articles; and to erect, or buy, lease, manage, or otherwise acquire
J.R. Blanco (Exh. J);
manufactories, warehouses, and depots for manufacturing, assemblage,
(d) News items of Bulletin Today dated August 30, 1982 (Exh. L); repair and storing, buying, selling, and dealing in the aforesaid appliances,
accessories and products. [23]
(e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979 listing
Aircon as one of its subsidiaries (Exh. P); The existence of interlocking directors, corporate officers and shareholders,
which the respondent court considered, is not enough justification to pierce
(f) Financial Statement of Aircon as of December 31, 1982 and 1981 (Exh. S); the veil of corporate fiction, in the absence of fraud or other public policy
considerations.[24] But even when there is dominance over the affairs of the
(g) Financial Statement of Aircon as of December 31, 1981 (Exh. S-1).[13] subsidiary, the doctrine of piercing the veil of corporate fiction applies only
when such fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime.[25] To warrant resort to this extraordinary remedy, there
Applying the doctrine of piercing the veil of corporate fiction, both the must be proof that the corporation is being used as a cloak or cover for fraud
respondent and trial courts conveniently held the petitioner liable for the or illegality, or to work injustice.[26] Any piercing of the corporate veil has to be
alleged omissions of Aircon, considering that the latter was its instrumentality
done with caution.[27] The wrongdoing must be clearly and convincingly G.R. No. L-47673 October 10, 1946
established. It cannot just be presumed.[28] KOPPEL (PHILIPPINES), INC., plaintiff-appellant,
vs.
In the instant case, there is no evidence that Aircon was formed or utilized with ALFREDO L. YATCO, Collector of Internal Revenue, defendant-appellee.
the intention of defrauding its creditors or evading its contracts and obligations.
There was nothing fraudulent in the acts of Aircon in this case. Aircon, as a
manufacturing firm of air HILADO, J.:
conditioners, complied with its obligation of providing two air conditioning units
for the second floor of the Blanco Center in good faith, pursuant to its contract This is an appeal by Koppel (Philippines), Inc., from the judgment of the Court
with the respondent. Unfortunately, the performance of the air conditioning of First Instance of Manila in civil case No. 51218 of said court dismissing said
units did not satisfy the respondent despite several adjustments and corrective corporations complaint for the recovery of the sum of P64,122.51 which it had
measures. In a Letter[29] dated October 22, 1980, the respondent even paid under protest to the Collector of Internal Revenue on October 30, 1936,
conceded that Fedders Air Conditioning USA has not yet perhaps perfected as merchant sales tax. The main facts of the case were stipulated in the court
its technology of rotary compressors, and agreed to change the compressors below as follows:
with the semi-hermetic type. Thus, Aircon substituted the units with
AGREED STATEMENT OF FACTS
serviceable ones which delivered the cooling temperature needed for the law
office. After enjoying ten (10) years of its cooling power, respondent cannot Now come the plaintiff by attorney Eulogio P. Revilla and the defendant by the
now complain about the performance of these units, nor can it demand a Solicitor General and undersigned Assistant Attorney of the Bureau of Justice
replacement thereof. and, with leave of this Honorable Court, hereby respectfully stipulated and
agree to the following facts, to wit:
Moreover, it was reversible error to award the respondent the amount
of P556,551.55 representing the alleged 30% unsaved electricity costs I. That plaintiff is a corporation duly organized and existing under and by virtue
and P185,951.67 as maintenance cost without showing any basis for such of the laws of the Philippines, with principal office therein at the City of Manila,
award. To justify a grant of actual or compensatory damages, it is necessary the capital stock of which is divided into thousand (1,000) shares of P100 each.
to prove with a reasonable degree of certainty, premised upon competent The Koppel Industrial Car and Equipment company, a corporation organized
proof and on the best evidence obtainable by the injured party, the actual and existing under the laws of the State of Pennsylvania, United States of
amount of loss.[30] The respondent merely based its cause of action on Aircons America, and not licensed to do business in the Philippines, owned nine
alleged representation that Fedders air conditioners with rotary compressors hundred and ninety-five (995) shares out of the total capital stock of the plaintiff
can save as much as 30% on electricity compared to other brands. Offered in from the year 1928 up to and including the year 1936, and the remaining five
evidence were newspaper advertisements published on April 12 and 26, 1981. (5) shares only were and are owned one each by officers of the plaintiff
The respondent then recorded its electricity consumption from October 21, corporation.
1981 up to April 3, 1995 and computed 30% thereof, which amounted
to P556,551.55. The Court rules that this amount is highly speculative and II. That plaintiff, at all times material to this case, was and now is duly licensed
merely hypothetical, and for which the petitioner can not be held accountable. to engage in business as a merchant and commercial broker in the Philippines;
and was and is the holder of the corresponding merchants and commercial
First. The respondent merely relied on the newspaper advertisements showing brokers privilege tax receipts.
the Fedders window-type air conditioners, which are far different from the big
capacity air conditioning units installed at Blanco Center. III. That the defendant Collector of Internal revenue is now Mr. Bibiano L. Meer
in lieu of Mr. Alfredo L. Yatco.
Second. After such print advertisements, the respondent informed Aircon that
it was going to install an electric meter to register its electric consumption so IV. That during the period from January 1, 1929, up to and including
as to determine the electric costs not saved by the presently installed units December 31, 1932, plaintiff transacted business in the Philippines in the
with semi-hermetic compressors. Contrary to the allegations of the respondent following manner, with the exception of the transactions which are described
that this was in pursuance to their Revised Agreement, no proof was adduced in paragraphs V and VI of this stipulation:
that Aircon agreed to the respondents proposition. It was a unilateral act on
When a local buyer was interested in the purchase of railway materials,
the part of the respondent, which Aircon did not oblige or commit itself to pay.
machinery, and supplies, it asked for price quotations from plaintiff. A typical
Third. Needless to state, the amounts computed are mere estimates form of such request is attached hereto and made a part hereof as Exhibit
representing the respondents self-serving claim of unsaved electricity cost, A. (Exhibit A represents typical transactions arising from written requests for
which is too speculative and conjectural to merit consideration. No other quotations, while Exhibits B to G, inclusive, are typical transactions arising
proofs, reports or bases of comparison showing that Fedders Air Conditioning from verbal requests for quotation.) Plaintiff then cabled for the quotation
USA could indeed cut down electricity cost by 30% were adduced. desired for Koppel Industrial Car and Equipment Company. A sample of the
pertinent cable is hereto attached and made a part hereof as Exhibit B. Koppel
Likewise, there is no basis for the award of P185,951.67 representing Industrial Car and Equipment Company answered by cable quoting its cost
maintenance cost. The respondent merely submitted a schedule[31] prepared price, usually A. C. I. F. Manila cost price, which was later followed by a letter
by the respondents accountant, listing the alleged repair costs from March of confirmation. A sample of the said cable quotation and of the letter of
1987 up to June 1994. Such evidence is self-serving and can not also be given confirmation are hereto attached and made a part hereof as Exhibits C and C-
probative weight, considering that there are no proofs of receipts, 1. Plaintiff, however, quoted by Koppel Industrial Car and Equipment
vouchers, etc., which would substantiate the amounts paid for such services. Company. Copy of the plaintiffs letter to purchaser is hereto attached and
Absent any more convincing proof, the Court finds that the respondents claims made a part hereof as Exhibit D. On the basis of these quotations, orders were
are without basis, and cannot, therefore, be awarded. placed by the local purchasers, copies of which orders are hereto attached as
Exhibits E and E-1.
We sustain the petitioners separateness from that of Aircon in this case. It
bears stressing that the petitioner was never a party to the contract. Privity of A cable was then sent to Koppel Industrial Car and Equipment company giving
contracts take effect only between parties, their successors-in-interest, heirs instructions to ship the merchandise to Manila forwarding the customers
and assigns.[32] The petitioner, which has a order. Sample of said cable is hereto attached as Exhibit F. The bills of lading
separate and distinct legal personality from that of Aircon, cannot, therefore, were usually made to order and indorsed in blank with notation to the effect
be held liable. that the buyer be notified of the shipment of the goods covered in the bills of
lading; commercial invoices were issued by Koppel Industrial Car and
IN VIEW OF THE FOREGOING, the petition is GRANTED. The assailed
Equipment Company in the names of the purchasers and certificates of
decision of the Court of Appeals, affirming the decision of the Regional Trial
insurance were likewise issued in their names, or in the name of Koppel
Court is REVERSED and SET ASIDE. The complaint of the respondent
Industrial Car and Equipment Company but indorsed in blank and attached to
is DISMISSED. Costs against the respondent.
drafts drawn by Koppel Industrial Car and Equipment Company on the
SO ORDERED. purchasers, which were forwarded through foreign banks to local banks.
Samples of the bills of lading are hereto attached as Exhibits F-1, I-1, I-2 and
I-3. Bills of ladings, Exhibits I-1, I-2 and I-3, may equally have been employed,
but said Exhibits I-1, I-2 and I-3 have no connection with the transaction
covered by Exhibits B to G, inclusive. The purchasers secured the shipping
papers by arrangement with the banks, and thereupon received and cleared
the shipments. If the merchandise were of European origin, and if there was xxx xxx xxx
not sufficient time to forward the documents necessary for clearance, through
foreign banks to local banks, to the purchasers, the Koppel Industrial Car and That the parties hereby reserve the right to present additional evidence in
Equipment company did, in many cases, send the documents directly from support of their respective contentions.
Europe to plaintiff with instructions to turn these documents over to the
Manila, Philippines, December 26, 1939
purchasers. In many cases, where sales was effected on the basis of C. I. F.
(Sgd.) ROMAN OZAETA
Manila, duty paid, plaintiff advanced the sums required for the payment of the
Solicitor General
duty, and these sums, so advanced, were in every case reimbursed to plaintiff
(Sgd.) ANTONIO CAIZARES
by Koppel Industrial Car and Equipment Company. The price were payable by
Assistant Attorney
drafts agreed upon in each case and drawn by Koppel Industrial Car and
(Sgd.) E. P. REVILLA
Equipment Company on respective purchasers through local banks, and
Attorney for the Plaintiff
payments were made to the banks by the purchasers on presentation and
3rd Floor, Perez Samanillo Bldg., Manila
delivery to them of the above-mentioned shipping documents or copies
thereof. A sample of said drafts is hereto attached as Exhibit G. Plaintiff Both parties adduced some oral evidence in clarification of or addition to their
received by way of compensation a percentage of the profits realized on the agreed statement of facts. A preponderance of evidence has established,
above transactions as fixed in paragraph 6 of the plaintiffs contract with besides the facts thus stipulated, the following:
Koppel Industrial Car and Equipment Company, which contract is hereto
attached as Exhibit H, and suffered its corresponding share in the losses (a) The shares of stock of plaintiff corporation were and are all owned by
resulting from some of the transactions. Koppel Industries Car and Equipment Company of Pennsylvania, U.S.A.,
exceptive which were necessary to qualify the Board of Directors of said
That the total gross sales from January 1, 1929, up to and including December plaintiff corporation;
31, 1932, effected in the foregoing manner and under the above specified
conditions, amount to P 3,596,438.84. (b) In the transactions involved herein the plaintiff corporation acted as the
representative of Koppel Industrial Car and Equipment Company only, and not
V. That when a local sugar central was interested in the purchase of railway as the agent of both the latter company and the respective local purchasers
materials, machinery and supplies, it secured quotations from, and placed the plaintiffs principal witness, A.H. Bishop, its resident Vice-President, in his
corresponding orders with, the plaintiff in substantially the same manner as testimony invariably referred to Koppel Industrial Car and Equipment Co. as
outlined in paragraph IV of this stipulation, with the only difference that the our principal 9 t. s. n., pp. 10, 11, 12, 19, 75), except that at the bottom of
purchase orders which were agreed to by the central and the plaintiff are page 10 to the top of page 11, the witness stated that they had several
similar to the sample hereto attached and made a part hereof as Exhibit I. principal abroad but that our principal abroad was, for the years in question,
Typical samples of the bills of lading covering the herein transaction are hereto Koppel Industrial Car and Equipment Company, and on page 68, he testified
attached and made a part hereto as Exhibits I-1, I-2 and I-3. The value of the that what he actually said was . . . but our principal abroad and not our
sales carried out in the manner mentioned in this paragraph is P 133,964.98. principal abroad as to which it is very significant that neither this witness
nor any other gave the name of even a single other principal abroad of the
VI. That sometime in February, 1929, Miguel J. Ossorio, of Manila,
plaintiff corporation;
Philippines, placed an option with Koppel Industrial Car and Equipment
Company, through plaintiff, to purchase within three months a pair of Atlas- (c) The plaintiff corporation bore alone incidental expenses as, for instance,
Diesel Marine Engines. Koppel Industrial Car and Equipment Company cable expenses-not only those of its own cables but also those of its principal
purchased said Diesel Engines in Stockholm, Sweden, for $16,508.32. The (t.s.n., pp. 52, 53);
suppliers drew a draft for the amount of $16,508.32 on the Koppel Industrial
Car and Equipment Company, which paid the amount covered by the draft. (d) the plaintiffs share in the profits realized from the transactions in which it
Later, Miguel J. Ossorio definitely called the deal off, and as Koppel Industrial intervened was left virtually in the hands of Koppel Industrial Car and
Car and Equipment Company could not ship to or draw on said Mr. Miguel J. Equipment Company (t.s.n., p. 51);
Ossorio, it in turn drew another draft on plaintiff for the same amount at six
(e) Where drafts were not paid by the purchasers, the local banks were
months sight, with the understanding that Koppel Industrial Car and
instructed not to protest them but to refer them to plaintiff which was fully
Equipment Company would reimburse plaintiff when said engines were
empowered by Koppel Industrial Car and Equipment company to instruct the
disposed of. Plaintiff honored the draft and debited the said sum of $16,508.32
banks with regards to disposition of the drafts and documents (t.s.n., p. 50;
to merchandise account. The engines were left stored at Stockholm, Sweden.
Exhibit G);
On April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines,
was found and the same engines were sold to him for $21,000 (P42,000) C. I. (f) Where the goods were European origin, consular invoices, bill of lading,
F. Hongkong. The engines were shipped to Hongkong and a draft for $21,000 and, in general, the documents necessary for clearance were sent directly to
was drawn by Koppel Industrial Car and Equipment Company on Mr. Cesar plaintiff (t.s.n., p. 14);
Barrios. After the draft was fully paid by Mr. Barrios, Koppel Industrial Car and
Equipment Company reimbursed plaintiff with cost price of $16,508.32 and (g) If the plaintiff had in stock the merchandise desired by local buyers, it
credited it with $1,152.95 as its share of the profit on the transaction. Exhibits immediately filled the orders of such local buyers and made delivery in the
J and J-1 are herewith attached and made integral parts of this stipulation with Philippines without the necessity of cabling its principal in America either for
particular reference to paragraph VI hereof. price quotations or confirmation or rejection of that agreed upon between it
and the buyer (t.s.n., pp. 39-43);
VII. That plaintiffs share in the profits realized out of these transactions
described in paragraphs IV, V and VI hereof totaling P 3,772,403.82, amounts (h) Whenever the deliveries made by Koppel Industrial Car and Equipment
to P 132,201.30; and that plaintiff within the time provided by law returned the Company were incomplete or insufficient to fill the local buyers orders, plaintiff
aforesaid amount P 132,201.30 for the purpose of the commercial brokers 4 used to make good the deficiencies by deliveries from its own local stock, but
per cent tax and paid thereon the sum P 5,288.05 as such tax. in such cases it charged its principal only the actual cost of the merchandise
thus delivered by it from its stock and in such transactions plaintiff did not
VIII. That defendant demanded of the plaintiff the sum of P 64,122.51 as the realize any profit (t.s.n., pp. 53-54);
merchants sales tax of 1% per cent on the amount of P 3,772,403.82,
representing the total gross value of the sales mentioned in paragraphs IV, V (i) The contract of sale involved herein were all perfected in the Philippines.
and VI hereof, including the 25 percent surcharge for the late payment of the
said tax, which tax and surcharge were determined after the amount of P Those described in paragraph IV of the agreed statement of facts went through
5,288.05 mentioned in paragraph VI hereof was deducted. the following process: (1) When a local buyer was interested in the purchase
of railway materials, machinery, and supplies, it asked for price quotations
IX. That plaintiff, on October 30, 1936, paid under protest said sum of P from plaintiff; (2) Plaintiff then cabled for the quotation desired from Koppel
64,122.51 in order to avoid further penalties, levy and distraint proceedings. Industrial Car and Equipment Company; (3) Plaintiff, however, quoted to the
purchaser a selling price above the figures quoted by Koppel Industrial Car
X. That defendant, on November 10, 1936, overruled plaintiffs protest, and and Equipment Company; (4) On the basis of these quotations, orders were
defendant has failed and refused and still fails and refuses, notwithstanding placed by the local purchasers . . .
demands by plaintiff, to return to the plaintiff said sum of P 64,122.51 or any
part thereof. Those described in paragraph V of said agreed statement of facts were
transacted in substantially the same manner as outlined in paragraph IV.
As to the single transaction described in paragraph VI of the same agreed If any general rule can be laid down, in the present state of authority, it is that
statement of facts, discarding the Ossorio option which anyway was called off, a corporation will be looked upon as a legal entity as a general rule, and until
On April 1, 1930, a new local buyer, Mr. Cesar Barrios, of Iloilo, Philippines, sufficient reason to the contrary appears; but, when the notion of legal entity
was found and the same engines were sold to him for $21,000(P 42,000) C.I.F. is used to defeat public convenience, justify wrong, protect fraud, or defend
Hongkong. (Emphasis supplied.). crime, the law will regard the corporation as an association of persons. (1
Fletcher Cyclopedia of Corporation [Permanent Edition], pp. 135, 136; United
(j) Exhibit H contains the following paragraph: States vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255, per
Sanborn, J.)
It is clearly understood that the intent of this contract is that the broker shall
perform only the functions of a broker as set forth above, and shall not take In his second special defense appellee alleges that the plaintiff was and is in
possession of any of the materials or equipment applying to said orders or fact a branch or subsidiary of Koppel Industrial Car and Equipment Co., a
perform any acts or duties outside the scope of a broker; and in no sense shall Pennsylvania corporation not licensed to do business in the Philippines but
this contract be construed as granting to the broker the power to represent the actually doing business here through the plaintiff; that the said foreign
principal as its agent or to make commitments on its behalf. corporation holds 995 of the 1,000 shares of the plaintiffs capital stock, the
remaining five shares being held by the officers of the plaintiff herein in order
The Court of First Instance held for the defendant and dismissed plaintiffs
to permit the incorporation thereof and to enable its aforesaid officers to act as
complaint with costs to it.
directors of the plaintiff corporation; and that plaintiff was organized as a
Upon this appeal, seven errors are assigned to said judgment as follows: Philippine corporation for the purpose of evading the payment by its parent
foreign corporation of merchants sales tax on the transactions involved in this
1. That the court a quo erred in not holding that appellant is a domestic case and others of similar nature.
corporation distinct and separate from, and not a mere branch of Koppel
Industrial Car and Equipment Co.; By most courts the entity is normally regarded but is disregarded to prevent
injustice, or the distortion or hiding of the truth, or to let in a just defense. (1
2. the court a quo erred in ignoring the ruling of the Secretary of Finance, dated Fletcher, Cyclopedia of Corporation, Permanent Edition, pp. 139,140;
January 31, 1931, Exhibit M; emphasis supplied.)
3. the court a quo erred in not holding that a character of a broker is Another rule is that, when the corporation is the mere alter ego, or business
determined by the nature of the transaction and not by the basis or measure conduit of a person, it may be disregarded. (1 Fletcher, Cyclopedia of
of his compensation; Corporation, Permanent Edition, p. 136.)
4. The court a quo erred in not holding that appellant acted as a commercial Manifestly, the principle is the same whether the person be natural or
broker in the transactions covered under paragraph VI of the agreed statement artificial.
of facts;
A very numerous and growing class of cases wherein the corporate entity is
5. The court a quo erred in not holding that appellant acted as a commercial disregarded is that (it is so organized and controlled, and its affairs are so
broker in the transactions covered under paragraph v of the agreed statement conducted, as to make it merely an instrumentality, agency, conduit or adjunct
of facts; of another corporation). (1 Fletcher, Cyclopedia of Corporation, Permanent
ed., pp. 154, 155.)
6. The court a quo erred in not holding that appellant acted as a commercial
broker in the sole transaction covered under paragraph VI of the agreed While we recognize the legal principle that a corporation does not lose its entity
statement of facts; by the ownership of the bulk or even the whole of its stock, by another
corporation (Monongahela Co. vs. Pittsburg Co., 196 Pa., 25; 46 Atl., 99; 79
7. the court a quo erred in dismissing appellants complaint.
Am. St. Rep., 685) yet it is equally well settled and ignore corporate forms.
The lower court found and held that Koppel (Philippines), Inc. is a mere dummy (Colonial Trust Co. vs. Montello Brick Works, 172 Fed., 310.)
or brach (hechura) of Koppel industrial Car and Equipment Company. The
Where it appears that two business enterprises are owned, conducted and
lower court did not deny legal personality to Koppel (Philippines), Inc. for any
controlled by the same parties, both law and equity will, when necessary to
and all purposes, but in effect its conclusion was that, in the transactions
protect the rights of third persons, disregard the legal fiction that two
involved herein, the public interest and convenience would be defeated and
corporations are distinct entities, and treat them as identical. (Abney vs.
what would amount to a tax evasion perpetrated, unless resort is had to the
Belmont Country Club Properties, Inc., 279 Pac., 829.)
doctrine of disregard of the corporate fiction.
. . . the legal fiction of distinct corporate existence will be disregarded in a case
I.
where a corporation is so organized and controlled and its affairs are so
In its first assignment of error appellant submits that the trial court erred in not conducted, as to make it merely an instrumentality or adjunct of another
holding that it is a domestic corporation distinct and separate from and not a corporation. (Hanter vs. Baker Motor Vehicle Co., 190 Fed., 665.)
mere branch of Koppel Industrial Car and Equipment Company. It contends
In United States vs. Lehigh Valley R. Co. 9220 U.S., 257; 55 Law. ed., 458,
that its corporate existence as Philippine corporation can not be collaterally
464), the Supreme Court of the United States disregarded the artificial
attacked and that the Government is estopped from so doing.
personality of the subsidiary coal company in order to avoid that the parent
As stated above, the lower court did not deny legal personality to appellant for corporation, the Lehigh Valley R. Co., should be able, through the fiction of
any and all purposes, but held in effect that in the transaction involved in this that personality, to evade the prohibition of the Hepburn Act against the
case the public interest and convenience would be defeated and what would transportation by railroad companies of the articles and commodities
amount to a tax evasion perpetrated, unless resort is had to the doctrine of described therein.
disregard of the corporate fiction. In other words, in looking through the
Chief Justice White, speaking for the court, said:
corporate form to the ultimate person or corporation behind that form, in the
particular transactions which were involved in the case submitted to its . . . Coming to discharge this duty it follows, in view of the express prohibitions
determination and judgment, the court did so in order to prevent the of the commodities clause, it must be held that while the right of a railroad
contravention of the local internal revenue laws, and the perpetration of what company as a stockholder to use its stock ownership for the purpose of a bona
would amount to a tax evasion, inasmuch as it considered and in our fide separate administration of the affairs of a corporation in which it has a
opinion, correctly that appellant Koppel (Philippines), Inc. was a mere stock interest may not be denied, the use of such stock ownership in
branch or agency or dummy (hechura) of Koppel Industrial Car and substance for the purpose of destroying the entity of a producing, etc.,
Equipment Co. The court did not hold that the corporate personality of Koppel corporation, and commingling its affairs in administration with the affairs of the
(Philippines), Inc., would also be disregarded in other cases or for other railroad company, so as to make the two corporations virtually one, brings the
purposes. It would have had no power to so hold. The courts action in this railroad company so voluntarily acting as to such producing, etc., corporation
regard must be confined to the transactions involved in the case at bar for the within the prohibitions of the commodities clause. In other words, that by
purpose of adjudging the rights and liabilities of the parties in the case. They operation and effect of the commodities clause there is duty cast upon a
have no jurisdiction to do more. (1 Flethcer, Cyclopedia of Corporation, railroad company proposing to carry in interstate commerce the product of a
Permanent ed., p. 124, section 41.) producing, etc., corporation in which it has a stock interest, not to abuse such
power so as virtually to do by indirection that which the commodities clause
A leading and much cited case puts it as follows:
prohibits, a duty which plainly would be violated by the unnecessary said customers dishonored the drafts, and the fact that the American
commingling of the affairs of the producing company with its own, so as to corporation had previously advised said banks that plaintiff in those cases was
cause them to be one and inseparable. fully empowered to instruct (the banks) with regard to the disposition of the
drafts and documents (t.s.n., p. 50), in the absence of any other satisfactory
Corroborative authorities can be cited in support of the same proposition, explanation naturally give rise to the inference that plaintiff was a subsidiary,
which we deem unnecessary to mention here. branch or agency of the American concern, rather than an independent
corporation acting as a broker. For, without such positive explanation, this
From the facts herein above stated, as established by a preponderance of the
delegation of power is indicative of the relations between central and branch
evidence , particularly those narrated in paragraph (a), (b), (c), (d), (e),(f), (h),
offices of the same business enterprise, with the latter acting under
(i), and (j) after the agreed statement of facts, we find that, in so far as the
instructions already given by the former. Far from disclosing a real separation
sales involved herein are concerned, Koppel (Philippines), Inc., and Koppel
between the two entities, particularly in regard to the transactions in question,
Industrial Car and Equipment company are to all intents and purposes one
the evidence reveals such commingling and interlacing of their activities as to
and the same; or, to use another mode of expression, that, as regards those
render even incomprehensible certain accounting operations between them,
transactions, the former corporation is a mere branch, subsidiary or agency of
except upon the basis that the Philippine corporation was to all intents and
the latter. To our mind, this is conclusively borne out by the fact, among others,
purposes a mere subsidiary, branch, or agency of the American parent
that the amount of he so-called share in the profits of Koppel (Philippines),
entity. Only upon this basis can it be comprehended why it seems not to
Inc., was ultimately left to the sole, unbridled control of Koppel Industrial Car
matter at all how much profit would be allocated to plaintiff, or even that no
and Equipment Company. If, in their relations with each other, Koppel
profit at all be so allocated to it, at any given time or after any given period.
(Philippines), Inc., was considered and intended to function as a bona
fide separate corporation, we can not conceive how this arrangement could As already stated above, under the evidence the sales in the Philippines of the
have been adopted, for if there was any factor in its business as to which it railway materials, machinery and supplies imported here by Koppel Industrial
would in that case naturally have been opposed to being thus controlled, it Car and Equipment Company could have been as conveniently and efficiently
must have been precisely the amount of profit which it could endeavor and transacted and handled if not more so had said corporation merely
hope to earn. No group of businessmen could be expected to organize a established a branch or agency in the Philippines and obtained license to do
mercantile corporation the ultimate end of which could only be profit if business locally; and if it had done so and said sales had been effected by
the amount of that profit were to be subjected to such a unilateral control of such branch or agency, there seems to be no dispute that the 1 per cent
another corporation, unless indeed the former has previously been designed merchants sales tax then in force would have been collectible. So far as we
by the incorporators to serve as a mere subsidiary, branch or agency of the can discover, there would be only one, but very important, difference between
latter. Evidently, Koppel Industrial Car and Equipment Company made us of the two schemes a difference in tax liability on the ground that the sales
its ownership of the overwhelming majority 99.5% of the capital stock of were made through another and distinct corporation, as alleged broker, when
the local corporation to control the operations of the latter to such an extent we have seen that this latter corporation is virtually owned by the former, or
that it had the final say even as to how much should be allotted to said local that they practically one and the same, is to sanction a circumvention of our
entity in the so-called sharing in the profits. We can not overlook the fact that tax laws, and permit a tax evasion of no mean proportions and the consequent
in the practical working of corporate organizations of the class to which these commission of a grave injustice to the Government. Not only this; it would
two entities belong, the holder or holders of the controlling part of the capital allow the taxpayer to do by indirection what the tax laws prohibited to be done
stock of the corporation, particularly where the control is determined by the directly (non-payment of legitimate taxes), paraphrasing the United States
virtual ownership of the totality of the shares, dominate not only the selection Supreme Court in United States vs. Lehigh Valley R. Co., supra.
of the Board of Directors but, more often than not, also the action of that Board.
Applying this to the instant case, we can not conceive how the Philippine The act of one corporation crediting or debiting the other for certain items,
corporation could effectively go against the policies, decisions, and desires of expenses or even merchandise sold or disposed of, is perfectly compatible
the American corporation with regards to the scheme which was devised with the idea of the domestic entity being or acting as a mere branch, agency
through the instrumentality of the contract Exhibit H, as well as all the other or subsidiary of the parent organization. Such operations were called for any
details of the system which was adopted in order to avoid paying the 1 per way by the exigencies or convenience of the entire business. Indeed,
cent merchants sales tax. Neither can we conceive how the Philippine accounting operation such as these are inevitable, and have to be effected in
corporation could avoid following the directions of the American corporation the ordinary course of business enterprise extends its trade to another land
held 99.5 per cent of the capital stock of the Philippine corporation. In the through a branch office, or through another scheme amounting to the same
present instance, we note that Koppel (Philippines), Inc., was represented in thing.
the Philippines by its resident Vice-President. This fact necessarily leads to
the inference that the corporation had at least a Vice-President, and If plaintiff were to act as broker in the Philippines for any other corporation,
presumably also a President, who were not resident in the Philippines but in entity or person, distinct from Koppel Industrial Car and Equipment company,
America, where the parent corporation is domiciled. If Koppel (Philippines), an entirely different question will arise, which, however, we are not called
Inc., had been intended to operate as a regular domestic corporation in the upon, nor in a position, to decide.
Philippines, where it was formed, the record and the evidence do not disclose
As stated above, Exhibit H contains to the following paragraph:
any reason why all its officers should not reside and perform their functions in
the Philippines. It is clearly understood that the intent of this contract is that the broker shall
perform only the functions of a broker as set forth above, and shall not take
Other facts appearing from the evidence, and presently to be stated,
possession of any of the materials or equipment applying to said orders or
strengthen our conclusion, because they can only be explained if the local
perform any acts or duties outside the scope of a broker; and in no sense shall
entity is considered as a mere subsidiary, branch or agency of the parent
this contract be construed as granting to the broker the power to represent the
organization. Plaintiff charged the parent corporation no more than actual cost
principal as its agent or to make commitments on its behalf.
without profit whatsoever for merchandise allegedly of its own to
complete deficiencies of shipments made by said parent corporation (t.s.n., The foregoing paragraph, construed in the light of other facts noted elsewhere
pp. 53, 54) a fact which could not conceivably have been the case if plaintiff in this decision, betrays, we think a deliberate intent, through the medium of a
had acted in such transactions as an entirely independent entity doing scheme devised with great care, to avoid the payment of precisely the 1 per
business for profit, of course with the American concern. There has been cent merchants sales tax in force in the Philippines before, at the time of, and
no attempt even to explain, if the latter situation really obtained, why these two after, the making of the said contract Exhibit H. If this were to be allowed, the
corporations should have thus departed from the ordinary course of payment of a tax, which directly could not have been avoided, could be
business. Plaintiff was charged by the American corporation with the cost evaded by indirection, consideration being had of the aforementioned peculiar
even of the latters cable quotations from ought that appears from the relations between the said American and local corporations. Such evasion,
evidence, this can only be comprehended by considering plaintiff as such a involving as it would, a violation of the former Internal Revenue Law, would
subsidiary, branch or agency of the parent entity, in which case it would be even fall within the penal sanction of section 2741 of the Revised
perfectly understandable that for convenient accounting purposes and the Administrative Code. Which only goes to show the illegality of the whole
easy determination of the profits or losses of the parent corporations scheme. We are not here concerned with the impossibility of collecting the
Philippines should be charged against the Philippine office and set off against merchants sales tax, as a mere incidental consequence of transactions legal
its receipts, thus separating the accounts of said branch from those which the in themselves and innocent in their purpose. We are dealing with a scheme
central organization might have in other countries. The reference to plaintiff by the primary, not to say the sole, object of which the evasion of the payment of
local banks, under a standing instruction of the parent corporation, of unpaid such tax. It is this aim of the scheme that makes it illegal.
drafts drawn on Philippine customers by said parent corporation, whenever
We have said above that the contracts of sale involved herein were all precedent, simply as precedent, no longer rules. More important than anything
perfected in the Philippines. From the facts stipulated in paragraph IV of the else is that court should be right. . .
agreed statement of facts, it clearly appears that the Philippine purchasers had
to wait for Koppel Industrial Car and Equipment Company to communicate its III.
cost prices to Koppel (Philippines), Inc., were perfected in the Philippines. In
In the view we take of the case, and after the disposition made above of the
those cases where no such price quotations from the American corporation
first assignment of error, it becomes unnecessary to make any specific ruling
were needed, of course, the sales effected in those cases described in
on the third, fourth, fifth, sixth, and seventh assignments of error, all of which
paragraph V of the agreed statement of facts were, as expressed therein,
are necessarily disposed of adversely to appellants contention.
transacted in substantially the same manner as outlined in paragraph VI.
Even the single transaction described in paragraph VI of the agreed statement Wherefore, he judgment appealed from is affirmed, with costs of both
of facts was also perfected in the Philippines, because the contracting parties instances against appellant. So ordered.
were here and the consent of each was given here. While it is true that when Moran, C.J., Paras, Feria, Pablo, Bengzon, Briones, and Tuason, JJ., concur.
the contract was thus perfected in the Philippines the pair of Atlas-Diesel
Marine Engines were in Sweden and the agreement was to deliver them C.I.F.
Hongkong, the contract of sale being consensual perfected by mere
G.R. No. 182770 September 17, 2014
consent (Civil Code, article 1445; 10 Manresa, 4th ed., p. 11), the location
of the property and the place of delivery did not matter in the question of where WPM INTERNATIONAL TRADING, INC. and WARLITO P.
the agreement was perfected. MANLAPAZ, Petitioners,
vs.
In said paragraph VI, we read the following, as indicating where the contract
FE CORAZON LABAYEN, Respondent.
was perfected, considering beforehand that one party, Koppel
(Philippines),Inc., which in contemplation of law, as to that transaction, was DECISION
the same Koppel Industrial Car Equipment Co., was in the Philippines:
BRION, J.:
. . . on April 1, 1930, a new local buyer Mr. Cesar Barrios, of Iloilo, Philippines,
was found and the same engines were sold to him for $21,000 (P 42,000) We review in this petition for review on certiorari1 the decision2 dated
C.I.F. Hongkong . . . (Emphasis supplied.) September 28, 2007 and the resolution3 dated April 28, 2008 of the Court of
Appeals (CA) in CA-G.R. CV No. 68289 that affirmed with modification the
Under the revenue law in force when the sales in question took place, the decision4 of the Regional Trial Court (RTC), Branch 77, Quezon City.
merchants sales tax attached upon the happening of the respective sales of
the commodities, goods, wares, and merchandise involved, and we are The Factual Background
clearly of opinion that such sales took place upon the perfection of the
corresponding contracts. If such perfection took place in the Philippines, the The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems
merchants sales tax then in force here attached to the transactions. Consultants, a management and consultant firm. The petitioner, WPM
International Trading, Inc. (WPM), is a domestic corporation engaged in the
Even if we should consider that the Philippine buyers in the cases covered by restaurant business, while Warlito P. Manlapaz (Manlapaz) is its president.
paragraph IV and V of the agreed statement of facts, contracted with Koppel
Industrial Car and Equipment company, we will arrive at the same final result. Sometime in 1990, WPM entered into a management agreement with the
It can not be denied in that case that said American corporation contracted respondent, by virtue of which the respondent was authorized to operate,
through Koppel (Philippines), Inc., which was in the Philippines. The real manage and rehabilitate Quickbite, a restaurant owned and operated by WPM.
transaction in each case of sale, in final effect, began with an offer of sale from As part of her tasks, the respondent looked for a contractor who would
the seller, said American corporation, through its agent, the local corporation, renovate the two existing Quickbite outlets in Divisoria, Manila and Lepanto
of the railway materials, machinery, and supplies at the prices quoted, and St., University Belt, Manila. Pursuant to the agreement, the respondent
perfected or completed by the acceptance of that offer by the local buyers engaged the services of CLN Engineering Services (CLN) to renovate
when the latter, accepting those prices, placed their orders. The offer could Quickbite-Divisoria at the cost of 432,876.02.
not correctly be said to have been made by the local buyers when they asked
On June 13, 1990, Quickbite-Divisorias renovation was finally completed, and
for price quotations, for they could not rationally be taken to have bound
its possession was delivered to the respondent. However, out of the
themselves to buy before knowing the prices. And even if we should take into
432,876.02 renovation cost, only the amount of 320,000.00 was paid to
consideration the fact that the american corporation contracted, at least partly,
CLN, leaving a balance of 112,876.02.
through correspondence, according to article 54 of the Code of Commerce,
the respective contracts were completed from the time of the acceptance by Complaint for Sum of Money (Civil Case No. Q-90-7013)
the local buyers, which happened in the Philippines.
On October 19, 1990, CLN filed a complaint for sum of money and damages
Contracts executed through correspondence shall be completed from the time before the RTC against the respondent and Manlapaz, which was docketed
an answer is madeaccepting the proposition or the conditions by which the as Civil Case No. Q-90-7013. CLN later amended the complaint to exclude
latter may be modified. (Code of Commerce, article 54; emphasis supplied.) Manlapaz as defendant. The respondent was declared in default for her failure
to file a responsive pleading.
A contract is as a rule considered as entered into at the place where the place
it is performed. So where delivery is regarded as made at the place of The RTC, in its January 28, 1991 decision, found the respondent liable to pay
delivery. (13 C. J., 580-81, section 581.) CLN actual damages inthe amount of 112,876.02 with 12% interest per
annum from June 18,1990 (the date of first demand) and 20% of the amount
(In the consensual contract of sale delivery is not needed for its perfection.)
recoverable as attorneys fees.
II.
Complaint for Damages (Civil Case No. Q-92-13446)
Appellants second assignment of error can be summarily disposed of. It is
Thereafter, the respondent instituted a complaint for damages against the
clear that the ruling of the Secretary of Finance, Exhibit M, was not binding
petitioners, WPM and Manlapaz. The respondent alleged that in Civil Case
upon the trial court, much less upon this tribunal, since the duty and power of
No. Q-90-7013, she was adjudged liable for a contract that she entered into
interpreting the laws is primarily a function of the judiciary. (Ortua vs. Singson
for and in behalf of the petitioners, to which she should be entitled to
Encarnacion, 59 Phil., 440, 444.) Plaintiff cannot be excused from abiding by
reimbursement; that her participation in the management agreement was
this legal principle, nor can it properly be heard to say that it relied on the
limited only to introducing Manlapaz to Engineer Carmelo Neri (Neri), CLNs
Secretarys ruling and that, therefore, the courts should not now apply an
general manager; that it was actually Manlapaz and Neri who agreed on the
interpretation at variance therewith. The rule of stare decisis is undoubtedly
terms and conditions of the agreement; that when the complaint for damages
entitled to more respect in the construction of statutes than the interpretations
was filed against her, she was abroad; and that she did not know of the case
given by officers of the administrative branches of the government, even those
until she returned to the Philippines and received a copy of the decision of the
entrusted with the administration of particular laws. But this court, in Philippine
RTC.
Trust Company and Smith, Bell and Co. vs. Mitchell(59 Phil., 30, 36), said:
In her prayer, the respondent sought indemnification in the amount of
. . . The rule of stare decisis is entitled to respect. Stability in the law,
112,876.60 plus interest at 12%per annum from June 18, 1990 until fully
particularly in the business field, is desirable. But idolatrous reverence for
paid; and 20% of the award as attorneys fees. She likewise prayed that an The Issues
award of 100,000.00 as moral damages and 20,000.00 as attorneys fees
be paid to her. The core issues are: (1) whether WPM is a mere instrumentality, alter-ego,
and business conduit of Manlapaz; and (2) whether Manlapaz is jointly and
In his defense, Manlapaz claims that it was his fellow incorporator/director severally liable with WPM to the respondent for reimbursement, damages and
Edgar Alcansajewho was in-charge with the daily operations of the Quickbite interest.
outlets; that when Alcansaje left WPM, the remaining directors were compelled
to hire the respondent as manager; that the respondent had entered intothe Our Ruling
renovation agreement with CLN in her own personal capacity; that when he
We find merit in the petition.
found the amount quoted by CLN too high, he instructed the respondent to
either renegotiate for a lower price or to look for another contractor; that since We note, at the outset, that the question of whether a corporation is a mere
the respondent had exceeded her authority as agent of WPM, the renovation instrumentality or alter-ego of another is purely one of fact.5 This is also true
agreement should only bind her; and that since WPM has a separate and with respect to the question of whether the totality of the evidence adduced by
distinct personality, Manlapaz cannot be made liable for the respondents the respondentwarrants the application of the piercing the veil of corporate
claim. fiction doctrine.6
Manlapaz prayed for the dismissal of the complaint for lack of cause of action, Generally, factual findings of the lower courts are accorded the highest degree
and by way of counterclaim, for the award of 350,000.00 as moral and of respect, if not finality. When adopted and confirmed by the CA, these
exemplary damages and 50,000.00 attorneys fees. findings are final and conclusive and may not be reviewed on appeal,7save in
some recognized exceptions8 among others, when the judgment is based on
The RTC, through an order dated March 2, 1993 declared WPM in default for
misapprehension of facts.
its failure to file a responsive pleading.
We have reviewed the records and found that the application of the principle
The Decision of the RTC
of piercing the veil of corporate fiction is unwarranted in the present case.
In its decision, the RTC held that the respondent is entitled to indemnity from
On the Application ofthe Principle of Piercing the Veil of Corporate Fiction
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 The rule is settled that a corporation has a personality separate and distinct
such, WPM and Manlapaz are considered one and the same. The RTC also from the persons acting for and in its behalf and, in general, from the people
found that Manlapaz had complete control over WPM considering that he is its comprising it.9 Following this principle, the obligations incurred by the
chairman, president and treasurer at the same time. The RTC thus concluded corporate officers, orother persons acting as corporate agents, are the direct
that Manlapaz is liable in his personal capacity to reimburse the respondent accountabilities ofthe corporation they represent, and not theirs. Thus, a
the amount she paid to CLN inconnection with the renovation agreement. director, officer or employee of a corporation is generally not held personally
liable for obligations incurred by the corporation;10 it is only in exceptional
The petitioners appealed the RTC decision with the CA. There, they argued
circumstances that solidary liability will attach to them.
that in view of the respondents act of entering into a renovation agreement
with CLN in excess of her authority as WPMs agent, she is not entitled to Incidentally, the doctrine of piercing the corporate veil applies only in three (3)
indemnity for the amount she paid. Manlapaz also contended that by virtue basic instances, namely: a) when the separate and distinct corporate
ofWPMs separate and distinct personality, he cannot be madesolidarily liable personality defeats public convenience, as when the corporate fiction is used
with WPM. 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
The Ruling of the Court of Appeals
crime; or c) is used in alter ego cases, i.e., where a corporation is essentially
On September 28, 2007, the CA affirmed, with modification on the award of a farce, since it is a mere alter ego or business conduit of a person, or where
attorneys fees, the decision of the RTC.The CA held that the petitioners are the corporation is so organized and controlled and its affairs so conducted as
barred from raising as a defense the respondents alleged lack of authority to to make it merely aninstrumentality, agency, conduit or adjunct of another
enter into the renovation agreement in view of their tacit ratification of the corporation.11
contract.
Piercing the corporate veil based on the alter ego theory requires the
The CA likewise affirmed the RTC ruling that WPM and Manlapaz are one and concurrence of three elements, namely:
the same based on the following: (1) Manlapaz is the principal stockholder of
(1) Control, not mere majority or complete stock control, but complete
WPM; (2) Manlapaz had complete control over WPM because he concurrently
domination, not only of finances but of policy and business practice in respect
held the positions of president, chairman of the board and treasurer, in
to the transaction attacked so that the corporate entity as to this transaction
violation of the Corporation Code; (3) two of the four other stockholders of
had at the time no separate mind, will or existence of its own;
WPM are employed by Manlapaz either directly or indirectly; (4) Manlapazs
residence is the registered principal office of WPM; and (5) the acronym (2) Such control must have beenused by the defendant to commit fraud or
"WPM" was derived from Manlapazs initials. The CA applied the principle of wrong, to perpetuate the violation of a statutory or other positive legal duty, or
piercing the veil of corporate fiction and agreed with the RTC that Manlapaz dishonest and unjust act in contravention of plaintiffs legal right; and
cannot evade his liability by simply invoking WPMs separate and distinct
personality. (3) The aforesaid control and breach of duty must have proximately caused
the injury or unjust loss complained of.
After the CA's denial of their motion for reconsideration, the petitioners filed
the present petition for review on certiorari under Rule 45 of the Rules of Court. The absence of any ofthese elements prevents piercing the corporate veil.12

The Petition In the present case, the attendantcircumstances do not establish that WPM is
a mere alter ego of Manlapaz.
The petitioners submit that the CA gravely erred in sustaining the RTCs
application of the principle of piercing the veil of corporate fiction. They argue Aside from the fact that Manlapaz was the principal stockholder of WPM,
that the legal fiction of corporate personality could only be discarded upon records do not show that WPM was organized and controlled, and its affairs
clear and convincing proof that the corporation is being used as a shield to conducted in a manner that made it merely an instrumentality, agency, conduit
avoid liability or to commit a fraud. Since the respondent failed to establish that or adjunct ofManlapaz. As held in Martinez v. Court of Appeals,13 the mere
any of the circumstances that would warrant the piercing is present, Manlapaz ownership by a singlestockholder of even all or nearly all of the capital stocks
claims that he cannot be made solidarily liable with WPM to answerfor ofa corporation is not by itself a sufficient ground to disregard the separate
damages allegedly incurred by the respondent. corporate personality. To disregard the separate juridical personality of a
corporation, the wrongdoing must be clearly and convincingly established.14
The petitioners further argue that, assuming they may be held liable to
reimburse to the respondentthe amount she paid in Civil Case No. Q-90-7013, Likewise, the records of the case do not support the lower courts finding that
such liability is only limited to the amount of 112,876.02, representing the Manlapaz had control or domination over WPM or its finances. That Manlapaz
balance of the obligation to CLN, and should not include the twelve 12% concurrentlyheld the positions of president, chairman and treasurer, or that the
percent interest, damages and attorneys fees. Manlapazs residence is the registered principal office of WPM, are insufficient
considerations to prove that he had exercised absolutecontrol over WPM.
In this connection, we stress thatthe control necessary to invoke the petitioner Ricardo Tantongco was cited to appear and present his evidence.
instrumentality or alter ego rule is not majority or even complete stock control The contempt proceedings which petitioner seeks to stop are based on the
but such domination of finances, policies and practices that the controlled order of the Court of Industrial Relations, dated September 30, 1957, which
corporation has, so tospeak, no separate mind, will or existence of its own, reads as follows:
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 "It appearing' that the Order of this Court, in the above-entitled case, dated
and breach of duty must proximately cause the injury or unjust loss for which February 18, 1957 (folios 134-166), has become final and executory and the
the complaint is made. respondents have failed to comply with the same, the said respondents,
namely, the La Campana Starch and Coffee Factory or its manager or the
Here, the respondent failed to prove that Manlapaz, acting as president, had person who has charge of the management, and the administrator of the
absolute control over WPM.1wphi1 Even granting that he exercised a certain Estate of Ramon Tantongco are hereby ordered to comply with said Order,
degree of control over the finances, policies and practices of WPM, in view of within five days from receipt hereof, paritcularly the following, to wit:
his position as president, chairman and treasurer of the corporation, such
control does not necessarily warrant piercing the veil of corporate fiction since "(a) To reinstate the persons named in the said Order of February 18, 1957;
there was not a single proof that WPM was formed to defraud CLN or the "(b) To deposit the amount of P65.534.01 with this Court.
respondent, or that Manlapaz was guilty of bad faith or fraud.
"With respect to possible back wages from August 28, 1957 as mentioned in
On the contrary, the evidence establishes that CLN and the respondent knew the petition for contempt of August 30, 1957, the same shall first be
and acted on the knowledgethat they were dealing with WPM for the determined. "Failure to comply with this Order shall be directly dealt with
renovation of the latters restaurant, and not with Manlapaz. That WPM later accordingly."
reneged on its monetary obligation to CLN, resulting to the filing of a civil case
It would appear that petitioner Ricardo Tantongco failed to comply with said
for sum of money against the respondent, does not automatically indicate
order and so, as already stated, he was cited to appear and to adduce
fraud, in the absence of any proof to support it.
evidence on his behalf to show why he should not be punished for indirect
This Court also observed that the CA failed to demonstrate how the separate contempt.
and distinct personalityof WPM was used by Manlapaz to defeat the
The facts in this case may be briefly narrated thus: Sometime in June, 1951,
respondents right for reimbursement. Neither was there any showing that
members of the Kaisahan ng mga Manggagawa sa La Campana, a labor union
WPM attempted to avoid liability or had no property against which to proceed.
to which were affiliated workers in the La Campana Starch Factory and La
Since no harm could be said to have been proximately caused by Manlapaz Campana Coffee Factory, two separate entities but under one management,
for which the latter could be held solidarily liable with WPM, and considering presented demands for higher wages, and more privileges and benefits in
that there was no proof that WPM had insufficient funds, there was no connection with their work. When the management failed and refused to grant
sufficient justification for the RTC and the CA to have ruled that Manlapaz the demands, the Department of Labor intervened; but failing to settle the
should be held jointly and severally liable to the respondent for the amount she controversy, it certified the dispute to the Court of Industrial Relations on July
paid to CLN. Hence, only WPM is liable to indemnify the respondent. 17, 1951, where it was docketed as Case No. 584-V. On the theory that the
laborers presenting the demands were only the ones working in the coffee
Finally, we emphasize that the piercing of the veil of corporate fiction is factory, said company filed through the management a motion to dismiss
frowned upon and thus, must be done with caution.15 It can only be done if it claiming that inasmuch as there were only 14 of them in said factory, the Court
has been clearly established that the separate and distinct personality of the of Industrial Relations had no jurisdiction to entertain and decide the case. The
corporation is used to justify a wrong, protect fraud, or perpetrate a deception. motion was denied by the Court of Industrial Relations, which said:
The court must be certain that the corporate fiction was misused to such an
extent that injustice, fraud, or crime was committed against another, in "* * * There was only one management for the business of gawgaw and coffee
disregard of its rights; it cannot be presumed. with whom the laborers are dealing regarding their work. Hence, the filing of
action against Hie La Campana Starch and Coffee Factory is proper and
On the Award of Moral Damages justified."

On the award of moral damages, we find the same in order in view of WPM's The order of denial was appealed to this Tribunal through certiorari under G.
unjustified refusal to pay a just debt. Under Article 2220 of the New Civil R. No. Lr-5677. In disposing of the case, we held:
Code,16 moral damages may be awarded in cases of a breach of contract
where the defendant acted fraudulently or in bad faith or was guilty of gross "As to the first ground, petitioners obviously do not question the fact that the
negligence amounting to bad faith. number of employees of the La Campana Gaugau Packing involved in the
case is more than the jurisdictional number (31) required by law, but they
In the present case, when payment for the balance of the renovation cost was contend that the industrial court has no jurisdiction to try the case against La
demanded, WPM, instead of complying with its obligation, denied having Campana Coffee Factory, Inc. because the latter has allegedly only 14
authorized the respondent to contract in its behalf and accordingly refused to laborers and only five of these are members of respondent Kaisahan. This,
pay. Such cold refusal to pay a just debt amounts to a breach of contract in contention loses force when it is noted that, as found by the industrial court
bad faith, as contemplated by Article 2220. Hence, the CA's order to pay moral and this finding is conclusive upon us La Campana Gaugau Packing and La
damages was in order. Campana Coffee Factory Co. Inc., are operating-under one single
management, that is, one business though with two trade names'. True, the
WHEREFORE, in light of the foregoing, the decision dated September 28, coffee factory is a corporation, and, by legal fiction, an entity existing separate
2007 of the Court of Appeals in CA-G.R. CV No. 68289 is MODIFIED and.that and apart from the persona composing it, that is, Tan Tong and his family. But
petitioner Warlito P. Manlapaz is ABSOLVED from any liability under the it is settled this fiction of law, which has been introduced as a matter of
renovation agreement. convenience and to subserve the ends of justice cannot be invoked to further
an end subversive of that purpose.
SO ORDERED.
"* * * The attempt to make the two factories appear as two separate
businesses, when in reality they are but one is but a device to defeat the ends
[ G.R. No. L-13119, September 22, 1959 ] of the law (the Act governing capital and labor relations) and should not be
permitted to prevail"( La Campana Coffee Factory, et al. vs. Kaisahan ng mga
RICARDO TANTONGCO, PETITIONER, VS. KAISAHAN NG MGA Manggagawa, etc. et al., 93 Phil., 160; 49 Off. Gaz., [6] 2300.)
MANGGAGAWA SA LA CAMPANA (KKM) AND THE HONORABLE
COURT OF INDUSTRIAL RELATIONS, RESPONDENTS. Upon the return of the case to the Court of Industrial Relations, the latter
proceeded with the hearing. In the meantime incidental cases involving the
DECISION same parties came up and were filed before the Court of Industrial Relations
in the following cases:
MONTEMAYOR, J.:
Case No. 584 V(l) petition for contempt against the La Campana Starch and
This is a petition for certiorari and prohibition with prayer for issuance of a writ Coffee Factory for having employed 21 new laborers in violation of the order
of preliminary injunction to prohibit respondent Court of Industrial Relations of July 21, 1951, filed on July 25, 1951;
from proceeding with the hearing of the contempt proceedings for which Case No. 584-V(2) petition of La Campana for authority to dismiss Loreto
Bernabe, filed on July 25, 1951; not the claims contemplated by law to be submitted before the administrator.
Case No. 684-V(3) petition of Union to reinstate Bonifacio Calderon with In other words the death of Ramon Tantongco did not deprive the CIR of its
backpay, filed on August 3, 1951; jurisdiction over the cases aforementioned. Moreover, the money claims of the
Case No. 584-V(5) petition of Union to reinstate Marcelo Estrada and Exequiel laborers were merely incidental to their demands for reinstatement for having
Rapiz with back pay and to punish officials of the company for contempt, filed been unjustly dismissed, and for better working conditions.
on February 13, 1952; and
Case No. 584-V(6) petition of union for reinstement of Ibardolaza and seven Petitioner, however, contends that in G. R. No. L-5677, we "pierced the veil of
other member-laborers and to punish the officers of the company for contempt, corporate existence", and held that the La Campana Starch and Coffee
filed on July 15, 1953. Factory and its owner, Ramon Tantongco, were one; so that with the death of
Ramon, the La Campana entities ceased to exist, resulting in the loss of
These five cases were heard jointly. In the meantime Ramon Tantongco jurisdiction of the CIR to enforce its order against said entities. The reason we
supposed to be the owner and manager of the La Campana Starch Factory applied the so-called "piercing the veil of corporate existence" in G. R. No. L-
and the person in charge of the La Campana Coffee Factory died on May 16, 5677 was to avoid the technicality therein advanced in order to defeat the
1956. On motion of the labor union, the Court of Industrial Relations ordered jurisdiction of the CIR. We there found that although there were ostensibly,
the inclusion as party respondent of the administrator of the estate of Ramon two separate companies or entities, they were managed by the same person
Tantongco who was Ricardo Tantongco. or persons and the workers in both were used interchangeably so that in order
to determine whether or not the CIR had jurisdiction, the number of workers in
Ricardo Tantongco, as administrator, under a special appearance filed a both entities, not in only one, was to be considered.
motion to dismiss all the cases including the main case, that is to say, Cases
No. 584-(V) to 584-V(6), on the ground that said cases involved claims for However, we still believe that although the family of Ramon Tantongco was
sums of money and consequently should be filed before the probate court practically the owner of both the coffee factory and the starch factory,
having jurisdiction over the estate, pursuant to the provisions of Rule 3, nevertheless these entities are separate from the personality of Ramon. The
Section 21, and Rule 88, Section 1 of the Rules of Court. On August 23, 1956, coffee factory is a stock corporation and the shares are owned not only by
the Court of Industrial Relations denied the motion to dismiss and proceeded Ramon but also by others, such as petitioner Ricardo who not only is a
to hear the incidental cases against the La Campana entities. stockholder and director and treasurer but also the manager of the same
Furthermore, petitioner is now estopped from claiming that the two entities in
On June 12,1956, a partial decision was rendered in the main case No. 584- question and Ramon are one. Thus in Annex 3-CIR (par. 1 thereof) which is a
V, which partial decision was elevated to us and is still pending appeal. On complaint for injunction filed by La Campana Food Products, et al and La
February 18, 1957, the Court of Industrial Relations issued an order in Campana Starch Packing against the Consolidated Labor Organization of the
incidental Cases No. 584-V(D, V(2), V(3), V(5) and V(6), directing the Philippines, in Civil Case No. P-2482 in the Court of First Instance of Rizal,
"management of the respondent company and or the administrator of the petitioner admitted the existence and operation of said entities; in Annex 4 CIR
Estate of Ramon Tantongco", to reinstate the dismissed laborers mentioned where petitioner appeared as General Manager representing the two entities
therein with back wages. This order of February 18, 1957, as well as tlie order in its agreement with the La Campana Workers Union to resolve the dispute
directing the inclusion of the administrator of the estate of Ramon Tantongco between the two entities and the laborers in cases Nos. 1072-V and 1371-
as additional respondent in the incidental cases, and the order denying the ULP, the existence of the two entities appears to have been admitted; and in
petition of the administrator to dismiss said incidental cases were appealed to Annex 5-A-CIR, an answer to the complaint of La Campana Workers Union in
this tribunal through certiorari. The appeal, however, was summarily dismissed case No. 1471-ULP (Annex 5-CIR), petitioner admitted the allegation that said
by this Court in its resolution of June 12, 1957, as follows: two factories were in existence and doing business with petitioner as manager
of the same.
"This Court, deliberating upon the allegations of the petition filed in case L-
12355 (La Campana Starch Coffee Factory et al. vs. Kaisahan ng Mga In relation to the order of the CIR requiring petitioner to appear in the contempt
Manggagawa sa La Campana, KKM, et al.,) for review, on certiorari of the proceedings instituted against liim, petitioner contends that after he ceased to
decision of the Court of Industrial Relations referred to therein, and finding that be the administrator of the estate of Ramon Tantongco, he may not now be
there is no merit in the petition, Resolves to Dismiss the same." compelled to comply with the order of the court. In answer, it is enough to bear
in mind the jurisdiction and authority of the CIR as to compliance with and
The CIR order of February 18, 1957, in the incidental cases Nos. 584-V to
violations of its orders under section 6, Commonwealth Act No. 143, which we
V(6), having become final and executory, the laborers involved reported for
quote below:
work on August 28, 1957, but they were not admitted by the management.
Consequently, the union filed a petition dated August 30, 1957, to hold "* * * The Court or any Judge thereof shall have furthermore, all the inherent
respondents in said cases for contempt. After hearing the CIR issued the order powers of a court of justice provided in paragraph 5 of Rule 124 of the
of September 30, 1957, subject of this petition, ordering "the La Campana Supreme Court, as well as the power to punish direct and indirect contempt
Starch and Coffee Factory or its manager or the person who has charge of its as provided in Rule 64 of the same Court, under the same procedure and
management and the administrator of the estate of Ramon Tantongco" to penalties provided therein.
"reinstate the persons named in the order of February 18, 1957" and "to
deposit the amount of P65,534.01." For refusal or failure to comply with said "Any violation of any order, award, or decision of the Court of Industrial
order, petitioner Ricardo Tantongco was required to appear before the Relations shall, after such order, award or decision has become final,
attorney of the CIR in contempt proceedings. conclusive, and executory, constitute contempt of court: * * *

Petitioner now seeks to prohibit the CIR from proceeding with the trial for "In case the employer (or landlord) committing any such violation or contempt
contempt and to enjoin respondent CIR from enforcing its order of September is an association or corporation, the manager or the person who has the
30, 1957. Petitioner contends that upon the death of Ramon Tantongco, the charge of the management of the business of the association or corporation
claims of the laborers should have been dismissed and that said claims should and the officers or directors thereof who have ordered or authorized the
have been filed with the probate court having jurisdiction over the violation of contempt shall be liable. *** "
administration proceedings of the estate of Ramon Tantongco, pursuant to the
provisions of Rule 3, Section 21 of the Rules of Court and that the failure to In conclusion, we find and hold that the La Campana Starch and Food
file said claims with the administrator forever barred said claims as provided Products Company which stands for the La Campana Starch and Coffee
in Rule 87, Section 5 of the Rules of Court, especially after the assets of the Factory are entities distinct from the personality of Ramon Tantongco; that
estate had been distributed among the heirs, and petitioner had ceased to be after the death of Ramon these two entities continued to exist and to operate
the administrator of the estate. As already stated this same question was under the management of petitioner and that consequently he is the proper
raised by petitioner in G. R. No. L- 12355, entitled "La Campana Starch and person and official to which the orders of the CIR are addressed and who is in
Coffee Factory and Ricardo Tantongco, etc. vs. Kaisahan ng mga duty bound to comply with the same. We further find that the CIR acted within
Manggagawa sa La Campana (KKM)," which, as already stated, was its jurisdiction in issuing its order of September 30, 1957 and in requiring
summarily dismissed by this Court in a resolution dated June 12, 1957. petitioner to appear to give his evidence if any in relation with the contempt
Consequently, said question may not again be raised in the present case. proceedings instituted against him.
Furthermore, it may be recalled that both in the main case and in the incidental
In view of the foregoing, the petition for certiorari is hereby denied and the writ
cases No. 584-V to 584-V(6), Ramon Tantongco was never a party. The party
of preliminary injunction dissolved, with costs.
there was the La Campana Starch and Coffee Factory by which name it was
sought to designate the two entities La Campana Starch Packing and the La Paras, C. J., Bengzon, Padilla, Bautista Angela, Labrador, Concepcion,
Campana Coffee Factory. Naturally, the claims contained in said cases were Endencia, and Barrera, JJ., concur.