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FILIPINAS BROADCASTING NETWORK, INC., vs.

AGO MEDICAL AND EDUCATIONAL CENTER-BICOL


CHRISTIAN COLLEGE OF MEDICINE, (AMEC-BCCM) [G.R. No. 141994. January 17, 2005]

The Case
This petition for review assails the 4 January 1999 Decision [2] and 26 January 2000 Resolution of the Court of
[1]

Appeals in CA-G.R. CV No. 40151. The Court of Appeals affirmed with modification the 14 December 1992
Decision[3] of the Regional Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236. The Court of Appeals held
Filipinas Broadcasting Network, Inc. and its broadcasters Hermogenes Alegre and Carmelo Rima liable for libel and
ordered them to solidarily pay Ago Medical and Educational Center-Bicol Christian College of Medicine moral damages,
attorneys fees and costs of suit.

The Antecedents

Expos is a radio documentary[4] program hosted by Carmelo Mel Rima (Rima) and Hermogenes Jun Alegre (Alegre).
[5]
Expos is aired every morning over DZRC-AM which is owned by Filipinas Broadcasting Network, Inc. (FBNI). Expos
is heard over Legazpi City, the Albay municipalities and other Bicol areas. [6]
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various alleged complaints from students,
teachers and parents against Ago Medical and Educational Center-Bicol Christian College of Medicine (AMEC) and its
administrators. Claiming that the broadcasts were defamatory, AMEC and Angelita Ago (Ago), as Dean of AMECs
College of Medicine, filed a complaint for damages [7] against FBNI, Rima and Alegre on 27 February 1990. Quoted are
portions of the allegedly libelous broadcasts:

JUN ALEGRE:

Let us begin with the less burdensome: if you have children taking medical course at AMEC-BCCM, advise them to
pass all subjects because if they fail in any subject they will repeat their year level, taking up all subjects including
those they have passed already. Several students had approached me stating that they had consulted with the DECS
which told them that there is no such regulation. If [there] is no such regulation why is AMEC doing the same?

xxx

Second: Earlier AMEC students in Physical Therapy had complained that the course is not recognized by DECS.
xxx

Third: Students are required to take and pay for the subject even if the subject does not have an instructor - such
greed for money on the part of AMECs administration. Take the subject Anatomy: students would pay for the subject
upon enrolment because it is offered by the school. However there would be no instructor for such subject. Students
would be informed that course would be moved to a later date because the school is still searching for the appropriate
instructor.

xxx

It is a public knowledge that the Ago Medical and Educational Center has survived and has been surviving for the past
few years since its inception because of funds support from foreign foundations. If you will take a look at the AMEC
premises youll find out that the names of the buildings there are foreign soundings. There is a McDonald Hall. Why not
Jose Rizal or Bonifacio Hall? That is a very concrete and undeniable evidence that the support of foreign foundations for
AMEC is substantial, isnt it? With the report which is the basis of the expose in DZRC today, it would be very easy for
detractors and enemies of the Ago family to stop the flow of support of foreign foundations who assist the medical school
on the basis of the latters purpose. But if the purpose of the institution (AMEC) is to deceive students at cross purpose
with its reason for being it is possible for these foreign foundations to lift or suspend their donations temporarily. [8]

xxx
On the other hand, the administrators of AMEC-BCCM, AMEC Science High School and the AMEC-Institute of
Mass Communication in their effort to minimize expenses in terms of salary are absorbing or continues to accept
rejects. For example how many teachers in AMEC are former teachers of Aquinas University but were removed because
of immorality? Does it mean that the present administration of AMEC have the total definite moral foundation from
catholic administrator of Aquinas University. I will prove to you my friends, that AMEC is a dumping ground, garbage,
not merely of moral and physical misfits. Probably they only qualify in terms of intellect. The Dean of Student Affairs
of AMEC is Justita Lola, as the family name implies. She is too old to work, being an old woman. Is the AMEC
administration exploiting the very [e]nterprising or compromising and undemanding Lola? Could it be that AMEC is just
patiently making use of Dean Justita Lola were if she is very old. As in atmospheric situation zero visibility the plane
cannot land, meaning she is very old, low pay follows. By the way, Dean Justita Lola is also the chairman of the
committee on scholarship in AMEC. She had retired from Bicol University a long time ago but AMEC has patiently made
use of her.

xxx

MEL RIMA:

xxx My friends based on the expose, AMEC is a dumping ground for moral and physically misfit people. What does this
mean? Immoral and physically misfits as teachers.

May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that your are no longer fit to teach. You are
too old. As an aviation, your case is zero visibility. Dont insist.

xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the scholarship committee at that. The reason is
practical cost saving in salaries, because an old person is not fastidious, so long as she has money to buy the ingredient of
beetle juice. The elderly can get by thats why she (Lola) was taken in as Dean.

xxx

xxx On our end our task is to attend to the interests of students. It is likely that the students would be influenced by
evil. When they become members of society outside of campus will be liabilities rather than assets. What do you
expect from a doctor who while studying at AMEC is so much burdened with unreasonable imposition? What do you
expect from a student who aside from peculiar problems because not all students are rich in their struggle to improve their
social status are even more burdened with false regulations. xxx [9] (Emphasis supplied)

The complaint further alleged that AMEC is a reputable learning institution. With the supposed exposs, FBNI, Rima
and Alegre transmitted malicious imputations, and as such, destroyed plaintiffs (AMEC and Ago) reputation. AMEC and
Ago included FBNI as defendant for allegedly failing to exercise due diligence in the selection and supervision of its
employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an Answer [10] alleging that the
broadcasts against AMEC were fair and true. FBNI, Rima and Alegre claimed that they were plainly impelled by a sense
of public duty to report the goings-on in AMEC, [which is] an institution imbued with public interest.
Thereafter, trial ensued. During the presentation of the evidence for the defense, Atty. Edmundo Cea, collaborating
counsel of Atty. Lozares, filed a Motion to Dismiss [11] on FBNIs behalf. The trial court denied the motion to dismiss.
Consequently, FBNI filed a separate Answer claiming that it exercised due diligence in the selection and supervision of
Rima and Alegre. FBNI claimed that before hiring a broadcaster, the broadcaster should (1) file an application; (2) be
interviewed; and (3) undergo an apprenticeship and training program after passing the interview. FBNI likewise claimed
that it always reminds its broadcasters to observe truth, fairness and objectivity in their broadcasts and to refrain from
using libelous and indecent language. Moreover, FBNI requires all broadcasters to pass the Kapisanan ng mga Brodkaster
sa Pilipinas (KBP) accreditation test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision [12] finding FBNI and Alegre liable for libel except Rima.
The trial court held that the broadcasts are libelous per se. The trial court rejected the broadcasters claim that their
utterances were the result of straight reporting because it had no factual basis. The broadcasters did not even verify their
reports before airing them to show good faith. In holding FBNI liable for libel, the trial court found that FBNI failed to
exercise diligence in the selection and supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rimas only participation was when he agreed with
Alegres expos. The trial court found Rimas statement within the bounds of freedom of speech, expression, and of the
press. The dispositive portion of the decision reads:

WHEREFORE, premises considered, this court finds for the plaintiff. Considering the degree of damages caused by the
controversial utterances, which are not found by this court to be really very serious and damaging, and there being
no showing that indeed the enrollment of plaintiff school dropped, defendants Hermogenes Jun Alegre, Jr. and
Filipinas Broadcasting Network (owner of the radio station DZRC), are hereby jointly and severally ordered to pay
plaintiff Ago Medical and Educational Center-Bicol Christian College of Medicine (AMEC-BCCM) the amount
of P300,000.00 moral damages, plus P30,000.00 reimbursement of attorneys fees, and to pay the costs of suit.

SO ORDERED. [13] (Emphasis supplied)

Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago, on the other, appealed the decision
to the Court of Appeals. The Court of Appeals affirmed the trial courts judgment with modification. The appellate court
made Rima solidarily liable with FBNI and Alegre. The appellate court denied Agos claim for damages and attorneys fees
because the broadcasts were directed against AMEC, and not against her. The dispositive portion of the Court of Appeals
decision reads:

WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the modification that broadcaster Mel
Rima is SOLIDARILY ADJUDGED liable with FBN[I] and Hermo[g]enes Alegre.

SO ORDERED.[14]

FBNI, Rima and Alegre filed a motion for reconsideration which the Court of Appeals denied in its 26 January 2000
Resolution.
Hence, FBNI filed this petition.[15]

The Ruling of the Court of Appeals

The Court of Appeals upheld the trial courts ruling that the questioned broadcasts are libelous per se and that FBNI,
Rima and Alegre failed to overcome the legal presumption of malice. The Court of Appeals found Rima and Alegres claim
that they were actuated by their moral and social duty to inform the public of the students gripes as insufficient to justify
the utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the Court of Appeals ruled that the
broadcasts were made with reckless disregard as to whether they were true or false. The appellate court pointed out that
FBNI, Rima and Alegre failed to present in court any of the students who allegedly complained against AMEC. Rima and
Alegre merely gave a single name when asked to identify the students. According to the Court of Appeals, these
circumstances cast doubt on the veracity of the broadcasters claim that they were impelled by their moral and social duty
to inform the public about the students gripes.
The Court of Appeals found Rima also liable for libel since he remarked that (1) AMEC-BCCM is a dumping ground
for morally and physically misfit teachers; (2) AMEC obtained the services of Dean Justita Lola to minimize expenses on
its employees salaries; and (3) AMEC burdened the students with unreasonable imposition and false regulations. [16]
The Court of Appeals held that FBNI failed to exercise due diligence in the selection and supervision of its
employees for allowing Rima and Alegre to make the radio broadcasts without the proper KBP accreditation. The Court of
Appeals denied Agos claim for damages and attorneys fees because the libelous remarks were directed against AMEC,
and not against her. The Court of Appeals adjudged FBNI, Rima and Alegre solidarily liable to pay AMEC moral
damages, attorneys fees and costs of suit.
Issues

FBNI raises the following issues for resolution:

I. WHETHER THE BROADCASTS ARE LIBELOUS;

II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;

III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and

IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR PAYMENT OF MORAL
DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.

The Courts Ruling

We deny the petition.


This is a civil action for damages as a result of the allegedly defamatory remarks of Rima and Alegre against AMEC.
[17]
While AMEC did not point out clearly the legal basis for its complaint, a reading of the complaint reveals that AMECs
cause of action is based on Articles 30 and 33 of the Civil Code. Article 30 [18] authorizes a separate civil action to recover
civil liability arising from a criminal offense. On the other hand, Article 33 [19] particularly provides that the injured party
may bring a separate civil action for damages in cases of defamation, fraud, and physical injuries. AMEC also invokes
Article 19[20] of the Civil Code to justify its claim for damages. AMEC cites Articles 2176 [21] and 2180[22] of the Civil Code
to hold FBNI solidarily liable with Rima and Alegre.

I.
Whether the broadcasts are libelous

A libel[23] is a public and malicious imputation of a crime, or of a vice or defect, real or imaginary, or any act or
omission, condition, status, or circumstance tending to cause the dishonor, discredit, or contempt of a natural or juridical
person, or to blacken the memory of one who is dead. [24]
There is no question that the broadcasts were made public and imputed to AMEC defects or circumstances tending to
cause it dishonor, discredit and contempt. Rima and Alegres remarks such as greed for money on the part of AMECs
administrators; AMEC is a dumping ground, garbage of xxx moral and physical misfits; and AMEC students who
graduate will be liabilities rather than assets of the society are libelous per se. Taken as a whole, the broadcasts suggest
that AMEC is a money-making institution where physically and morally unfit teachers abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that Rima and Alegre were plainly
impelled by their civic duty to air the students gripes. FBNI alleges that there is no evidence that ill will or spite motivated
Rima and Alegre in making the broadcasts. FBNI further points out that Rima and Alegre exerted efforts to obtain AMECs
side and gave Ago the opportunity to defend AMEC and its administrators. FBNI concludes that since there is no malice,
there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious. [25] Rima and Alegre failed to show adequately their good
intention and justifiable motive in airing the supposed gripes of the students. As hosts of a documentary or public affairs
program, Rima and Alegre should have presented the public issues free from inaccurate and misleading information.
[26]
Hearing the students alleged complaints a month before the expos, [27] they had sufficient time to verify their sources
and information. However, Rima and Alegre hardly made a thorough investigation of the students alleged gripes. Neither
did they inquire about nor confirm the purported irregularities in AMEC from the Department of Education, Culture and
Sports. Alegre testified that he merely went to AMEC to verify his report from an alleged AMEC official who refused to
disclose any information. Alegre simply relied on the words of the students because they were many and not because there
is proof that what they are saying is true. [28] This plainly shows Rima and Alegres reckless disregard of whether their
report was true or not.
Contrary to FBNIs claim, the broadcasts were not the result of straight reporting. Significantly, some courts in the
United States apply the privilege of neutral reportage in libel cases involving matters of public interest or public figures.
Under this privilege, a republisher who accurately and disinterestedly reports certain defamatory statements made against
public figures is shielded from liability, regardless of the republishers subjective awareness of the truth or falsity of the
accusation.[29] Rima and Alegre cannot invoke the privilege of neutral reportage because unfounded comments abound in
the broadcasts. Moreover, there is no existing controversy involving AMEC when the broadcasts were made. The
privilege of neutral reportage applies where the defamed person is a public figure who is involved in an existing
controversy, and a party to that controversy makes the defamatory statement. [30]
However, FBNI argues vigorously that malice in law does not apply to this case. Citing Borjal v. Court of Appeals,
[31]
FBNI contends that the broadcasts fall within the coverage of qualifiedly privileged communications for being
commentaries on matters of public interest. Such being the case, AMEC should prove malice in fact or actual malice.
Since AMEC allegedly failed to prove actual malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the doctrine of fair comment, thus:

[F]air commentaries on matters of public interest are privileged and constitute a valid defense in an action for libel or
slander. The doctrine of fair comment means that while in general every discreditable imputation publicly made is deemed
false, because every man is presumed innocent until his guilt is judicially proved, and every false imputation is deemed
malicious, nevertheless, when the discreditable imputation is directed against a public person in his public capacity, it is
not necessarily actionable. In order that such discreditable imputation to a public official may be actionable, it must
either be a false allegation of fact or a comment based on a false supposition. If the comment is an expression of
opinion, based on established facts, then it is immaterial that the opinion happens to be mistaken, as long as it might
reasonably be inferred from the facts.[32] (Emphasis supplied)

True, AMEC is a private learning institution whose business of educating students is genuinely imbued with public
interest. The welfare of the youth in general and AMECs students in particular is a matter which the public has the right to
know. Thus, similar to the newspaper articles in Borjal, the subject broadcasts dealt with matters of public interest.
However, unlike inBorjal, the questioned broadcasts are not based on established facts. The record supports the
following findings of the trial court:

xxx Although defendants claim that they were motivated by consistent reports of students and parents against plaintiff,
yet, defendants have not presented in court, nor even gave name of a single student who made the complaint to them,
much less present written complaint or petition to that effect. To accept this defense of defendants is too dangerous
because it could easily give license to the media to malign people and establishments based on flimsy excuses that there
were reports to them although they could not satisfactorily establish it. Such laxity would encourage careless and
irresponsible broadcasting which is inimical to public interests.

Secondly, there is reason to believe that defendant radio broadcasters, contrary to the mandates of their duties, did not
verify and analyze the truth of the reports before they aired it, in order to prove that they are in good faith.

Alegre contended that plaintiff school had no permit and is not accredited to offer Physical Therapy courses. Yet, plaintiff
produced a certificate coming from DECS that as of Sept. 22, 1987 or more than 2 years before the controversial
broadcast, accreditation to offer Physical Therapy course had already been given the plaintiff, which certificate is signed
by no less than the Secretary of Education and Culture herself, Lourdes R. Quisumbing (Exh. C-rebuttal). Defendants
could have easily known this were they careful enough to verify. And yet, defendants were very categorical and sounded
too positive when they made the erroneous report that plaintiff had no permit to offer Physical Therapy courses which
they were offering.

The allegation that plaintiff was getting tremendous aids from foreign foundations like Mcdonald Foundation prove not to
be true also. The truth is there is no Mcdonald Foundation existing. Although a big building of plaintiff school was given
the name Mcdonald building, that was only in order to honor the first missionary in Bicol of plaintiffs religion, as
explained by Dr. Lita Ago. Contrary to the claim of defendants over the air, not a single centavo appears to be received by
plaintiff school from the aforementioned McDonald Foundation which does not exist.
Defendants did not even also bother to prove their claim, though denied by Dra. Ago, that when medical students fail in
one subject, they are made to repeat all the other subject[s], even those they have already passed, nor their claim that the
school charges laboratory fees even if there are no laboratories in the school. No evidence was presented to prove the
bases for these claims, at least in order to give semblance of good faith.

As for the allegation that plaintiff is the dumping ground for misfits, and immoral teachers, defendant[s] singled out Dean
Justita Lola who is said to be so old, with zero visibility already. Dean Lola testified in court last Jan. 21, 1991, and was
found to be 75 years old. xxx Even older people prove to be effective teachers like Supreme Court Justices who are still
very much in demand as law professors in their late years. Counsel for defendants is past 75 but is found by this court to
be still very sharp and effective. So is plaintiffs counsel.

Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally infirmed, but is still alert and docile.

The contention that plaintiffs graduates become liabilities rather than assets of our society is a mere conclusion. Being
from the place himself, this court is aware that majority of the medical graduates of plaintiffs pass the board examination
easily and become prosperous and responsible professionals. [33]

Had the comments been an expression of opinion based on established facts, it is immaterial that the opinion happens
to be mistaken, as long as it might reasonably be inferred from the facts. [34] However, the comments of Rima and Alegre
were not backed up by facts. Therefore, the broadcasts are not privileged and remain libelous per se.
The broadcasts also violate the Radio Code [35] of the Kapisanan ng mga Brodkaster sa Pilipinas, Ink. (Radio Code).
Item I(B) of the Radio Code provides:

B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES

1. x x x

4. Public affairs program shall present public issues free from personal bias, prejudice and inaccurate and
misleading information. x x x Furthermore, the station shall strive to present balanced discussion of issues.
x x x.

xxx

7. The station shall be responsible at all times in the supervision of public affairs, public issues and commentary
programs so that they conform to the provisions and standards of this code.

8. It shall be the responsibility of the newscaster, commentator, host and announcer to protect public interest,
general welfare and good order in the presentation of public affairs and public issues. [36](Emphasis supplied)

The broadcasts fail to meet the standards prescribed in the Radio Code, which lays down the code of ethical conduct
governing practitioners in the radio broadcast industry. The Radio Code is a voluntary code of conduct imposed by the
radio broadcast industry on its own members. The Radio Code is a public warranty by the radio broadcast industry that
radio broadcast practitioners are subject to a code by which their conduct are measured for lapses, liability and sanctions.
The public has a right to expect and demand that radio broadcast practitioners live up to the code of conduct of their
profession, just like other professionals. A professional code of conduct provides the standards for determining whether a
person has acted justly, honestly and with good faith in the exercise of his rights and performance of his duties as required
by Article 19[37] of the Civil Code. A professional code of conduct also provides the standards for determining whether a
person who willfully causes loss or injury to another has acted in a manner contrary to morals or good customs under
Article 21[38] of the Civil Code.
II.
Whether AMEC is entitled to moral damages

FBNI contends that AMEC is not entitled to moral damages because it is a corporation. [39]
A juridical person is generally not entitled to moral damages because, unlike a natural person, it cannot experience
physical suffering or such sentiments as wounded feelings, serious anxiety, mental anguish or moral shock. [40] The Court
of Appeals cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award of moral damages. However, the Courts
statement inMambulao that a corporation may have a good reputation which, if besmirched, may also be a ground for the
award of moral damages is an obiter dictum.[42]
Nevertheless, AMECs claim for moral damages falls under item 7 of Article 2219 [43] of the Civil Code. This provision
expressly authorizes the recovery of moral damages in cases of libel, slander or any other form of defamation. Article
2219(7) does not qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical person such as a
corporation can validly complain for libel or any other form of defamation and claim for moral damages. [44]
Moreover, where the broadcast is libelous per se, the law implies damages. [45] In such a case, evidence of an honest
mistake or the want of character or reputation of the party libeled goes only in mitigation of damages. [46] Neither in such a
case is the plaintiff required to introduce evidence of actual damages as a condition precedent to the recovery of some
damages.[47] In this case, the broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.
However, we find the award of P300,000 moral damages unreasonable. The record shows that even though the
broadcasts were libelous per se, AMEC has not suffered any substantial or material damage to its reputation. Therefore,
we reduce the award of moral damages from P300,000 to P150,000.

III.
Whether the award of attorneys fees is proper

FBNI contends that since AMEC is not entitled to moral damages, there is no basis for the award of attorneys fees.
FBNI adds that the instant case does not fall under the enumeration in Article 2208 [48] of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify satisfactorily its claim for attorneys fees.
AMEC did not adduce evidence to warrant the award of attorneys fees. Moreover, both the trial and appellate courts failed
to explicitly state in their respective decisions the rationale for the award of attorneys fees. [49] In Inter-Asia Investment
Industries, Inc. v. Court of Appeals,[50] we held that:

[I]t is an accepted doctrine that the award thereof as an item of damages is the exception rather than the rule, and counsels
fees are not to be awarded every time a party wins a suit. The power of the court to award attorneys fees under Article
2208 of the Civil Code demands factual, legal and equitable justification, without which the award is a conclusion
without a premise, its basis being improperly left to speculation and conjecture. In all events, the court must
explicitly state in the text of the decision, and not only in the decretal portion thereof, the legal reason for the award of
attorneys fees.[51](Emphasis supplied)

While it mentioned about the award of attorneys fees by stating that it lies within the discretion of the court and
depends upon the circumstances of each case, the Court of Appeals failed to point out any circumstance to justify the
award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre
for moral damages, attorneys fees
and costs of suit

FBNI contends that it is not solidarily liable with Rima and Alegre for the payment of damages and attorneys fees
because it exercised due diligence in the selection and supervision of its employees, particularly Rima and Alegre. FBNI
maintains that its broadcasters, including Rima and Alegre, undergo a very regimented process before they are allowed to
go on air. Those who apply for broadcaster are subjected to interviews, examinations and an apprenticeship program.
FBNI further argues that Alegres age and lack of training are irrelevant to his competence as a broadcaster. FBNI
points out that the minor deficiencies in the KBP accreditation of Rima and Alegre do not in any way prove that FBNI did
not exercise the diligence of a good father of a family in selecting and supervising them. Rimas accreditation lapsed due to
his non-payment of the KBP annual fees while Alegres accreditation card was delayed allegedly for reasons attributable to
the KBP Manila Office. FBNI claims that membership in the KBP is merely voluntary and not required by any law or
government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally liable for the tort which they
commit.[52] Joint tort feasors are all the persons who command, instigate, promote, encourage, advise, countenance,
cooperate in, aid or abet the commission of a tort, or who approve of it after it is done, if done for their benefit. [53] Thus,
AMEC correctly anchored its cause of action against FBNI on Articles 2176 and 2180 of the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily liable to pay for damages arising
from the libelous broadcasts. As stated by the Court of Appeals, recovery for defamatory statements published by radio or
television may be had from the owner of the station, a licensee, the operator of the station, or a person who procures, or
participates in, the making of the defamatory statements. [54] An employer and employee are solidarily liable for a
defamatory statement by the employee within the course and scope of his or her employment, at least when the employer
authorizes or ratifies the defamation.[55] In this case, Rima and Alegre were clearly performing their official duties as hosts
of FBNIs radio program Expos when they aired the broadcasts. FBNI neither alleged nor proved that Rima and Alegre
went beyond the scope of their work at that time. There was likewise no showing that FBNI did not authorize and ratify
the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due diligence in
the selection and supervision of its employees, particularly Rima and Alegre. FBNI merely showed that it exercised
diligence in the selection of its broadcasters without introducing any evidence to prove that it observed the same diligence
in the supervision of Rima and Alegre. FBNI did not show how it exercised diligence in supervising its broadcasters.
FBNIs alleged constant reminder to its broadcasters to observe truth, fairness and objectivity and to refrain from using
libelous and indecent language is not enough to prove due diligence in the supervision of its broadcasters. Adequate
training of the broadcasters on the industrys code of conduct, sufficient information on libel laws, and continuous
evaluation of the broadcasters performance are but a few of the many ways of showing diligence in the supervision of
broadcasters.
FBNI claims that it has taken all the precaution in the selection of Rima and Alegre as broadcasters, bearing in mind
their qualifications. However, no clear and convincing evidence shows that Rima and Alegre underwent FBNIs
regimented process of application. Furthermore, FBNI admits that Rima and Alegre had deficiencies in their KBP
accreditation,[56] which is one of FBNIs requirements before it hires a broadcaster. Significantly, membership in the KBP,
while voluntary, indicates the broadcasters strong commitment to observe the broadcast industrys rules and regulations.
Clearly, these circumstances show FBNIs lack of diligence in selecting and supervising Rima and Alegre. Hence, FBNI is
solidarily liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4 January 1999 and Resolution of 26
January 2000 of the Court of Appeals in CA-G.R. CV No. 40151 with the MODIFICATION that the award of moral
damages is reduced from P300,000 to P150,000 and the award of attorneys fees is deleted. Costs against petitioner.
SO ORDERED.
ALFREDO CHING v. THE SECRETARY OF JUSTICE (G. R. No. 164317, February 6, 2006)

Before the Court is a petition for review on certiorari of the Decision[1] of the Court of Appeals (CA) in CA-G.R. SP No.
57169 dismissing the petition for certiorari, prohibition and mandamus filed by petitioner Alfredo Ching, and its
Resolution[2] dated June 28, 2004 denying the motion for reconsideration thereof.

Petitioner was the Senior Vice-President of Philippine Blooming Mills, Inc. (PBMI). Sometime in September to October
1980, PBMI, through petitioner, applied with the Rizal Commercial Banking Corporation (respondent bank) for the
issuance of commercial letters of credit to finance its importation of assorted goods. [3]

Respondent bank approved the application, and irrevocable letters of credit were issued in favor of petitioner. The
goods were purchased and delivered in trust to PBMI. Petitioner signed 13 trust receipts [4] as surety, acknowledging
delivery of the following goods:

T/R Date Granted Maturity Date Description of Goods


Principal
Nos.
79.9425 M/T SDK
1845 12-05-80 03-05-81 P1,596,470.05
Brand Synthetic
Graphite Electrode
3,000 pcs. (15 bundles)
1853 12-08-80 03-06-81 P198,150.67
Calorized Lance Pipes
One Lot High Fired
1824 11-28-80 02-26-81 P707,879.71
Refractory Tundish
Bricks
5 cases spare parts for
1798 11-21-80 02-19-81 P835,526.25
CCM
200 pcs. ingot moulds
1808 11-21-80 02-19-81 P370,332.52
High Fired Refractory
2042 01-30-81 04-30-81 P469,669.29
Nozzle Bricks
Synthetic Graphite
1801 11-21-80 02-19-81 P2,001,715.17
Electrode [with] tapered
pitch filed nipples
3,000 pcs. (15 bundles
1857 12-09-80 03-09-81 P197,843.61
calorized lance pipes [)]
Spare parts for
1895 12-17-80 03-17-81 P67,652.04
Spectrophotometer
1911 12-22-80 03-20-81 P91,497.85 50 pcs. Ingot moulds
2041 01-30-81 04-30-81 P91,456.97 50 pcs. Ingot moulds
2099 02-10-81 05-11-81 P66,162.26 8 pcs. Kubota Rolls for
rolling mills
2100 02-10-81 05-12-81 P210,748.00 Spare parts for
Lacolaboratory
Equipment[5]

Under the receipts, petitioner agreed to hold the goods in trust for the said bank, with authority to sell but not by way of
conditional sale, pledge or otherwise; and in case such goods were sold, to turn over the proceeds thereof as soon as
received, to apply against the relative acceptances and payment of other indebtedness to respondent bank. In case the
goods remained unsold within the specified period, the goods were to be returned to respondent bank without any need of
demand. Thus, said goods, manufactured products or proceeds thereof, whether in the form of money or bills, receivables,
or accounts separate and capable of identification were respondent banks property.

When the trust receipts matured, petitioner failed to return the goods to respondent bank, or to return their value
amounting to P6,940,280.66 despite demands. Thus, the bank filed a criminal complaint for estafa[6] against petitioner in
the Office of the City Prosecutor of Manila.

After the requisite preliminary investigation, the City Prosecutor found probable cause estafa under Article 315,
paragraph 1(b) of the Revised Penal Code, in relation to Presidential Decree (P.D.) No. 115, otherwise known as the Trust
Receipts Law. Thirteen (13) Informations were filed against the petitioner before the Regional Trial Court (RTC)
of Manila. The cases were docketed as Criminal Cases No. 86-42169 to 86-42181, raffled to Branch 31 of said court.

Petitioner appealed the resolution of the City Prosecutor to the then Minister of Justice. The appeal was dismissed in a
Resolution[7] dated March 17, 1987, and petitioner moved for its reconsideration. On December 23, 1987, the Minister of
Justice granted the motion, thus reversing the previous resolution finding probable cause against petitioner. [8] The City
Prosecutor was ordered to move for the withdrawal of the Informations.

This time, respondent bank filed a motion for reconsideration, which, however, was denied on February 24, 1988.
[9]
The RTC, for its part, granted the Motion to Quash the Informations filed by petitioner on the ground that the material
allegations therein did not amount to estafa.[10]

In the meantime, the Court rendered judgment in Allied Banking Corporation v. Ordoez, [11] holding that the penal
provision of P.D. No. 115 encompasses any act violative of an obligation covered by the trust receipt; it is not limited to
transactions involving goods which are to be sold (retailed), reshipped, stored or processed as a component of a product
ultimately sold. The Court also ruled that the non-payment of the amount covered by a trust receipt is an act violative of
the obligation of the entrustee to pay.[12]

On February 27, 1995, respondent bank re-filed the criminal complaint for estafa against petitioner before the
Office of the City Prosecutor of Manila. The case was docketed as I.S. No. 95B-07614.
Preliminary investigation ensued. On December 8, 1995, the City Prosecutor ruled that there was no probable cause to
charge petitioner with violating P.D. No. 115, as petitioners liability was only civil, not criminal, having signed the trust
receipts as surety.[13] Respondent bank appealed the resolution to the Department of Justice (DOJ) via petition for review,
alleging that the City Prosecutor erred in ruling:

1. That there is no evidence to show that respondent participated in the


misappropriation of the goods subject of the trust receipts;
2. That the respondent is a mere surety of the trust receipts; and

3. That the liability of the respondent is only civil in nature. [14]

On July 13, 1999, the Secretary of Justice issued Resolution No. 250 [15] granting the petition and reversing the
assailed resolution of the City Prosecutor. According to the Justice Secretary, the petitioner, as Senior Vice-President of
PBMI, executed the 13 trust receipts and as such, was the one responsible for the offense. Thus, the execution of said
receipts is enough to indict the petitioner as the official responsible for violation of P.D. No. 115. The Justice Secretary
also declared that petitioner could not contend that P.D. No. 115 covers only goods ultimately destined for sale, as this
issue had already been settled in Allied Banking Corporation v. Ordoez, [16] where the Court ruled that P.D. No. 115 is not
limited to transactions in goods which are to be sold (retailed), reshipped, stored or processed as a component of a product
ultimately sold but covers failure to turn over the proceeds of the sale of entrusted goods, or to return said goods if unsold
or not otherwise disposed of in accordance with the terms of the trust receipts.

The Justice Secretary further stated that the respondent bound himself under the terms of the trust receipts not
only as a corporate official of PBMI but also as its surety; hence, he could be proceeded against in two (2) ways: first, as
surety as determined by the Supreme Court in its decision in Rizal Commercial Banking Corporation v. Court of Appeals;
[17]
and second, as the corporate official responsible for the offense under P.D. No. 115, via criminal
prosecution. Moreover, P.D. No. 115 explicitly allows the prosecution of corporate officers without prejudice to the civil
liabilities arising from the criminal offense. Thus, according to the Justice Secretary, following Rizal Commercial Banking
Corporation, the civil liability imposed is clearly separate and distinct from the criminal liability of the accused under P.D.
No. 115.

Conformably with the Resolution of the Secretary of Justice, the City Prosecutor filed 13 Informations against
petitioner for violation of P.D. No. 115 before the RTC of Manila. The cases were docketed as Criminal Cases No. 99-
178596 to 99-178608 and consolidated for trial before Branch 52 of said court. Petitioner filed a motion for
reconsideration, which the Secretary of Justice denied in a Resolution [18] dated January 17, 2000.

Petitioner then filed a petition for certiorari, prohibition and mandamus with the CA, assailing the resolutions of
the Secretary of Justice on the following grounds:
1. THE RESPONDENTS ARE ACTING WITH AN UNEVEN HAND AND IN FACT, ARE ACTING
OPPRESSIVELY AGAINST ALFREDO CHING WHEN THEY ALLOWED HIS PROSECUTION
DESPITE THE FACT THAT NO EVIDENCE HAD BEEN PRESENTED TO PROVE HIS
PARTICIPATION IN THE ALLEGED TRANSACTIONS.

2. THE RESPONDENT SECRETARY OF JUSTICE COMMITTED AN ACT IN GRAVE ABUSE OF


DISCRETION AND IN EXCESS OF HIS JURISDICTION WHEN THEY CONTINUED
PROSECUTION OF THE PETITIONER DESPITE THE LENGTH OF TIME INCURRED IN THE
TERMINATION OF THE PRELIMINARY INVESTIGATION THAT SHOULD JUSTIFY THE
DISMISSAL OF THE INSTANT CASE.

3. THE RESPONDENT SECRETARY OF JUSTICE AND ASSISTANT CITY PROSECUTOR ACTED


IN GRAVE ABUSE OF DISCRETION AMOUNTING TO AN EXCESS OF JURISDICTION WHEN
THEY CONTINUED THE PROSECUTION OF THE PETITIONER DESPITE LACK OF SUFFICIENT
BASIS.[19]

In his petition, petitioner incorporated a certification stating that as far as this Petition is concerned, no action or
proceeding in the Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or agency. It is
finally certified that if the affiant should learn that a similar action or proceeding has been filed or is pending before the
Supreme Court, the Court of Appeals, or different divisions thereof, of any other tribunal or agency, it hereby undertakes
to notify this Honorable Court within five (5) days from such notice. [20]

In its Comment on the petition, the Office of the Solicitor General alleged that -

A.
THE HONORABLE SECRETARY OF JUSTICE CORRECTLY RULED THAT PETITIONER
ALFREDO CHING IS THE OFFICER RESPONSIBLE FOR THE OFFENSE CHARGED AND THAT
THE ACTS OF PETITIONER FALL WITHIN THE AMBIT OF VIOLATION OF P.D. [No.] 115 IN
RELATION TO ARTICLE 315, PAR. 1(B) OF THE REVISED PENAL CODE.

B.

THERE IS NO MERIT IN PETITIONERS CONTENTION THAT EXCESSIVE DELAY HAS


MARRED THE CONDUCT OF THE PRELIMINARY INVESTIGATION OF THE CASE,
JUSTIFYING ITS DISMISSAL.

C.

THE PRESENT SPECIAL CIVIL ACTION FOR CERTIORARI, PROHIBITION AND MANDAMUS
IS NOT THE PROPER MODE OF REVIEW FROM THE RESOLUTION OF THE DEPARTMENT OF
JUSTICE. THE PRESENT PETITION MUST THEREFORE BE DISMISSED.[21]
On April 22, 2004, the CA rendered judgment dismissing the petition for lack of merit, and on procedural
grounds. On the procedural issue, it ruled that (a) the certification of non-forum shopping executed by petitioner and
incorporated in the petition was defective for failure to comply with the first two of the three-fold undertakings prescribed
in Rule 7, Section 5 of the Revised Rules of Civil Procedure; and (b) the petition for certiorari, prohibition and mandamus
was not the proper remedy of the petitioner.

On the merits of the petition, the CA ruled that the assailed resolutions of the Secretary of Justice were correctly issued for
the following reasons: (a) petitioner, being the Senior Vice-President of PBMI and the signatory to the trust receipts, is
criminally liable for violation of P.D. No. 115; (b) the issue raised by the petitioner, on whether he violated P.D. No. 115
by his actuations, had already been resolved and laid to rest in Allied Bank Corporation v. Ordoez;[22] and (c) petitioner
was estopped from raising the

City Prosecutors delay in the final disposition of the preliminary investigation because he failed to do so in the DOJ.

Thus, petitioner filed the instant petition, alleging that:

I
THE COURT OF APPEALS ERRED WHEN IT DISMISSED THE PETITION ON THE GROUND
THAT THE CERTIFICATION OF NON-FORUM SHOPPING INCORPORATED THEREIN WAS
DEFECTIVE.

II

THE COURT OF APPEALS ERRED WHEN IT RULED THAT NO GRAVE ABUSE OF DISCRETION
AMOUNTING TO LACK OR EXCESS OF JURISDICTION WAS COMMITTED BY THE
SECRETARY OF JUSTICE IN COMING OUT WITH THE ASSAILED RESOLUTIONS. [23]

The Court will delve into and resolve the issues seriatim.

The petitioner avers that the CA erred in dismissing his petition on a mere technicality. He claims that the rules of
procedure should be used to promote, not frustrate, substantial justice. He insists that the Rules of Court should be
construed liberally especially when, as in this case, his substantial rights are adversely affected; hence, the deficiency in
his certification of non-forum shopping should not result in the dismissal of his petition.

The Office of the Solicitor General (OSG) takes the opposite view, and asserts that indubitably, the certificate of
non-forum shopping incorporated in the petition before the CA is defective because it failed to disclose essential facts
about pending actions concerning similar issues and parties. It asserts that petitioners failure to comply with the Rules of
Court is fatal to his petition. The OSG cited Section 2, Rule 42, as well as the ruling of this Court in Melo v. Court of
Appeals.[24]
We agree with the ruling of the CA that the certification of non-forum shopping petitioner incorporated in his petition
before the appellate court is defective. The certification reads:

It is further certified that as far as this Petition is concerned, no action or proceeding in the
Supreme Court, the Court of Appeals or different divisions thereof, or any tribunal or agency.

It is finally certified that if the affiant should learn that a similar action or proceeding has been
filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, of any
other tribunal or agency, it hereby undertakes to notify this Honorable Court within five (5) days from
such notice.[25]

Under Section 1, second paragraph of Rule 65 of the Revised Rules of Court, the petition should be accompanied by a
sworn certification of non-forum shopping, as provided in the third paragraph of Section 3, Rule 46 of said Rules. The
latter provision reads in part:

SEC. 3. Contents and filing of petition; effect of non-compliance with requirements. The petition shall
contain the full names and actual addresses of all the petitioners and respondents, a concise statement of
the matters involved, the factual background of the case and the grounds relied upon for the relief prayed
for.

xxx

The petitioner shall also submit together with the petition a sworn certification that he has not theretofore
commenced any other action involving the same issues in the Supreme Court, the Court of Appeals or
different divisions thereof, or any other tribunal or agency; if there is such other action or proceeding, he
must state the status of the same; and if he should thereafter learn that a similar action or proceeding has
been filed or is pending before the Supreme Court, the Court of Appeals, or different divisions thereof, or
any other tribunal or agency, he undertakes to promptly inform the aforesaid courts and other tribunal or
agency thereof within five (5) days therefrom. xxx

Compliance with the certification against forum shopping is separate from and independent of the avoidance of
forum shopping itself. The requirement is mandatory. The failure of the petitioner to comply with the foregoing
requirement shall be sufficient ground for the dismissal of the petition without prejudice, unless otherwise provided. [26]

Indubitably, the first paragraph of petitioners certification is incomplete and unintelligible. Petitioner failed to certify that
he had not heretofore commenced any other action involving the same issues in the Supreme Court, the Court of Appeals
or the different divisions thereof or any other tribunal or agency as required by paragraph 4, Section 3, Rule 46 of the
Revised Rules of Court.
We agree with petitioners contention that the certification is designed to promote and facilitate the orderly administration
of justice, and therefore, should not be interpreted with absolute literalness. In his works on the Revised Rules of Civil
Procedure, former Supreme Court Justice Florenz Regalado states that, with respect to the contents of the certification
which the pleader may prepare, the rule of substantial compliance may be availed of. [27] However, there must be a special
circumstance or compelling reason which makes the strict application of the requirement clearly unjustified. The instant
petition has not alleged any such extraneous circumstance. Moreover, as worded, the certification cannot even be regarded
as substantial compliance with the procedural requirement. Thus, the CA was not informed whether, aside from the
petition before it, petitioner had commenced any other action involving the same issues in other tribunals.

On the merits of the petition, the CA ruled that the petitioner failed to establish that the Secretary of Justice committed
grave abuse of discretion in finding probable cause against the petitioner for violation of estafa under Article 315,
paragraph 1(b) of the Revised Penal Code, in relation to P.D. No. 115. Thus, the appellate court ratiocinated:
Be that as it may, even on the merits, the arguments advanced in support of the petition are not
persuasive enough to justify the desired conclusion that respondent Secretary of Justice gravely abused its
discretion in coming out with his assailed Resolutions. Petitioner posits that, except for his being the
Senior Vice-President of the PBMI, there is no iota of evidence that he was a participes crimines in
violating the trust receipts sued upon; and that his liability, if at all, is purely civil because he signed the
said trust receipts merely as a xxx surety and not as the entrustee. These assertions are, however, too dull
that they cannot even just dent the findings of the respondent Secretary, viz:

x x x it is apropos to quote section 13 of PD 115 which states in part, viz:

xxx If the violation or offense is committed by a corporation, partnership,


association or other judicial entities, the penalty provided for in this Decree shall be
imposed upon the directors, officers, employees or other officials or persons therein
responsible for the offense, without prejudice to the civil liabilities arising from the
criminal offense.

There is no dispute that it was the respondent, who as senior vice-president of PBM, executed the
thirteen (13) trust receipts. As such, the law points to him as the official responsible for the offense. Since
a corporation cannot be proceeded against criminally because it cannot commit crime in which personal
violence or malicious intent is required, criminal action is limited to the corporate agents guilty of an act
amounting to a crime and never against the corporation itself (West Coast Life Ins. Co. vs. Hurd, 27 Phil.
401; Times, [I]nc. v. Reyes, 39 SCRA 303). Thus, the execution by respondent of said receipts is enough
to indict him as the official responsible for violation of PD 115.

Parenthetically, respondent is estopped to still contend that PD 115 covers only goods which are
ultimately destined for sale and not goods, like those imported by PBM, for use in manufacture. This
issue has already been settled in the Allied Banking Corporation case, supra, where he was also a party,
when the Supreme Court ruled that PD 115 is not limited to transactions in goods which are to be sold
(retailed), reshipped, stored or processed as a component or a product ultimately sold but covers failure to
turn over the proceeds of the sale of entrusted goods, or to return said goods if unsold or disposed of in
accordance with the terms of the trust receipts.

In regard to the other assigned errors, we note that the respondent bound himself under the terms
of the trust receipts not only as a corporate official of PBM but also as its surety. It is evident that these
are two (2) capacities which do not exclude the other. Logically, he can be proceeded against in two (2)
ways: first, as surety as determined by the Supreme Court in its decision in RCBC vs. Court of Appeals,
178 SCRA 739; and, secondly, as the corporate official responsible for the offense under PD 115, the
present case is an appropriate remedy under our penal law.

Moreover, PD 115 explicitly allows the prosecution of corporate officers without prejudice to the
civil liabilities arising from the criminal offense thus, the civil liability imposed on respondent in RCBC
vs. Court of Appeals case is clearly separate and distinct from his criminal liability under PD 115. [28]
Petitioner asserts that the appellate courts ruling is erroneous because (a) the transaction between PBMI and respondent
bank is not a trust receipt transaction; (b) he entered into the transaction and was sued in his capacity as PBMI Senior
Vice-President; (c) he never received the goods as an entrustee for PBMI, hence, could not have committed any
dishonesty or abused the confidence of respondent bank; and (d) PBMI acquired the goods and used the same in operating
its machineries and equipment and not for resale.

The OSG, for its part, submits a contrary view, to wit:

34. Petitioner further claims that he is not a person responsible for the offense allegedly because
[b]eing charged as the Senior Vice-President of Philippine Blooming Mills (PBM), petitioner cannot be
held criminally liable as the transactions sued upon were clearly entered into in his capacity as an officer of
the corporation and that [h]e never received the goods as an entrustee for PBM as he never had or took
possession of the goods nor did he commit dishonesty nor abuse of confidence in transacting with RCBC.
Such argument is bereft of merit.

35. Petitioners being a Senior Vice-President of the Philippine Blooming Mills does not exculpate him from any
liability. Petitioners responsibility as the corporate official of PBM who received the goods in trust is
premised on Section 13 of P.D. No. 115, which provides:

Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale
of the goods, documents or instruments covered by a trust receipt to the extent of the amount
owing to the entruster or as appears in the trust receipt or to return said goods, documents or
instruments if they were not sold or disposed of in accordance with the terms of the trust receipt
shall constitute the crime of estafa, punishable under the provisions of Article Three hundred
and fifteen, paragraph one (b) of Act Numbered Three thousand eight hundred and fifteen, as
amended, otherwise known as the Revised Penal Code. If the violation or offense is
committed by a corporation, partnership, association or other juridical entities, the
penalty provided for in this Decree shall be imposed upon the directors, officers,
employees or other officials or persons therein responsible for the offense, without
prejudice to the civil liabilities arising from the criminal offense. (Emphasis supplied)
36. Petitioner having participated in the negotiations for the trust receipts and having received the
goods for PBM, it was inevitable that the petitioner is the proper corporate officer to be proceeded against
by virtue of the PBMs violation of P.D. No. 115.[29]

The ruling of the CA is correct.


In Mendoza-Arce v. Office of the Ombudsman (Visayas),[30] this Court held that the acts of a quasi-judicial officer may be
assailed by the aggrieved party via a petition forcertiorari and enjoined (a) when necessary to afford adequate protection
to the constitutional rights of the accused; (b) when necessary for the orderly administration of justice; (c) when the acts
of the officer are without or in excess of authority; (d) where the charges are manifestly false and motivated by the lust for
vengeance; and (e) when there is clearly no prima facie case against the accused.[31] The Court also declared that, if the
officer conducting a preliminary investigation (in that case, the Office of the Ombudsman) acts without or in excess of his
authority and resolves to file an Information despite the absence of probable cause, such act may be nullified by a writ
of certiorari.[32]

Indeed, under Section 4, Rule 112 of the 2000 Rules of Criminal Procedure, [33] the Information shall be prepared
by the Investigating Prosecutor against the respondent only if he or she finds probable cause to hold such respondent for
trial. The Investigating Prosecutor acts without or in excess of his authority under the Rule if the Information is filed
against the respondent despite absence of evidence showing probable cause therefor. [34] If the Secretary of Justice reverses
the Resolution of the Investigating Prosecutor who found no probable cause to hold the respondent for trial, and orders
such prosecutor to file the Information despite the absence of probable cause, the Secretary of Justice acts contrary to law,
without authority and/or in excess of authority. Such resolution may likewise be nullified in a petition for certiorari under
Rule 65 of the Revised Rules of Civil Procedure.[35]

A preliminary investigation, designed to secure the respondent against hasty, malicious and oppressive prosecution, is an
inquiry to determine whether (a) a crime has been committed; and (b) whether there is probable cause to believe that the
accused is guilty thereof. It is a means of discovering the person or persons who may be reasonably charged with a crime.
Probable cause need not be based on clear and convincing evidence of guilt, as the investigating officer acts upon
probable cause of reasonable belief. Probable cause implies probability of guilt and requires more than bare suspicion but
less than evidence which would justify a conviction. A finding of probable cause needs only to rest on evidence showing
that more likely than not, a crime has been committed by the suspect. [36]

However, while probable cause should be determined in a summary manner, there is a need to examine the evidence with
care to prevent material damage to a potential accuseds constitutional right to liberty and the guarantees of freedom and
fair play[37] and to protect the State from the burden of unnecessary expenses in prosecuting alleged offenses and holding
trials arising from false, fraudulent or groundless charges. [38]

In this case, petitioner failed to establish that the Secretary of Justice committed grave abuse of discretion in issuing the
assailed resolutions. Indeed, he acted in accord with law and the evidence.

Section 4 of P.D. No. 115 defines a trust receipt transaction, thus:


Section 4. What constitutes a trust receipt transaction. A trust receipt transaction, within the
meaning of this Decree, is any transaction by and between a person referred to in this Decree as the
entruster, and another person referred to in this Decree as entrustee, whereby the entruster, who owns or
holds absolute title or security interests over certain specified goods, documents or instruments, releases
the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a
signed document called a trust receipt wherein the entrustee binds himself to hold the designated goods,
documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods,
documents or instruments with the obligation to turn over to the entruster the proceeds thereof to the
extent of the amount owing to the entruster or as appears in the trust receipt or the goods, documents or
instruments themselvesif they are unsold or not otherwise disposed of, in accordance with the terms and
conditions specified in the trust receipt, or for other purposes substantially equivalent to any of the
following:

1. In case of goods or documents, (a) to sell the goods or procure their sale; or (b) to manufacture
or process the goods with the purpose of ultimate sale; Provided, That, in the case of goods delivered
under trust receipt for the purpose of manufacturing or processing before its ultimate sale, the entruster
shall retain its title over the goods whether in its original or processed form until the entrustee has
complied fully with his obligation under the trust receipt; or (c) to load, unload, ship or otherwise deal
with them in a manner preliminary or necessary to their sale; or

2. In the case of instruments a) to sell or procure their sale or exchange; or b) to deliver them to a
principal; or c) to effect the consummation of some transactions involving delivery to a depository or
register; or d) to effect their presentation, collection or renewal.

The sale of goods, documents or instruments by a person in the business of selling goods,
documents or instruments for profit who, at the outset of the transaction, has, as against the buyer, general
property rights in such goods, documents or instruments, or who sells the same to the buyer on credit,
retaining title or other interest as security for the payment of the purchase price, does not constitute a trust
receipt transaction and is outside the purview and coverage of this Decree.

An entrustee is one having or taking possession of goods, documents or instruments under a trust receipt
transaction, and any successor in interest of such person for the purpose of payment specified in the trust receipt
agreement.[39] The entrustee is obliged to: (1) hold the goods, documents or instruments in trust for the entruster and shall
dispose of them strictly in accordance with the terms and conditions of the trust receipt; (2) receive the proceeds in trust
for the entruster and turn over the same to the entruster to the extent of the amount owing to the entruster or as appears on
the trust receipt; (3) insure the goods for their total value against loss from fire, theft, pilferage or other casualties; (4)
keep said goods or proceeds thereof whether in money or whatever form, separate and capable of identification as
property of the entruster; (5) return the goods, documents or instruments in the event of non-sale or upon demand of the
entruster; and (6) observe all other terms and conditions of the trust receipt not contrary to the provisions of the decree. [40]

The entruster shall be entitled to the proceeds from the sale of the goods, documents or instruments released under a trust
receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt, or to the return
of the goods, documents or instruments in case of non-sale, and to the enforcement of all other rights conferred on him in
the trust receipt; provided, such are not contrary to the provisions of the document. [41]
In the case at bar, the transaction between petitioner and respondent bank falls under the trust receipt transactions
envisaged in P.D. No. 115. Respondent bank imported the goods and entrusted the same to PBMI under the trust receipts
signed by petitioner, as entrustee, with the bank as entruster. The agreement was as follows:

And in consideration thereof, I/we hereby agree to hold said goods in trust for the said BANK as
its property with liberty to sell the same within ____days from the date of the execution of this Trust
Receipt and for the Banks account, but without authority to make any other disposition whatsoever of the
said goods or any part thereof (or the proceeds) either by way of conditional sale, pledge or otherwise.

I/we agree to keep the said goods insured to their full value against loss from fire, theft, pilferage
or other casualties as directed by the BANK, the sum insured to be payable in case of loss to the BANK,
with the understanding that the BANK is, not to be chargeable with the storage premium or insurance or
any other expenses incurred on said goods.

In case of sale, I/we further agree to turn over the proceeds thereof as soon as received to the
BANK, to apply against the relative acceptances (as described above) and for the payment of any other
indebtedness of mine/ours to the BANK. In case of non-sale within the period specified herein, I/we agree
to return the goods under this Trust Receipt to the BANK without any need of demand.

I/we agree to keep the said goods, manufactured products or proceeds thereof, whether in the
form of money or bills, receivables, or accounts separate and capable of identification as property of the
BANK.[42]

It must be stressed that P.D. No. 115 is a declaration by legislative authority that, as a matter of public policy, the
failure of person to turn over the proceeds of the sale of the goods covered by a trust receipt or to return said goods, if not
sold, is a public nuisance to be abated by the imposition of penal sanctions. [43]

The Court likewise rules that the issue of whether P.D. No. 115 encompasses transactions involving goods
procured as a component of a product ultimately sold has been resolved in the affirmative in Allied Banking Corporation
v. Ordoez.[44] The law applies to goods used by the entrustee in the operation of its machineries and equipment. The non-
payment of the amount covered by the trust receipts or the non-return of the goods covered by the receipts, if not sold or
otherwise not disposed of, violate the entrustees obligation to pay the amount or to return the goods to the entruster.

In Colinares v. Court of Appeals,[45] the Court declared that there are two possible situations in a trust receipt
transaction. The first is covered by the provision which refers to money received under the obligation involving the duty
to deliver it (entregarla) to the owner of the merchandise sold. The second is covered by the provision which refers
to merchandise received under the obligation to return it (devolvera) to the owner.[46] Thus, failure of the entrustee to turn
over the proceeds of the sale of the goods covered by the trust receipts to the entruster or to return said goods if they were
not disposed of in accordance with the terms of the trust receipt is a crime under P.D. No. 115, without need of proving
intent to defraud. The law punishes dishonesty and abuse of confidence in the handling of money or goods to the prejudice
of the entruster, regardless of whether the latter is the owner or not. A mere failure to deliver the proceeds of the sale of
the goods, if not sold, constitutes a criminal offense that causes prejudice, not only to another, but more to the public
interest.[47]
The Court rules that although petitioner signed the trust receipts merely as Senior Vice-President of PBMI and
had no physical possession of the goods, he cannot avoid prosecution for violation of P.D. No. 115.

The penalty clause of the law, Section 13 of P.D. No. 115 reads:

Section 13. Penalty Clause. The failure of an entrustee to turn over the proceeds of the sale of the
goods, documents or instruments covered by a trust receipt to the extent of the amount owing to the
entruster or as appears in the trust receipt or to return said goods, documents or instruments if they were
not sold or disposed of in accordance with the terms of the trust receipt shall constitute the crime
of estafa, punishable under the provisions of Article Three hundred and fifteen, paragraph one (b) of Act
Numbered Three thousand eight hundred and fifteen, as amended, otherwise known as the Revised Penal
Code. If the violation or offense is committed by a corporation, partnership, association or other juridical
entities, the penalty provided for in this Decree shall be imposed upon the directors, officers, employees
or other officials or persons therein responsible for the offense, without prejudice to the civil liabilities
arising from the criminal offense.

The crime defined in P.D. No. 115 is malum prohibitum but is classified as estafa under paragraph 1(b), Article
315 of the Revised Penal Code, or estafa with abuse of confidence. It may be committed by a corporation or other
juridical entity or by natural persons. However, the penalty for the crime is imprisonment for the periods provided in said
Article 315, which reads:

ARTICLE 315. Swindling (estafa). Any person who shall defraud another by any of the means
mentioned hereinbelow shall be punished by:

1st. The penalty of prision correccional in its maximum period to prision mayor in its minimum
period, if the amount of the fraud is over 12,000 pesos but does not exceed 22,000 pesos; and if such
amount exceeds the latter sum, the penalty provided in this paragraph shall be imposed in its maximum
period, adding one year for each additional 10,000 pesos; but the total penalty which may be imposed
shall not exceed twenty years. In such cases, and in connection with the accessory penalties which may be
imposed and for the purpose of the other provisions of this Code, the penalty shall be termed prision
mayor or reclusion temporal, as the case may be;

2nd. The penalty of prision correccional in its minimum and medium periods, if the amount of the
fraud is over 6,000 pesos but does not exceed 12,000 pesos;

3rd. The penalty of arresto mayor in its maximum period to prision correccional in its minimum
period, if such amount is over 200 pesos but does not exceed 6,000 pesos; and

4th. By arresto mayor in its medium and maximum periods, if such amount does not exceed 200
pesos, provided that in the four cases mentioned, the fraud be committed by any of the following means;
xxx
Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or other
officers or persons responsible for the offense, without prejudice to the civil liabilities of such corporation and/or board of
directors, officers, or other officials or employees responsible for the offense. The rationale is that such officers or
employees are vested with the authority and responsibility to devise means necessary to ensure compliance with the law
and, if they fail to do so, are held criminally accountable; thus, they have a responsible share in the violations of the law.
[48]

If the crime is committed by a corporation or other juridical entity, the directors, officers, employees or other
officers thereof responsible for the offense shall be charged and penalized for the crime, precisely because of the nature of
the crime and the penalty therefor. A corporation cannot be arrested and imprisoned; hence, cannot be penalized for a
crime punishable by imprisonment. [49] However, a corporation may be charged and prosecuted for a crime if the imposable
penalty is fine. Even if the statute prescribes both fine and imprisonment as penalty, a corporation may be prosecuted and,
if found guilty, may be fined.[50]

A crime is the doing of that which the penal code forbids to be done, or omitting to do what it commands. A
necessary part of the definition of every crime is the designation of the author of the crime upon whom the penalty is to be
inflicted. When a criminal statute designates an act of a corporation or a crime and prescribes punishment therefor, it
creates a criminal offense which, otherwise, would not exist and such can be
committed only by the corporation. But when a penal statute does not
expressly apply to corporations, it does not create an offense for which a corporation may be punished. On the other hand,
if the State, by statute, defines a crime that may be committed by a corporation but prescribes the penalty therefor to be
suffered by the officers, directors, or employees of such corporation or other persons responsible for the offense, only such
individuals will suffer such penalty. [51] Corporate officers or employees, through whose act, default or omission the
corporation commits a crime, are themselves individually guilty of the crime. [52]

The principle applies whether or not the crime requires the consciousness of wrongdoing. It applies to those
corporate agents who themselves commit the crime and to those, who, by virtue of their managerial positions or other
similar relation to the corporation, could be deemed responsible for its commission, if by virtue of their relationship to the
corporation, they had the power to prevent the act. [53] Moreover, all parties active in promoting a crime, whether agents or
not, are principals.[54] Whether such officers or employees are benefited by their delictual acts is not a touchstone of their
criminal liability. Benefit is not an operative fact.

In this case, petitioner signed the trust receipts in question. He cannot, thus, hide behind the cloak of the separate
corporate personality of PBMI. In the words of Chief Justice Earl Warren, a corporate officer cannot protect himself
behind a corporation where he is the actual, present and efficient actor. [55]

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED for lack of merit. Costs against the petitioner.

SO ORDERED.
KUKAN INTERNATIONAL CORPORATION v. HON. AMOR REYES (G.R. No. 182729, September 29, 2010)

The Case

This Petition for Review on Certiorari under Rule 45 seeks to nullify and reverse the January 23, 2008 Decision [1] and the
April 16, 2008 Resolution[2] rendered by the Court of Appeals (CA) in CA-G.R. SP No. 100152.

The assailed CA decision affirmed the March 12, 2007 [3] and June 7, 2007[4] Orders of the Regional Trial Court (RTC) of
Manila, Branch 21, in Civil Case No. 99-93173, entitled Romeo M. Morales, doing business under the name and style RM
Morales Trophies and Plaques v. Kukan, Inc. In the said orders, the RTC disregarded the separate corporate identities of
Kukan, Inc. and Kukan International Corporation and declared them to be one and the same entity. Accordingly, the RTC
held Kukan International Corporation, albeit not impleaded in the underlying complaint of Romeo M. Morales, liable for
the judgment award decreed in a Decision dated November 28, 2002 [5] in favor of Morales and against Kukan, Inc.

The Facts

Sometime in March 1998, Kukan, Inc. conducted a bidding for the supply and installation of signages in a
building being constructed in Makati City. Morales tendered the winning bid and was awarded the PhP 5 million contract.
Some of the items in the project award were later excluded resulting in the corresponding reduction of the contract price
to PhP 3,388,502. Despite his compliance with his contractual undertakings, Morales was only paid the amount of PhP
1,976,371.07, leaving a balance of PhP 1,412,130.93, which Kukan, Inc. refused to pay despite demands. Shortchanged,
Morales filed a Complaint[6] with the RTC against Kukan, Inc. for a sum of money, the case docketed as Civil Case No.
99-93173 and eventually raffled to Branch 17 of the court.

Following the joinder of issues after Kukan, Inc. filed an answer with counterclaim, trial ensued. However,
starting November 2000, Kukan, Inc. no longer appeared and participated in the proceedings before the trial court,
prompting the RTC to declare Kukan, Inc. in default and paving the way for Morales to present his evidence ex parte.

On November 28, 2002, the RTC rendered a Decision finding for Morales and against Kukan, Inc., disposing as
follows:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by
preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, ordering Kukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN HUNDRED
TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum from February 17,
1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS, (P20,000.00) as reasonable attorneys fees; and
4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX CENTAVOS
(P7,960.06) as litigation expenses.

For lack of factual foundation, the counterclaim is DISMISSED.


IT IS SO ORDERED.[7]

After the above decision became final and executory, Morales moved for and secured a writ of execution [8] against Kukan,
Inc. The sheriff then levied upon various personal properties found at what was supposed to be Kukan, Inc.s office at Unit
2205, 88 Corporate Center, Salcedo Village, Makati City. Alleging that it owned the properties thus levied and that it was
a different corporation from Kukan, Inc., Kukan International Corporation (KIC) filed an Affidavit of Third-Party Claim.
Notably, KIC was incorporated in August 2000, or shortly after Kukan, Inc. had stopped participating in Civil Case No.
99-93173.

In reaction to the third party claim, Morales interposed an Omnibus Motion dated April 30, 2003. In it, Morales prayed,
applying the principle of piercing the veil of corporate fiction, that an order be issued for the satisfaction of the judgment
debt of Kukan, Inc. with the properties under the name or in the possession of KIC, it being alleged that both corporations
are but one and the same entity. KIC opposed Morales motion. By Order of May 29, 2003[9] as reiterated in a subsequent
order, the court denied the omnibus motion.
In a bid to establish the link between KIC and Kukan, Inc., and thus determine the true relationship between the two,
Morales filed a Motion for Examination of Judgment Debtors dated May 4, 2005. In this motion Morales sought that
subponae be issued against the primary stockholders of Kukan, Inc., among them Michael Chan, a.k.a. Chan Kai Kit. This
too was denied by the trial court in an Order dated May 24, 2005. [10]

Morales then sought the inhibition of the presiding judge, Eduardo B. Peralta, Jr., who eventually granted the motion. The
case was re-raffled to Branch 21, presided by public respondent Judge Amor Reyes.

Before the Manila RTC, Branch 21, Morales filed a Motion to Pierce the Veil of Corporate Fiction to declare KIC as
having no existence separate from Kukan, Inc. This time around, the RTC, by Order dated March 12, 2007, granted the
motion, the dispositive portion of which reads:

WHEREFORE, premises considered, the motion is hereby GRANTED. The Court hereby declares as
follows:

1. defendant Kukan, Inc. and newly created Kukan International Corp. as one
and the same corporation;

2. the levy made on the properties of Kukan International Corp. is hereby


valid;

3. Kukan International Corp. and Michael Chan are jointly and severally liable
to pay the amount awarded to plaintiff pursuant to the decision of November
[28], 2002 which has long been final and executory.

SO ORDERED.
From the above order, KIC moved but was denied reconsideration in another Order dated June 7, 2007.

KIC went to the CA on a petition for certiorari to nullify the aforesaid March 12 and June 7, 2007 RTC Orders.

On January 23, 2008, the CA rendered the assailed decision, the dispositive portion of which states:

WHEREFORE, premises considered, the petition is hereby DENIED and the assailed Orders dated March
12, 2007 and June 7, 2007 of the court a quo are both AFFIRMED. No costs.

SO ORDERED.[11]

The CA later denied KICs motion for reconsideration in the assailed resolution.

Hence, the instant petition for review, with the following issues KIC raises for the Courts consideration:

1. There is no legal basis for the [CA] to resolve and declare that petitioners Constitutional Right to
Due Process was not violated by the public respondent in rendering the Orders dated March 12, 2007
and June 7, 2007 and in declaring petitioner to be liable for the judgment obligations of the
corporation Kukan, Inc. to private respondent as petitioner is a stranger to the case and was never
made a party in the case before the trial court nor was it ever served a summons and a copy of the
complaint.

2. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007 and
June 7, 2007 rendered by public respondent declaring the petitioner liable to the judgment obligations
of the corporation Kukan, Inc. to private respondent are valid as said orders of the public respondent
modify and/or amend the trial courts final and executory decision rendered on November 28, 2002.

3. There is no legal basis for the [CA] to resolve and declare that the Orders dated March 12, 2007 and
June 7, 2007 rendered by public respondent declaring the petitioner [KIC] and the corporation Kukan,
Inc. as one and the same, and, therefore, the Veil of Corporate Fiction between them be pierced as the
procedure undertaken by public respondent which the [CA] upheld is not sanctioned by the Rules of
Court and/or established jurisprudence enunciated by this Honorable Supreme Court. [12]

In gist, the issues to be resolved boil down to the question of, first, whether the trial court can, after the judgment
against Kukan, Inc. has attained finality, execute it against the property of KIC; second, whether the trial court acquired
jurisdiction over KIC; and third, whether the trial and appellate courts correctly applied, under the premises, the principle
of piercing the veil of corporate fiction.

The Ruling of the Court

The petition is meritorious.

First Issue: Against Whom Can a Final and


Executory Judgment Be Executed
The preliminary question that must be answered is whether or not the trial court can, after adjudging Kukan, Inc. liable for
a sum of money in a final and executory judgment, execute such judgment debt against the property of KIC.

The poser must be answered in the negative.

In Carpio v. Doroja,[13] the Court ruled that the deciding court has supervisory control over the execution of its judgment:

A case in which an execution has been issued is regarded as still pending so that all proceedings
on the execution are proceedings in the suit. There is no question that the court which rendered the
judgment has a general supervisory control over its process of execution, and this power carries with it
the right to determine every question of fact and law which may be involved in the execution.

We reiterated the above holding in Javier v. Court of Appeals[14] in this wise: The said branch has a general supervisory
control over its processes in the execution of its judgment with a right to determine every question of fact and law which
may be involved in the execution.

The courts supervisory control does not, however, extend as to authorize the alteration or amendment of a final and
executory decision, save for certain recognized exceptions, among which is the correction of clerical errors. Else, the court
violates the principle of finality of judgment and its immutability, concepts which the Court, in Tan v. Timbal,[15]defined:
As we held in Industrial Management International Development Corporation vs. NLRC:

It is an elementary principle of procedure that the resolution of the court in a given issue as
embodied in the dispositive part of a decision or order is the controlling factor as to settlement of
rights of the parties. Once a decision or order becomes final and executory, it is removed
from the power or jurisdiction of the court which rendered it to further alter or amend it. It
thereby becomes immutable and unalterable and any amendment or alteration which
substantially affects a final and executory judgment is null and void for lack of jurisdiction,
including the entire proceedings held for that purpose. An order of execution which varies
the tenor of the judgment or exceeds the terms thereof is a nullity. (Emphasis supplied.)

Republic v. Tango[16] expounded on the same principle and its exceptions:

Deeply ingrained in our jurisprudence is the principle that a decision that has acquired finality
becomes immutable and unalterable. As such, it may no longer be modified in any respect even if the
modification is meant to correct erroneous conclusions of fact or law and whether it will be made by the
court that rendered it or by the highest court of the land. x x x

The doctrine of finality of judgment is grounded on the fundamental principle of public policy
and sound practice that, at the risk of occasional error, the judgment of courts and the award of quasi-
judicial agencies must become final on some definite date fixed by law. The only exceptions to the
general rule are the correction of clerical errors, the so-called nunc pro tuncentries which cause no
prejudice to any party, void judgments, and whenever circumstances transpire after the finality of the
decision which render its execution unjust and inequitable. None of the exceptions obtains here to merit
the review sought. (Emphasis added.)
So, did the RTC, in breach of the doctrine of immutability and inalterability of judgment, order the execution of
its final decision in a manner as would amount to its prohibited alteration or modification?

We repair to the dispositive portion of the final and executory RTC decision. Pertinently, it provides:

WHEREFORE, consistent with Section 5, Rule 18 of the 1997 Rules of Civil Procedure, and by
preponderance of evidence, judgment is hereby rendered in favor of the plaintiff, orderingKukan, Inc.:

1. to pay the sum of ONE MILLION TWO HUNDRED ONE THOUSAND SEVEN
HUNDRED TWENTY FOUR PESOS (P1,201,724.00) with legal interest at 12% per annum
from February 17, 1999 until full payment;

2. to pay the sum of FIFTY THOUSAND PESOS (P50,000.00) as moral damages;

3. to pay the sum of TWENTY THOUSAND PESOS (P20,000.00) as reasonable attorneys


fees; and

4. to pay the sum of SEVEN THOUSAND NINE HUNDRED SIXTY PESOS and SIX
CENTAVOS (P7,960.06) as litigation expenses.
x x x x (Emphasis supplied.)

As may be noted, the above decision, in unequivocal terms, directed Kukan, Inc. to pay the aforementioned awards to
Morales. Thus, making KIC, thru the medium of a writ of execution, answerable for the above judgment liability is a clear
case of altering a decision, an instance of granting relief not contemplated in the decision sought to be executed. And the
change does not fall under any of the recognized exceptions to the doctrine of finality and immutability of judgment. It is
a settled rule that a writ of execution must conform to the fallo of the judgment; as an inevitable corollary, a writ beyond
the terms of the judgment is a nullity.[17]

Thus, on this ground alone, the instant petition can already be granted. Nonetheless, an examination of the other issues
raised by KIC would be proper.

Second Issue: Propriety of the RTC


Assuming Jurisdiction over KIC

The next issue turns on the validity of the execution the trial court authorized against KIC and its property, given that it
was neither made a party nor impleaded in Civil Case No. 99-93173, let alone served with summons. In other words, did
the trial court acquire jurisdiction over KIC?

In the assailed decision, the appellate court deemed KIC to have voluntarily submitted itself to the jurisdiction of the trial
court owing to its filing of four (4) pleadings adverted to earlier, namely: (a) the Affidavit of Third-Party Claim;[18] (b)
the Comment and Opposition to Plaintiffs Omnibus Motion; [19] (c) the Motion for Reconsideration of the RTC Order dated
March 12, 2007;[20] and (d) the Motion for Leave to Admit Reply. [21] The CA, citing Section 20, Rule 14 of the Rules of
Court, stated that the procedural rule on service of summons can be waived by voluntary submission to the courts
jurisdiction through any form of appearance by the party or its counsel. [22]

We cannot give imprimatur to the appellate courts appreciation of the thrust of Sec. 20, Rule 14 of the Rules in
concluding that the trial court acquired jurisdiction over KIC.

Orion Security Corporation v. Kalfam Enterprises, Inc.[23] explains how courts acquire jurisdiction over the parties
in a civil case:

Courts acquire jurisdiction over the plaintiffs upon the filing of the complaint. On the other
hand, jurisdiction over the defendants in a civil case is acquired either through the service of
summons upon them or through their voluntary appearance in court and their submission to its
authority. (Emphasis supplied.)

In the fairly recent Palma v. Galvez,[24] the Court reiterated its holding in Orion Security Corporation, stating: [I]n civil
cases, the trial court acquires jurisdiction over the person of the defendant either by the service of summons or by the
latters voluntary appearance and submission to the authority of the former.

The courts jurisdiction over a party-defendant resulting from his voluntary submission to its authority is provided under
Sec. 20, Rule 14 of the Rules, which states:

Section 20. Voluntary appearance. The defendants voluntary appearance in the actions shall be
equivalent to service of summons. The inclusion in a motion to dismiss of other grounds aside from lack
of jurisdiction over the person of the defendant shall not be deemed a voluntary appearance.

To be sure, the CAs ruling that any form of appearance by the party or its counsel is deemed as voluntary
appearance finds support in the kindred Republic v. Ker & Co., Ltd.[25] and De Midgely v. Ferandos.[26]

Republic and De Midgely, however, have already been modified if not altogether superseded [27] by La Naval Drug
Corporation v. Court of Appeals,[28] wherein the Court essentially ruled and elucidated on the current view in our
jurisdiction, to wit: [A] special appearance before the courtchallenging its jurisdiction over the person through a motion to
dismiss even if the movant invokes other groundsis not tantamount to estoppel or a waiver by the movant of his objection
to jurisdiction over his person; and such is not constitutive of a voluntary submission to the jurisdiction of the court. [29]

In the instant case, KIC was not made a party-defendant in Civil Case No. 99-93173. Even if it is conceded that it raised
affirmative defenses through its aforementioned pleadings, KIC never abandoned its challenge, however implicit, to the
RTCs jurisdiction over its person. The challenge was subsumed in KICs primary assertion that it was not the same entity
as Kukan, Inc. Pertinently, in its Comment and Opposition to Plaintiffs Omnibus Motion dated May 20, 2003, KIC
entered its special but not voluntary appearance alleging therein that it was a different entity and has a separate legal
personality from Kukan, Inc. And KIC would consistently reiterate this assertion in all its pleadings, thus effectively
resisting all along the RTCs jurisdiction of its person. It cannot be overemphasized that KIC could not file before the RTC
a motion to dismiss and its attachments in Civil Case No. 99-93173, precisely because KIC was neither impleaded nor
served with summons. Consequently, KIC could only assert and claim through its affidavits, comments, and motions filed
by special appearance before the RTC that it is separate and distinct from Kukan, Inc.

Following La Naval Drug Corporation,[30] KIC cannot be deemed to have waived its objection to the courts lack of
jurisdiction over its person. It would defy logic to say that KIC unequivocally submitted itself to the jurisdiction of the
RTC when it strongly asserted that it and Kukan, Inc. are different entities. In the scheme of things obtaining, KIC had no
other option but to insist on its separate identity and plead for relief consistent with that position.

Third Issue: Piercing the


Veil of Corporate Fiction

The third and main issue in this case is whether or not the trial and appellate courts correctly applied the principle of
piercing the veil of corporate entitycalled also as disregarding the fiction of a separate juridical personality of a
corporationto support a conclusion that Kukan, Inc. and KIC are but one and the same corporation with respect to the
contract award referred to at the outset. This principle finds its context on the postulate that a corporation is an artificial
being invested with a personality separate and distinct from those of the stockholders and from other corporations to
which it may be connected or related.[31]

In Pantranco Employees Association (PEA-PTGWO) v. National Labor Relations Commission,[32] the Court revisited the
subject principle of piercing the veil of corporate fiction and wrote:

Under the doctrine of piercing the veil of corporate fiction, the court looks at the corporation as a
mere collection of individuals or an aggregation of persons undertaking business as a group, disregarding
the separate juridical personality of the corporation unifying the group. Another formulation of this
doctrine is that when two business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third parties, disregard the
legal fiction that two corporations are distinct entities and treat them as identical or as one and the
same.

Whether the separate personality of the corporation should be pierced hinges on obtaining
facts appropriately pleaded or proved. However, any piercing of the corporate veil has to be done with
caution, albeit the Court will not hesitate to disregard the corporate veil when it is misused or when
necessary in the interest of justice. x x x (Emphasis supplied.)

The same principle was the subject and discussed in Rivera v. United Laboratories, Inc.:

While a corporation may exist for any lawful purpose, the law will regard it as an association of
persons or, in case of two corporations, merge them into one, when its corporate legal entity is used
as a cloak for fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The
doctrine applies only when such corporate fiction is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, or when it is made as a shield to confuse the legitimate
issues, or where a corporation is the mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
To disregard the separate juridical personality of a corporation, the wrongdoing must be
established clearly and convincingly. It cannot be presumed.[33] (Emphasis supplied.)

Now, as before the appellate court, petitioner KIC maintains that the RTC violated its right to due process when, in the
execution of its November 28, 2002 Decision, the court authorized the issuance of the writ against KIC for Kukan, Inc.s
judgment debt, albeit KIC has never been a party to the underlying suit. As a counterpoint, Morales argues that KICs
specific concern on due process and on the validity of the writ to execute the RTCs November 28, 2002 Decision would
be mooted if it were established that KIC and Kukan, Inc. are indeed one and the same corporation.

Morales contention is untenable.

The principle of piercing the veil of corporate fiction, and the resulting treatment of two related corporations as
one and the same juridical person with respect to a given transaction, is basically applied only to determine established
liability;[34] it is not available to confer on the court a jurisdiction it has not acquired, in the first place, over a party not
impleaded in a case. Elsewise put, a corporation not impleaded in a suit cannot be subject to the courts process of piercing
the veil of its corporate fiction. In that situation, the court has not acquired jurisdiction over the corporation and, hence,
any proceedings taken against that corporation and its property would infringe on its right to due process.Aguedo
Agbayani, a recognized authority on Commercial Law, stated as much:
23. Piercing the veil of corporate entity applies to determination of liability not of jurisdiction. x x x

This is so because the doctrine of piercing the veil of corporate fiction comes to play
only during the trial of the case after the court has already acquired jurisdiction over the
corporation. Hence, before this doctrine can be applied, based on the evidence presented, it is imperative
that the court must first have jurisdiction over the corporation. [35] x x x (Emphasis supplied.)

The implication of the above comment is twofold: (1) the court must first acquire jurisdiction over the corporation or
corporations involved before its or their separate personalities are disregarded; and (2) the doctrine of piercing the veil of
corporate entity can only be raised during a full-blown trial over a cause of action duly commenced involving parties duly
brought under the authority of the court by way of service of summons or what passes as such service.

The issue of jurisdiction or the lack of it over KIC has already been discussed. Anent the matter of the time and manner of
raising the principle in question, it is undisputed that no full-blown trial involving KIC was had when the RTC
disregarded the corporate veil of KIC. The reason for this actuality is simple and undisputed: KIC was not impleaded in
Civil Case No. 99-93173 and that the RTC did not acquire jurisdiction over it. It was dragged to the case after it reacted to
the improper execution of its properties and veritably hauled to court, not thru the usual process of service of summons,
but by mere motion of a party with whom it has no privity of contract and after the decision in the main case had already
become final and executory. As to the propriety of a plea for the application of the principle by mere motion, the
following excerpts are instructive:

Generally, a motion is appropriate only in the absence of remedies by regular pleadings, and
is not available to settle important questions of law, or to dispose of the merits of the case. A motion
is usually a proceeding incidental to an action, but it may be a wholly distinct or independent
proceeding. A motion in this sense is not within this discussion even though the relief demanded is
denominated an order.
A motion generally relates to procedure and is often resorted to in order to correct errors which
have crept in along the line of the principal actions progress. Generally, where there is a procedural defect
in a proceeding and no method under statute or rule of court by which it may be called to the attention of
the court, a motion is an appropriate remedy. In many jurisdictions, the motion has replaced the common-
law pleas testing the sufficiency of the pleadings, and various common-law writs, such as writ of error
coram nobis and audita querela. In some cases, a motion may be one of several remedies available. For
example, in some jurisdictions, a motion to vacate an order is a remedy alternative to an appeal therefrom.

Statutes governing motions are given a liberal construction.[36] (Emphasis supplied.)


The bottom line issue of whether Morales can proceed against KIC for the judgment debt of Kukan, Inc.assuming
hypothetically that he can, applying the piercing the corporate veil principleresolves itself into the question of whether a
mere motion is the appropriate vehicle for such purpose.

Verily, Morales espouses the application of the principle of piercing the corporate veil to hold KIC liable on theory that
Kukan, Inc. was out to defraud him through the use of the separate and distinct personality of another corporation, KIC. In
net effect, Morales adverted motion to pierce the veil of corporate fiction dated January 3, 2007 stated a new cause of
action, i.e., for the liability of judgment debtor Kukan, Inc. to be borne by KIC on the alleged identity of the two
corporations. This new cause of action should be properly ventilated in another complaint and subsequent trial where the
doctrine of piercing the corporate veil can, if appropriate, be applied, based on the evidence adduced. Establishing the
claim of Morales and the corresponding liability of KIC for Kukan Inc.s indebtedness could hardly be the subject, under
the premises, of a mere motion interposed after the principal action against Kukan, Inc. alone had peremptorily been
terminated. After all, a complaint is one where the plaintiff alleges causes of action.

In any event, the principle of piercing the veil of corporate fiction finds no application to the instant case.

As a general rule, courts should be wary of lifting the corporate veil between corporations, however related. Philippine
National Bank v. Andrada Electric Engineering Company[37] explains why:

A corporation is an artificial being created by operation of law. x x x It has a personality separate


and distinct from the persons composing it, as well as from any other legal entity to which it may be
related. This is basic.

Equally well-settled is the principle that the corporate mask may be removed or the corporate veil
pierced when the corporation is just an alter ego of a person or of another corporation.For reasons of
public policy and in the interest of justice, the corporate veil will justifiably be impaled only when it
becomes a shield for fraud, illegality or inequity committed against third persons.

Hence, any application of the doctrine of piercing the corporate veil should be done with
caution. A court should be mindful of the milieu where it is to be applied. It must be certain that the
corporate fiction was misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. Otherwise, an injustice that was never unintended may result
from an erroneous application.

This Court has pierced the corporate veil to ward off a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the decedent, to escape liability arising from a debt, or to
perpetuate fraud and/or confuse legitimate issues either to promote or to shield unfair objectives or to
cover up an otherwise blatant violation of the prohibition against forum-shopping.Only in these and
similar instances may the veil be pierced and disregarded. (Emphasis supplied.)

In fine, to justify the piercing of the veil of corporate fiction, it must be shown by clear and convincing proof that the
separate and distinct personality of the corporation was purposefully employed to evade a legitimate and binding
commitment and perpetuate a fraud or like wrongdoings. To be sure, the Court has, on numerous occasions,[38] applied the
principle where a corporation is dissolved and its assets are transferred to another to avoid a financial liability of the first
corporation with the result that the second corporation should be considered a continuation and successor of the first
entity.

In those instances when the Court pierced the veil of corporate fiction of two corporations, there was a confluence
of the following factors:

1. A first corporation is dissolved;

2. The assets of the first corporation is transferred to a second corporation to avoid a financial liability
of the first corporation; and

3. Both corporations are owned and controlled by the same persons such that the second corporation
should be considered as a continuation and successor of the first corporation.

In the instant case, however, the second and third factors are conspicuously absent. There is, therefore, no
compelling justification for disregarding the fiction of corporate entity separating Kukan, Inc. from KIC. In applying the
principle, both the RTC and the CA miserably failed to identify the presence of the abovementioned factors. Consider:

The RTC disregarded the separate corporate personalities of Kukan, Inc. and KIC based on the following premises and
arguments:

While it is true that a corporation has a separate and distinct personality from its stockholder, director and
officers, the law expressly provides for an exception. When Michael Chan, the Managing Director of
defendant Kukan, Inc. (majority stockholder of the newly formed corporation [KIC]) confirmed the award
to plaintiff to supply and install interior signages in the Enterprise Center he (Michael Chan, Managing
Director of defendant Kukan, Inc.) knew that there was no sufficient corporate funds to pay its
obligation/account, thus implying bad faith on his part and fraud in contracting the obligation. Michael
Chan neither returned the interior signages nor tendered payment to the plaintiff. This circumstance may
warrant the piercing of the veil of corporation fiction. Having been guilty of bad faith in the
management of corporate matters the corporate trustee, director or officer may be held personally
liable. x x x

Since fraud is a state of mind, it need not be proved by direct evidence but may be inferred from
the circumstances of the case. x x x [A]nd the circumstances are: the signature of Michael Chan,
Managing Director of Kukan, Inc. appearing in the confirmation of the award sent to the plaintiff;
signature of Chan Kai Kit, a British National appearing in the Articles of Incorporation and signature of
Michael Chan also a British National appearing in the Articles of Incorporation [of] Kukan International
Corp. give the impression that they are one and the same person, that Michael Chan and Chan Kai Kit are
both majority stockholders of Kukan International Corp. and Kukan, Inc. holding 40% of the stocks; that
Kukan International Corp. is practically doing the same kind of business as that of Kukan, Inc.
[39]
(Emphasis supplied.)

As is apparent from its disquisition, the RTC brushed aside the separate corporate existence of Kukan, Inc. and KIC on the
main argument that Michael Chan owns 40% of the common shares of both corporations, obviously oblivious that
overlapping stock ownership is a common business phenomenon. It must be remembered, however, that KICs properties
were the ones seized upon levy on execution and not that of Kukan, Inc. or of Michael Chan for that matter. Mere
ownership by a single stockholder or by another corporation of a substantial block of shares of a corporation does not,
standing alone, provide sufficient justification for disregarding the separate corporate personality. [40] For this ground to
hold sway in this case, there must be proof that Chan had control or complete dominion of Kukan and KICs finances,
policies, and business practices; he used such control to commit fraud; and the control was the proximate cause of the
financial loss complained of by Morales. The absence of any of the elements prevents the piercing of the corporate veil.
[41]
And indeed, the records do not show the presence of these elements.

On the other hand, the CA held:

In the present case, the facts disclose that Kukan, Inc. entered into a contractual obligation x x x worth
more than three million pesos although it had only Php5,000.00 paid-up capital; [KIC] was incorporated
shortly before Kukan, Inc. suddenly ceased to appear and participate in the trial; [KICs] purpose is related
and somewhat akin to that of Kukan, Inc.; and in [KIC] Michael Chan, a.k.a., Chan Kai Kit, holds forty
percent of the outstanding stocks, while he formerly held the same amount of stocks in Kukan Inc. These
would lead to the inescapable conclusion that Kukan, Inc. committed fraudulent representation by
awarding to the private respondent the contract with full knowledge that it was not in a position to
comply with the obligation it had assumed because of inadequate paid-up capital. It bears stressing
that shareholders should in good faith put at the risk of the business, unencumbered capital reasonably
adequate for its prospective liabilities. The capital should not be illusory or trifling compared with the
business to be done and the risk of loss.

Further, it is clear that [KIC] is a continuation and successor of Kukan, Inc. Michael Chan, a.k.a.
Chan Kai Kit has the largest block of shares in both business enterprises. The emergence of the former
was cleverly timed with the hasty withdrawal of the latter during the trial to avoid the financial liability
that was eventually suffered by the latter. The two companies have a related business
purpose. Considering these circumstances, the obvious conclusion is that the creation of Kukan
International Corporation served as a device to evade the obligation incurred by Kukan, Inc. and
yet profit from the goodwill attained by the name Kukan by continuing to engage in the same line of
business with the same list of clients.[42](Emphasis supplied.)

Evidently, the CA found the meager paid-up capitalization of Kukan, Inc. and the similarity of the business activities in
which both corporations are engaged as a jumping board to its conclusion that the creation of KIC served as a device to
evade the obligation incurred by Kukan, Inc. The appellate court, however, left a gaping hole by failing to demonstrate
that Kukan, Inc. and its stockholders defrauded Morales. In fine, there is no showing that the incorporation, and the
separate and distinct personality, of KIC was used to defeat Morales right to recover from Kukan, Inc. Judging from the
records, no serious attempt was made to levy on the properties of Kukan, Inc. Morales could not, thus, validly argue that
Kukan, Inc. tried to avoid liability or had no property against which to proceed.

Morales further contends that Kukan, Inc.s closure is evidenced by its failure to file its 2001 General Information
Sheet (GIS) with the Securities and Exchange Commission. However, such fact does not necessarily mean that Kukan,
Inc. had altogether ceased operations, as Morales would have this Court believe, for it is stated on the face of the GIS that
it is only upon a failure to file the corporate GIS for five (5) consecutive years that non-operation shall be presumed.

The fact that Kukan, Inc. entered into a PhP 3.3 million contract when it only had a paid-up capital of PhP 5,000 is
not an indication of the intent on the part of its management to defraud creditors. Paid-up capital is merely seed money to
start a corporation or a business entity. As in this case, it merely represented the capitalization upon incorporation in
1997 of Kukan, Inc. Paid-up capitalization of PhP 5,000 is not and should not be taken as a reflection of the firms capacity
to meet its recurrent and long-term obligations. It must be borne in mind that the equity portion cannot be equated to the
viability of a business concern, for the best test is the working capital which consists of the liquid assets of a given
business relating to the nature of the business concern.

Neither should the level of paid-up capital of Kukan, Inc. upon its incorporation be viewed as a badge of fraud,
for it is in compliance with Sec. 13 of the Corporation Code, [43] which only requires a minimum paid-up capital of PhP
5,000.

The suggestion that KIC is but a continuation and successor of Kukan, Inc., owned and controlled as they are by
the same stockholders, stands without factual basis. It is true that Michael Chan, a.k.a. Chan Kai Kit, owns 40% of the
outstanding capital stock of both corporations. But such circumstance, standing alone, is insufficient to establish
identity. There must be at least a substantial identity of stockholders for both corporations in order to consider this factor
to be constitutive of corporate identity.
It would not avail Morales any to rely [44] on General Credit Corporation v. Alsons Development and Investment
Corporation.[45] General Credit Corporation is factually not on all fours with the instant case. There, the common
stockholders of the corporations represented 90% of the outstanding capital stock of the companies, unlike here where
Michael Chan merely represents 40% of the outstanding capital stock of both KIC and Kukan, Inc., not even a majority of
it. In that case, moreover, evidence was adduced to support the finding that the funds of the second corporation came from
the first. Finally, there was proof in General Credit Corporation of complete control, such that one corporation was a
mere dummy or alter ego of the other, which is absent in the instant case.

Evidently, the aforementioned case relied upon by Morales cannot justify the application of the principle of
piercing the veil of corporate fiction to the instant case. As shown by the records, the name Michael Chan, the similarity
of business activities engaged in, and incidentally the word Kukan appearing in the corporate names provide the nexus
between Kukan, Inc. and KIC. As illustrated, these circumstances are insufficient to establish the identity of KIC as the
alter ego or successor of Kukan, Inc.
It bears reiterating that piercing the veil of corporate fiction is frowned upon. Accordingly, those who seek to
pierce the veil must clearly establish that the separate and distinct personalities of the corporations are set up to justify a
wrong, protect fraud, or perpetrate a deception. In the concrete and on the assumption that the RTC has validly acquired
jurisdiction over the party concerned, Morales ought to have proved by convincing evidence that Kukan, Inc. was
collapsed and thereafter KIC purposely formed and operated to defraud him. Morales has not to us discharged his burden.

WHEREFORE, the petition is hereby GRANTED. The CAs January 23, 2008 Decision and April 16, 2008 Resolution
in CA-G.R. SP No. 100152 are hereby REVERSED andSET ASIDE. The levy placed upon the personal properties of
Kukan International Corporation is hereby ordered lifted and the personal properties ordered returned to Kukan
International Corporation. The RTC of Manila, Branch 21 is hereby directed to execute the RTC Decision dated
November 28, 2002 against Kukan, Inc. with reasonable dispatch.

No costs.

SO ORDERED.
JAKA INVESTMENTS CORPORATION v. COMMISSIONER OF INTERNAL REVENUE (G.R. No. 147629,
July 28, 2010)

Before the Court is a petition for review of the Decision[1] of the Court of Appeals dated August 22, 2000
sustaining the Court of Tax Appeals in denying petitioners (JAKA Investments Corporations) claim for refund of its
alleged overpayment of documentary stamp tax and surcharges, as well as the Resolution[2] dated March 27, 2001
likewise denying petitioners Motion for Reconsideration.

The antecedent facts are undisputed.

Sometime in 1994, petitioner sought to invest in JAKA Equities Corporation (JEC), which was then planning
to undertake an initial public offering (IPO) and listing of its shares of stock with the Philippine Stock Exchange. JEC
increased its authorized capital stock from One Hundred Eighty-Five Million Pesos (P185,000,000.00) to Two Billion
Pesos (P2,000,000,000.00). Petitioner proposed to subscribe to Five Hundred Eight Million Eight Hundred Six Thousand
Two Hundred Pesos (P508,806,200.00) out of the increase in the authorized capital stock of JEC through a tax-free
exchange under Section 34(c)(2) of the National Internal Revenue Code (NIRC) of 1977, as amended, which was effected
by the execution of a Subscription Agreement and Deed of Assignment of Property in Payment of Subscription. Under this
Agreement, as payment for its subscription, petitioner will assign and transfer to JEC the following shares of stock:

(a) 154,208,404 shares in Republic Glass Holdings Corporation (RGHC),


(b) 2,822,500 shares in Philippine Global Communications, Inc. (PGCI),
(c) 7,495,488 shares in United Coconut Planters Bank (UCPB), and
(d) 1,313,176 shares in Far East Bank and Trust Company (FEBTC). [3]

The intended IPO and listing of shares of JEC did not materialize. However, JEC still decided to proceed with the
increase in its authorized capital stock and petitioner agreed to subscribe thereto, but under different terms of
payment. Thus, petitioner and JEC executed the Amended Subscription Agreement[4] on September 5, 1994, wherein the
above-enumerated RGHC, PGCI, and UCPB shares of stock were transferred to JEC. In lieu of the FEBTC shares,
however, the amount of Three Hundred Seventy Million Seven Hundred Sixty-Six Thousand Pesos (P370,766,000.00)
was paid for in cash by petitioner to JEC.

On October 14, 1994, petitioner paid One Million Three Thousand Eight Hundred Ninety-Five Pesos and Sixty-
Five Centavos (P1,003,895.65) for basic documentary stamp tax inclusive of the 25% surcharge for late payment on the
Amended Subscription Agreement, broken down as follows:

Documentary Stamp Tax - P803,116.72


25% Surcharge - 200,778.93
Total P1,003,895.65[5]
On October 17, 1994, Revenue District Officer (RDO) Atty. Sixto S. Esquivias IV (RDO Esquivias) issued three
Certifications,[6] as follows:

Cert. No. Shares of Stock Documentary Stamps

94-10-17-07 7,495,488 UCPB shares P 23,423.14


94-10-17-08 154,208,403 RGHC shares 481,901.88
94-10-17-14 2,822,500 PGCI shares 88,203.13
P593,528.15

Petitioner, after seeing the RDOs certifications, the total amount of which was less than the actual amount it had
paid as documentary stamp tax, concluded that it had overpaid. Petitioner subsequently sought a refund for the alleged
excess documentary stamp tax and surcharges it had paid on the Amended Subscription Agreement in the amount of Four
Hundred Ten Thousand Three Hundred Sixty-Seven Pesos (P410,367.00), the difference between the amount of
documentary stamp tax it had paid and the amount of documentary stamp tax certified to by the RDO, through a letter-
request[7] to the BIR dated October 10, 1996.

On October 11, 1996, petitioner filed a petition for refund before the Court of Tax Appeals, docketed as C.T.A.
Case No. 5428, which was denied in a Decision[8] dated January 19, 1999. The Court of Tax Appeals likewise denied
petitioners Motion for Reconsideration in its Resolution[9] dated March 1, 1999.

Petitioner appealed to the Court of Appeals by way of petition for review. The Court of Appeals sustained the
Court of Tax Appeals in its Decision on CA-G.R. SP No. 51834 dated August 22, 2000 as well as in its Resolution dated
March 27, 2001 of petitioners Motion for Reconsideration.

Hence, petitioner is now before this Court to seek the reversal of the questioned Decision and Resolution of the
Court of Appeals.

Petitioners main contention in this claim for refund is that the tax base for the documentary stamp tax on the
Amended Subscription Agreement should have been only the shares of stock in RGHC, PGCI, and UCPB that petitioner
had transferred to JEC as payment for its subscription to the JEC shares, and should not have included the cash portion of
its payment, based on Section 176 of the National Internal Revenue Code of 1977, as amended by Republic Act No. 7660,
or the New Documentary Stamps Tax Law (the 1994 Tax Code), the law applicable at the time of the
transaction. Petitioner argues that the cash component of its payment for its subscription to the JEC shares, totaling Three
Hundred Seventy Million Seven Hundred Sixty-Six Thousand Pesos (P370,766,000.00) should not have been charged any
documentary stamp tax. Petitioner claims that there was overpayment because the tax due on the transferred shares was
only Five Hundred Ninety-Three Thousand Five Hundred Twenty-Eight and 15/100 Pesos (P593,528.15), asindicated in
the certifications issued by RDO Esquivias. Petitioner alleges that it is entitled to a refund for the overpayment, which is
the difference in the amount it had actually paid (P1,003,895.65) and the amount of documentary stamp tax due on the
transfer of said shares (P593,528.15), or a total of Four Hundred Ten Thousand Three Hundred Sixty-Seven Pesos
(P410,367.00).
Petitioner contends that both the Court of Appeals and the Court of Tax Appeals erroneously relied on respondents
(Commissioner of Internal Revenues) assertions that it had paid the documentary stamp tax on the original issuance of the
shares of stock of JEC under Section 175 of the 1994 Tax Code.

Petitioner explains that in this instance where shares of stock are used as subscription payment, there are two
documentary stamp tax incidences, namely, the documentary stamp tax on the original issuance of the shares subscribed
(the JEC shares), which is imposed under Section 175; and the documentary stamp tax on the shares transferred in
payment of such subscription (the transfer of the RGHC, PGCI and UCPB shares of stock from petitioner to JEC), which
is imposed under Section 176 of the 1994 Tax Code.Petitioner argues that the documentary stamp tax imposed under
Section 175 is due on original issuances of certificates of stock and is computed based on the aggregate par value of the
shares to be issued; and that these certificates of stock are issued only upon full payment of the subscription price such
that under the Bureau of Internal Revenues (BIRs) Revised Documentary Stamp Tax Regulations, [10] it is stated that the
documentary stamp tax on the original issuance of certificates of stock is imposed on fully paid shares of stock
only. Petitioner alleges that it is the issuing corporation which is primarily liable for the payment of the documentary
stamp tax on the original issuance of shares of stock.Petitioner further argues that the documentary stamp tax on Section
176 of the 1994 Tax Code is imposed for every transfer of shares or certificates of stock, computed based on the par value
of the shares to be transferred, and is due whether a certificate of stock is actually issued, indorsed or delivered pursuant to
such transfer. It is the transferor who is liable for the documentary stamp tax on the transfer of shares.

Petitioner claims that the documentary stamp tax under Section 175 attaches to the certificate/s of stock to be
issued by virtue of petitioners subscription while the documentary stamp tax under Section 176 attaches to the Amended
Subscription Agreement, since it is this instrument that evidences the transfer of the RGHC, PGCI and UCPB shares from
petitioner to JEC.

Petitioner contends that at the time of the execution of the Amended Subscription Agreement, the JEC shares or
certificates subscribed by petitioner could not have been issued by JEC because the same were yet to be sourced from the
increase in authorized capital stock of JEC, which in turn had yet to be approved by the Securities and Exchange
Commission (SEC). Petitioner thus reasons that the documentary stamp tax under Section 175 could not have accrued at
the time the Amended Subscription Agreement was executed because no right to the shares had neither been nor could be
established in favor of the petitioner at such time. Petitioner theorizes that the earliest time that the subscription could
actually be executed would be when the SEC approves the increase in the authorized capital stock of JEC. On the other
hand, upon the execution of the Amended Subscription Agreement, the assignment or the transfer of RGHC, PGCI and
UCPB shares in favor of JEC (which is evidenced by said agreement), is deemed immediately enforceable as this is a
necessary requirement of the SEC.

Petitioner points out that Section 175 of the 1994 Tax Code imposes a documentary stamp tax on every original
issuance of certificates of stock, whereas Republic Act No. 8424, the Tax Reform Act of 1997 (the 1997 Tax Code),
amended this provision and imposed a documentary stamp tax on the original issuance of shares of stock. Petitioner
argues that under Section 175 of the 1994 Tax Code, there was no documentary stamp tax due on the mere execution of a
subscription agreement to shares of stock, and the tax only accrued upon issuance of the certificates of stock. In this case,
the change in wording introduced by the 1997 Tax Code cannot be made applicable to the Amended Subscription
Agreement, which was executed in 1994, because it is a well-settled doctrine in taxation that a law must have prospective
application.

Lastly, petitioner alleges that it is entitled to refund under the NIRC. [11]

In his Comment (To Petition for Review),[12] respondent avers that the lower courts did not err in denying
petitioners claim for refund, and that petitioner is raising issues in this petition which were not raised in the lower courts.

Respondent maintains that the documentary stamp tax imposed in this case is on the original issue of certificates
of stock of JEC on the subscription by the petitioner of theP508,806,200.00 shares out of the increase in the authorized
capital stock of the former pursuant to Section 175 of the NIRC. The documentary stamp tax was not imposed on the
shares of stock owned by petitioner in RGHC, PGCI, and UCPB, which merely form part of the partial payment of the
subscribed shares in JEC. Respondent avers that the amounts indicated in the Certificates of RDO Esquivias are the
amounts of documentary stamp tax representing the equivalent of each group of shares being applied for payment.
Considering that the amount of documentary stamp tax represented by the shares of stock in the aforementioned
companies amounted only to P593,528.15, while the basic documentary stamp tax for the entire subscription
of P508,806,200.00 was computed by respondents revenue officers to the tune of P803,116.72, exclusive of the penalties,
leaving a balance of P209,588.57, is a clear indication that the payment made with the shares of stock is insufficient.

Respondent claims that the certifications were issued by RDO Esquivias purposely to allow the registration of
transfer of the shares of stock used in payment of the subscribed shares in the name of JEC from petitioner by the
Corporate Secretary of the UCPB and are not evidence of the payment of the documentary stamp tax on the issuance of
the increased shares of stocks of JEC.[13]

Respondent argues that the documentary stamp tax attaches upon acceptance by the corporation of the
stockholders subscription in the capital stock of the corporation, and that the term original issue of the certificate of stock
means the point at which the stockholder acquires and may exercise attributes of ownership over the stocks. [14] Respondent
further argues that the stocks can be alienated; the dividends or fruits derived therefrom can be enjoyed; and they can be
conveyed, pledged, or encumbered; that the certificate, irrespective of whether or not it is in the actual constructive
possession of the stockholder, is considered issued because it is with value and, hence, the documentary stamp tax must be
paid; and concludes that a person may own shares of stock without possessing a certificate of stock. Respondent
cites Commissioner of Internal Revenue v. Construction Resources of Asia, Inc.,[15] where the Court held:

The delivery of the certificates of stocks to the private respondent's stockholders whether actual
or constructive, is not essential for the documentary and science stamps taxes to attach. What is taxed is
the privilege of issuing shares of stock and, therefore, the taxes accrue at the time the shares are issued.
The only question before us is whether or not said private respondents issued the certificates of stock
covering the paid-in-capital of P17,880,000.00.
Respondent claims that it is well-settled as a general rule of Corporation Law that a subscriber for stock in a
corporation or purchaser of stock becomes a stockholder as soon as his subscription is accepted by the corporation
whether a certificate of stock is issued to him or not, and although he may have no certificate, he is thereupon entitled to
all the rights and is subject to all the liabilities of a stockholder.

Respondent argues, based on the above, that the contention of petitioner that the documentary stamp tax under
Section 175 of the 1994 Tax Code could not have accrued at the time the Amended Subscription Agreement was executed
since the increase in capital stock of JEC had yet to be approved by the SEC was inaccurate. He states that it is evident
from the Amended Subscription Agreement that the subscribed shares from the increase in JECs stock were fully paid
through cash and shares of stock.

Respondent submits that the change in wording, from certificates to shares of stock, introduced to Section 175 by
the 1997 Tax Code, was a mere clarification and codification of the foregoing principle or policy.

Respondent stresses that the documentary stamp tax can be levied or collected from the person making, signing,
issuing, accepting, or transferring the obligation or property, as provided in Section 173 of the Tax Code.

In its Reply to Respondents Comment to the Petition,[16] petitioner contends that respondent erroneously insists
that the documentary stamp tax sought to be refunded is the one imposed on the subscription by petitioner
to P508,806,200.00 new shares of JEC. Petitioner further contends that since the documentary stamp tax due on the
issuance of new shares or on original shares is P2.00 for every P200 under Section 175 of the Tax Code, then the
documentary stamp tax on petitioners subscription to JEC shares should amount to P5,088,062.00, which is much higher
than the P803,116.72 basic documentary stamp tax paid under ATAP No. 1511920. [17] Petitioner argues that at the time the
documentary stamp tax was paid, before a taxpayer was allowed to pay the taxes due, a BIR revenue officer would first
compute the tax due and then issue an authority to accept payment (ATAP) and it was very unlikely that the revenue
officer could have made such a glaring mistake.

Petitioner alleges that there is no BIR certification requirement prior to the issuance of original shares of stock;
and that it is only upon the regular annual audit of the books of a corporation that the BIR determines if the documentary
stamp tax on new or original issuances of shares, if any were issued, had in fact been paid. If not, then a deficiency
assessment, with penalties and surcharges, would then be made by the BIR. Petitioner further alleges that, on the other
hand, before the transfer of issued and outstanding shares to a new owner is recorded in the books of a corporation, the
capital gains tax thereon and the documentary stamp tax on the transfer must first be paid, and a BIR certification must be
presented to the Corporate Secretary authorizing the corporation to record the transfer, otherwise, the corporate secretary
shall be subjected to penalties.

Petitioner claims that the three BIR certifications in this case specifically allow the registration of the UCPB,
RGHC, and PGCI shares in the name of JEC, the transferee, and that said certifications evidence payment of the taxes due
on the transfer of the shares from petitioner to JEC, not on the original issuance of shares of JEC.
The parties respective memoranda contained reiterations of the allegations raised in their respective pleadings as
discussed above.

The sole issue to be resolved is whether petitioner is entitled to a partial refund of the documentary stamp
tax and surcharges it paid on the execution of the Amended Subscription Agreement.

In claims for refund, the burden of proof is on the taxpayer to prove entitlement to such refund. As we held
in Compagnie Financiere Sucres Et Denrees v. Commissioner of Internal Revenue[18] -

Along with police power and eminent domain, taxation is one of the three basic and necessary
attributes of sovereignty. Thus, the State cannot be deprived of this most essential power and attribute of
sovereignty by vague implications of law. Rather, being derogatory of sovereignty, the governing
principle is that tax exemptions are to be construed in strictissimi juris against the taxpayer and liberally
in favor of the taxing authority; and he who claims an exemption must be able to justify his claim by
the clearest grant of statute.

x x x Tax refunds are a derogation of the State's taxing power. Hence, like tax exemptions, they
are construed strictly against the taxpayer and liberally in favor of the State. Consequently, he who claims
a refund or exemption from taxes has the burden of justifying the exemption by words too plain to be
mistaken and too categorical to be misinterpreted. x x x.

It was thus incumbent upon petitioner to show clearly its basis for claiming that it is entitled to a tax refund. This,
to our mind, the petitioner failed to do.

The Court of Tax Appeals construed the claim for exemption strictly against petitioner and held that:

The focal issue which is presented for our consideration is whether or not the transfer of the
1,313,176 FEBTC shares under the Amended Subscription Agreement and Deed of Assignment of
Property in Payment of Subscription should be excluded in the taxable base for the computation of DST,
thus entitling petitioner to the refund of the amount of P410,367.00.

We find nothing ambiguous nor obscure in the language of Section 173, taken in relation to
Section 175 of the 1994 Tax Code x x x insofar as the same is brought to bear upon the
circumstances in the instant case. These provisions furnish the best means of their own exposition
that a documentary stamp tax (DST) is due and payable on documents, instruments, loan
agreements and papers, acceptances, assignments, sales and transfers which evidenced the
transaction agreed upon by the parties and should be paid by the personmaking, signing, issuing,
accepting or transferring the property, right or obligation.

Sec. 173. Stamp taxes upon documents, instruments, and papers. Upon
documents, instruments, and papers, and upon acceptances, assignments, sales, and
transfers of the obligation, or property incident thereto, there shall be levied, collected
and paid for, and in respect of the transaction so had or accomplished, the corresponding
documentary stamp taxes prescribed in the following sections of this Title, by the person
making, signing, issuing, accepting, or transferring the same, whenever the document is
made, signed, issued, accepted or transferred when the obligation or right arises from
Philippine sources or the property is situated in the Philippines, and at the same time such
act is done or transaction had: Provided, That whenever one party to the taxable
document enjoys exemption from the tax herein imposed, the other party thereto who is
not exempt shall be the one directly liable for the tax. (as amended by R.A. No. 7660)

xxxx

Understood to mean what it plainly expressed, the DST imposition is essentially addressed and
directly brought to bear upon the DOCUMENT evidencing the transaction of the parties which establishes
its rights and obligations.

In the case at bar, the rights and obligations between petitioner JAKA Investments Corporation
and JAKA Equities Corporation are established and enforceable at the time the Amended Subscription
Agreement and Deed of Assignment of Property in Payment of Subscription were signed by the parties
and their witness, so is the right of the state to tax the aforestated document evidencing the
transaction. DST is a tax on the document itself and therefore the rate of tax must be determined on
the basis of what is written or indicated on the instrument itself independent of any adjustment
which the parties may agree on in the future x x x. The DST upon the taxable document should be paid
at the time the contract is executed or at the time the transaction is accomplished. The overriding purpose
of the law is the collection of taxes. So that when it paid in cash the amount of P370,766,000.00 in
substitution for, or replacement of the 1,313,176 FEBTC shares, its payment of P1,003,835.65
documentary stamps tax pursuant to Section 175 of NIRC is in order.

Thus, applying the settled rule in this jurisdiction that, a claim for refund is in the nature of
a claim for exemption, thus, should be construed in strictissimi juris against the taxpayer
(Commissioner of Internal Revenue vs. Tokyo Shipping Co., Ltd., 244 SCRA 332) and since the
petitioner failed to adduce evidence that will show that it is exempt from DST under Section 199 or
other provision of the tax code, We rule the focal issue in the negative. [19] (Emphases ours.)

In the questioned Decision, the Court of Appeals concurred with the findings of the Court of Tax Appeals and we
quote with approval the relevant portions below:

Petitioner alleges, though, that considering that the assessment of payment of documentary stamp
tax was made payable only to the aforesaid issuances of certificates of [stock] exclusive of that of FEBTC
shares of stock which were paid in cash, and that it has paid a total of Php1,003,895.65 inclusive of
surcharges for late payment, the petitioner is entitled to a refund of Php410,367.00. This argument does
not hold water. As discussed earlier, a documentary stamp is levied upon the privilege, the
opportunity and the facility offered at exchanges for the transaction of the business. This being the
case, and as correctly found by the tax court, the documentary stamp tax imposition is essentially
addressed and directly brought to bear upon the document evidencing the transaction of the parties
which establishes its rights and obligations, which in the case at bar, was established and enforceable
upon the execution of the Amended Subscription Agreement and Deed of Assignment of Property in
Payment of Subscription.

Moreover, the documentary stamp tax is imposed on the entire subscription (i.e., subscribed
capital stock) which is the amount of the capital stock subscribed whether fully paid or not.It connotes an
original subscription contract for the acquisition by a subscriber of unissued shares in a corporation,
which in this case is equivalent to a total par value of Php508,806,200.00.

Besides, a tax cannot be imposed unless it is supported by the clear and express language of a
statute; on the other hand, once the tax is unquestionably imposed, a claim of exemption from tax
payments must be clearly shown and based on language in the law too plain to be mistaken. And since a
claim for refund is in the nature of a claim for exemption the same is likewise construed in strictissimi
juris against the taxpayer. Furthermore, it is a basic rule in taxation that the factual findings of the Court
of Tax Appeals, when supported by substantial evidence, will not be disturbed on appeal unless it [is]
shown that the said court committed gross error in the appreciation of facts. In this case, the tax court did
not deviate from this rule.

We find no error in the above pronouncements of the Court of Appeals.

A documentary stamp tax is in the nature of an excise tax. It is not imposed upon the business transacted but is an
excise upon the privilege, opportunity or facility offered at exchanges for the transaction of the business. It is an excise
upon the facilities used in the transaction of the business separate and apart from the business itself. Documentary stamp
taxes are levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination
of specific legal relationships through the execution of specific instruments. [20]

Thus, we have held that documentary stamp taxes are levied independently of the legal status of the
transactions giving rise thereto. The documentary stamp taxes must be paid upon the issuance of the said
instruments, without regard to whether the contracts which gave rise to them are rescissible, void, voidable, or
unenforceable.[21]

The relevant provisions of the Tax Code at the time of the transaction are quoted below:

Sec. 175. Stamp tax on original issue of certificates of stock. On every original issue, whether
on organization, reorganization or for any lawful purpose, of certificates of stock by any association,
company, or corporations, there shall be collected a documentary stamp tax of Two pesos (P2.00) on
each two hundred pesos, or fractional part thereof, of the par value of such certificates: Provided,
That in the case of the original issue of stock without par value the amount of the documentary stamp tax
herein prescribed shall be based upon the actual consideration received by the association, company, or
corporation for the issuance of such stock, and in the case of stock dividends on the actual value
represented by each share.

Sec. 176. Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfer of
due-bills, certificates of obligation, or shares or certificates of stock. On all sales, or agreements to sell,
or memoranda of sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares or
certificates of stock in any association, company or corporation, or transfer of such securities by
assignment in blank, or by delivery, or by any paper or agreement, or memorandum or other evidences of
transfer or sale whether entitling the holder in any manner to the benefit of such due-bills, certificates of
obligation or stock, or to secure the future payment of money, or for the future transfer of any due-bill,
certificates of obligation or stock, there shall be collected a documentary stamp tax of One peso (P1.00)
on each two hundred pesos, or fractional part thereof, of the par value of such due-bill, certificates of
obligation or stock:Provided, That only one tax shall be collected on each sale or transfer of stock or
securities from one person to another, regardless of whether or not a certificate of stock or obligation is
issued, endorsed, or delivered in pursuance of such sale or transfer: and Provided, further, That in the case
of stock without par value the amount of the documentary stamp herein prescribed shall be equivalent to
twenty-five per centum of the documentary stamp tax paid upon the original issue of said
stock: Provided, furthermore, That the tax herein imposed shall be increased to One peso and fifty
centavos (P1.50) beginning 1996.

We find our discussion in the case of Commissioner of Internal Revenue v. First Express Pawnshop
Company, Inc.[22] regarding these same provisions of the Tax Code to be instructive, and we quote:
In Section 175 of the Tax Code, DST is imposed on the original issue of shares of stock. The
DST, as an excise tax, is levied upon the privilege, the opportunity and the facility of issuing shares of
stock. In Commissioner of Internal Revenue v. Construction Resources of Asia, Inc., this Court explained
that the DST attaches upon acceptance of the stockholder's subscription in the corporation's capital
stock regardless of actual or constructive delivery of the certificates of stock. Citing Philippine
Consolidated Coconut Ind., Inc. v. Collector of Internal Revenue, the Court held:

The documentary stamp tax under this provision of the law may be levied only
once, that is upon the original issue of the certificate. The crucial point therefore, in the
case before Us is the proper interpretation of the word 'issue'. In other words, when is the
certificate of stock deemed 'issued' for the purpose of imposing the documentary stamp
tax? Is it at the time the certificates of stock are printed, at the time they are filled up (in
whose name the stocks represented in the certificate appear as certified by the proper
officials of the corporation), at the time they are released by the corporation, or at the
time they are in the possession (actual or constructive) of the stockholders owning them?

xxxx

Ordinarily, when a corporation issues a certificate of stock (representing the


ownership of stocks in the corporation to fully paid subscription) the certificate of stock
can be utilized for the exercise of the attributes of ownership over the stocks mentioned
on its face. The stocks can be alienated; the dividends or fruits derived therefrom can be
enjoyed, and they can be conveyed, pledged or encumbered. The certificate as issued by
the corporation, irrespective of whether or not it is in the actual or constructive
possession of the stockholder, is considered issued because it is with value and hence the
documentary stamp tax must be paid as imposed by Section 212 of the National Internal
Revenue Code, as amended.

In Section 176 of the Tax Code, DST is imposed on the sales, agreements to sell, memoranda of
sales, deliveries or transfer of shares or certificates of stock in any association, company, or corporation,
or transfer of such securities by assignment in blank, or by delivery, or by any paper or agreement, or
memorandum or other evidences of transfer or sale whether entitling the holder in any manner to the
benefit of such certificates of stock, or to secure the future payment of money, or for the future transfer of
certificates of stock. In Compagnie Financiere Sucres et Denrees v. Commissioner of Internal Revenue,
this Court held that under Section 176 of the Tax Code, sales to secure the future transfer of due-bills,
certificates of obligation or certificates of stock are subject to documentary stamp tax.

Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the guidelines on the corporate
stock documentary stamp tax program. RMO 08-98 states that:

1. All existing corporations shall file the Corporation Stock DST Declaration, and the
DST Return, if applicable when DST is still due on the subscribed share
issued by the corporation, on or before the tenth day of the month following
publication of this Order.

xxxx
STDEH
3. All existing corporations with authorization for increased capital stock shall file their
Corporate Stock DST Declaration, together with the DST Return, if
applicable when DST is due on subscriptions made after the authorization,
on or before the tenth day of the month following the date of authorization.
(Boldfacing supplied)

RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 (RMC 47-97), also states that
what is being taxed is the privilege of issuing shares of stock, and, therefore, the taxes accrue at the time
the shares are issued. RMC 47-97 also defines issuance as the point in which the stockholder acquires and
may exercise attributes of ownership over the stocks.

As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate a subscription
agreement in order for a taxpayer to be liable to pay the DST. A subscription contract is defined as any
contract for the acquisition of unissued stocks in an existing corporation or a corporation still to be
formed. A stock subscription is a contract by which the subscriber agrees to take a certain number of
shares of the capital stock of a corporation, paying for the same or expressly or impliedly promising to
pay for the same. (Emphases ours.)

Petitioner claims overpayment of the documentary stamp tax but its basis for such is not clear at all. While
insisting that the documentary stamp tax it had paid for was not based on the original issuance of JEC shares as provided
in Section 175 of the 1994 Tax Code, petitioner failed in showing, even through a mere basic computation of the tax base
and the tax rate, that the documentary stamp tax was based on the transfer of shares under Section 176 either. It would
have been helpful for petitioners cause had it submitted proof of the par value of the shares of stock involved, to show the
actual basis for the documentary stamp tax computation. For comparison, the original Subscription Agreement ought to
have been submitted as well.

All that petitioner submitted to back up its claim were the certifications issued by then RDO Esquivias. As
correctly pointed out by respondent, however, the amounts in the RDO certificates were the amounts of documentary
stamp tax representing the equivalent of each group of shares being applied for payment. The purpose for issuing such
certifications was to allow registration of transfer of shares of stock used in partial payment for petitioners subscription to
the original issuance of JEC shares. It should not be used as evidence of payment of documentary stamp tax. Neither
should it be the lone basis of a claim for a documentary stamp tax refund.

The fact that it was petitioner and not JEC that paid for the documentary stamp tax on the original issuance of
shares is of no moment, as Section 173 of the 1994 Tax Code states that the documentary stamp tax shall be paid by the
person making, signing, issuing, accepting or transferring the property, right or obligation.

Lastly, we deem it appropriate to reiterate the well-established doctrine that as a matter of practice and principle,
this Court will not set aside the conclusion reached by an agency, like the Court of Tax Appeals, especially if affirmed by
the Court of Appeals. By the very nature of its function, it has dedicated itself to the study and consideration of tax
problems and has necessarily developed an expertise on the subject, unless there has been an abuse or improvident
exercise of authority on its part, which we find is not present here. [23]

WHEREFORE, premises considered, the petition is hereby DISMISSED.

SO ORDERED.
ONG YONG v. TIU (G.R. No. 144476. April 8, 2003)

Before us are the (1) motion for reconsideration, dated March 15, 2002, of petitioner movants Ong Yong, Juanita Tan
Ong, Wilson Ong, Anna Ong, William Ong, Willie Ong and Julia Ong Alonzo (the Ongs); (2) motion for partial
reconsideration, dated March 15, 2002, of petitioner movant Willie Ong seeking a reversal of this Courts Decision, [1] dated
February 1, 2002, in G.R. Nos. 144476 and 144629 affirming with modification the decision [2] of the Court of Appeals,
dated October 5, 1999, which in turn upheld, likewise with modification, the decision of the SEC en banc, dated
September 11, 1998; and (3) motion for issuance of writ of execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu
Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our February 1, 2002 Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was threatened with stoppage and incompletion
when its owner, the First Landlink Asia Development Corporation (FLADC), which was owned by the Tius, encountered
dire financial difficulties. It was heavily indebted to the Philippine National Bank (PNB) for P190 million. To stave off
foreclosure of the mortgage on the two lots where the mall was being built, the Tius invited Ong Yong, Juanita Tan Ong,
Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC. Under the Pre-
Subscription Agreement they entered into, the Ongs and the Tius agreed to maintain equal shareholdings in FLADC: the
Ongs were to subscribe to 1,000,000 shares at a par value of P100.00 each while the Tius were to subscribe to an
additional 549,800 shares at P100.00 each in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to nominate the Vice-President and the Treasurer plus five
directors while the Ongs were entitled to nominate the President, the Secretary and six directors (including the chairman)
to the board of directors of FLADC. Moreover, the Ongs were given the right to manage and operate the mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to 1,000,000 shares of stock while the Tius
committed to contribute to FLADC a four-storey building and two parcels of land respectively valued at P20 million (for
200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for 49,800 shares) to cover their additional 549,800
stock subscription therein. The Ongs paid in another P70 million[3] to FLADC and P20 million to the Tius over and above
their P100 million investment, the total sum of which (P190 million) was used to settle the P190 million mortgage
indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was shortlived because the Tius, on
February 23, 1996, rescinded the Pre-Subscription Agreement. The Tius accused the Ongs of (1) refusing to credit to them
the FLADC shares covering their real property contributions; (2) preventing David S. Tiu and Cely Y. Tiu from assuming
the positions of and performing their duties as Vice-President and Treasurer, respectively, and (3) refusing to give them
the office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to assume the positions and perform the
duties of Vice-President and Treasurer, respectively, but the Ongs prevented them from doing so. Furthermore, the Ongs
refused to provide them the space for their executive offices as Vice-President and Treasurer. Finally, and most serious of
all, the Ongs refused to give them the shares corresponding to their property contributions of a four-story building, a
1,902.30 square-meter lot and a 151 square-meter lot. Hence, they felt they were justified in setting aside their Pre-
Subscription Agreement with the Ongs who allegedly refused to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact assumed the positions of Vice-President
and Treasurer of FLADC but that it was they who refused to comply with the corporate duties assigned to them. It was the
contention of the Ongs that they wanted the Tius to sign the checks of the corporation and undertake their management
duties but that the Tius shied away from helping them manage the corporation. On the issue of office space, the Ongs
pointed out that the Tius did in fact already have existing executive offices in the mall since they owned it 100% before
the Ongs came in. What the Tius really wanted were new offices which were anyway subsequently provided to them. On
the most important issue of their alleged failure to credit the Tius with the FLADC shares commensurate to the Tius
property contributions, the Ongs asserted that, although the Tius executed a deed of assignment for the 1,902.30 square-
meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690 for capital gains tax and documentary stamp
tax. Without the payment thereof, the SEC would not approve the valuation of the Tius property contribution (as opposed
to cash contribution). This, in turn, would make it impossible to secure a new Transfer Certificate of Title (TCT) over the
property in FLADCs name. In any event, it was easy for the Tius to simply pay the said transfer taxes and, after the new
TCT was issued in FLADCs name, they could then be given the corresponding shares of stocks. On the 151 square-meter
property, the Tius never executed a deed of assignment in favor of FLADC. The Tius initially claimed that they could not
as yet surrender the TCT because it was still being reconstituted by the Lichaucos from whom the Tius bought it. The
Ongs later on discovered that FLADC had in reality owned the property all along, even before their Pre-Subscription
Agreement was executed in 1994. This meant that the 151 square-meter property was at that time already the corporate
property of FLADC for which the Tius were not entitled to the issuance of new shares of stock.
The controversy finally came to a head when this case was commenced [4] by the Tius on February 27, 1996 at the
Securities and Exchange Commission (SEC), seeking confirmation of their rescission of the Pre-Subscription Agreement.
After hearing, the SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a decision on May 19, 1997
confirming the rescission sought by the Tius, as follows:

WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-Subscription Agreement, and
consequently ordering:

(a) The cancellation of the 1,000,000 shares subscription of the individual defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual defendants representing the return of their
contribution for 1,000,000 shares of FLADC;
( c) The plaintiffs to submit with (sic) the Securities and Exchange Commission amended articles of
incorporation of FLADC to conform with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493, 132494, 134066 (formerly 15587), 135325
and 134204 and any other title or deed in the name of FLADC, failing in which said titles are declared void;
(e) The Register of Deeds to issue new certificates of titles in favor of the plaintiffs and to cancel the annotation
of the Pre-Subscription Agreement dated 15 August 1994 on TCT No. 134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their agents and representatives, to desist from
exercising or performing any and all acts pertaining to stockholder, director or officer of FLADC or in any
manner intervene in the management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to FLADC interest payment in the amount of
P8,866,669.00 and all interest payments as well as any payments on principal received from the
P70,000,000.00 inexistent loan, plus the legal rate of interest thereon from the date of their receipt of such
payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of P20,000,000.00 representing his loan from
said defendants plus legal interest from the date of receipt of such amount.

SO ORDERED.[5]

On motion of both parties, the above decision was partially reconsidered but only insofar as the Ongs P70 million
was declared not as a premium on capital stock but an advance (loan) by the Ongs to FLADC and that the imposition of
interest on it was correct.[6]
Both parties appealed[7] to the SEC en banc which rendered a decision on September 11, 1998, affirming the May 19,
1997 decision of the Hearing Officer. The SEC en banc confirmed the rescission of the Pre-Subscription Agreement but
reverted to classifying the P70 million paid by the Ongs as premium on capital and not as a loan or advance to FLADC,
hence, not entitled to earn interest.[8]
On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999, thus:

WHEREFORE, the Order dated September 11, 1998 issued by the Securities and Exchange Commission En Banc in SEC
AC CASE NOS. 598 and 601 confirming the rescission of the Pre-Subscription Agreement dated August 15, 1994 is
hereby AFFIRMED, subject to the following MODIFICATIONS:

1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia Development Corporation in
accordance with the following cash and property contributions of the parties therein.
(a) Ong Group P100,000,000.00 cash contribution for one (1) million shares in First Landlink Asia
Development Corporation at a par value of P100.00 per share;

(b) Tiu Group:

1) P45,020,000.00 original cash contribution for 450,200 shares in First Landlink Asia
Development Corporation at a par value of P100.00 per share;

2) A four-storey building described in Transfer Certificate of Title No. 15587 in the name of
Intraland Resources and Development Corporation valued at P20,000,000.00 for 200,000
shares in First Landlink Asia Development Corporation at a par value of P100.00 per share;

3) A 1,902.30 square-meter parcel of land covered by Transfer Certificate of Title No. 15587 in the
name of Masagana Telamart, Inc. valued at P30,000,000.00 for 300,000 shares in First Landlink
Asia Development Corporation at a par value of P100.00 per share.

2) Whatever remains of the assets of the First Landlink Asia Development Corporation and the management
thereof is (sic) hereby ordered transferred to the Tiu Group.

3) First Landlink Asia Development Corporation is hereby ordered to pay the amount of P70,000,000.00
that was advanced to it by the Ong Group upon the finality of this decision. Should the former incur in
delay in the payment thereof, it shall pay the legal interest thereon pursuant to Article 2209 of the New
Civil Code.

4) The Tius are hereby ordered to pay the amount of P20,000,000.00 loaned them by the Ongs upon the
finality of this decision. Should the former incur in delay in the payment thereof, it shall pay the legal
interest thereon pursuant to Article 2209 of the New Civil Code.

SO ORDERED.[9]

An interesting sidelight of the CA decision was its description of the rescission made by the Tius as the height of
ingratitude and as pulling a fast one on the Ongs. The CA moreover found the Tius guilty of withholding FLADC funds
from the Ongs and diverting corporate income to their own MATTERCO account. [10] These were findings later on
affirmed in our own February 1, 2002 Decision which is the subject of the instant motion for reconsideration. [11]
But there was also a strange aspect of the CA decision. The CA concluded that both the Ongs and the Tius were
in pari delicto (which would not have legally entitled them to rescission) but, for practical considerations, that is, their
inability to work together, it was best to separate the two groups by rescinding the Pre-Subscription Agreement, returning
the original investment of the Ongs and awarding practically everything else to the Tius.
Their motions for reconsideration having been denied, both parties filed separate petitions for review before this
Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs argued that the Tius may not
properly avail of rescission under Article 1191 of the Civil Code considering that the Pre-Subscription Agreement did not
provide for reciprocity of obligations; that the rights over the subject matter of the rescission (capital assets and
properties) had been acquired by a third party (FLADC); that they did not commit a substantial and fundamental breach of
their agreement since they did not prevent the Tius from assuming the positions of Vice-President and Treasurer of
FLADC, and that the failure to credit the 300,000 shares corresponding to the 1,902.30 square-meter property covered by
TCT No. 134066 (formerly 15587) was due to the refusal of the Tius to pay the required transfer taxes to secure the
approval of the SEC for the property contribution and, thereafter, the issuance of title in FLADCs name. They also argued
that the liquidation of FLADC may not legally be ordered by the appellate court even for so called practical considerations
or even to prevent further squabbles and numerous litigations, since the same are not valid grounds under the Corporation
Code. Moreover, the Ongs bewailed the failure of the CA to grant interest on their P70 million and P20 million advances
to FLADC and David S. Tiu, respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on the other hand, contended that the
rescission should have been limited to the restitution of the parties respective investments and not the liquidation of
FLADC based on the erroneous perception by the court that: the Masagana Citimall was threatened with
incompletion since FLADC was in financial distress; that the Tius invited the Ongs to invest in FLADC to settle its P190
million loan from PNB; that they violated the Pre-Subscription Agreement when it was the Lichaucos and not the Tius
who executed the deed of assignment over the 151 square-meter property commensurate to 49,800 shares in FLADC
thereby failing to pay the price for the said shares;that they did not turn over to the Ongs the entire amount of FLADC
funds; that they were diverting rentals from lease contracts due to FLADC to their own MATTERCO account; that theP70
million paid by the Ongs was an advance and not a premium on capital; and that, by rescinding the Pre-Subscription
Agreement, they wanted to wrestle away the management of the mall and prevent the Ongs from enjoying the profits of
their P190 million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of the instant motions), affirming the assailed
decision of the Court of Appeals but with the following modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn interest at twelve percent (12%) per annum
to be computed from the time of judicial demand which is from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn interest at ten percent (10%) per annum to be
computed from the date of the FLADC Board Resolution which is June 19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their property contribution, specifically, the 151
sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated their respective obligations under the Pre-
Subscription Agreement. The Ongs prevented the Tius from assuming the positions of Vice-President and Treasurer of the
corporation. On the other hand, the Decision established that the Tius failed to turn over FLADC funds to the Ongs and
that the Tius diverted rentals due to FLADC to their MATTERCO account. Consequently, it held that rescission was not
possible since both parties were in pari delicto. However, this Court agreed with the Court of Appeals that the remedy of
specific performance, as espoused by the Ongs, was not practical and sound either and would only lead to further
squabbles and numerous litigations between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ of Execution on the grounds that:
(a) the SEC order had become executory as early as September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the
Rules of Court; (b) any further delay would be injurious to the rights of the Tius since the case had been pending for more
than six years; and (c) the SEC no longer had quasi-judicial jurisdiction under RA 8799 (Securities Regulation Code). The
Ongs filed their opposition, contending that the Decision dated February 1, 2002 was not yet final and executory; that no
good reason existed to issue a warrant of execution; and that, pursuant to Section 5.2 of RA 8799, the SEC retained
jurisdiction over pending cases involving intra-corporate disputes already submitted for final resolution upon the
effectivity of the said law.
Aside from their opposition to the Tius Motion for Issuance of Writ of Execution, the Ongs filed their own Motion
for Reconsideration; Alternatively, Motion for Modification (of the February 1, 2002 Decision) on March 15, 2002,
raising two main points: (a) that specific performance and not rescission was the proper remedy under the premises; and
(b) that, assuming rescission to be proper, the subject decision of this Court should be modified to entitle movants to their
proportionate share in the mall.
On their first point (specific performance and not rescission was the proper remedy), movants Ong argue that their
alleged breach of the Pre-Subscription Agreement was, at most, casual which did not justify the rescission of the
contract. They stress that providing appropriate offices for David S. Tiu and Cely Y. Tiu as Vice-President and Treasurer,
respectively, had no bearing on their obligations under the Pre-Subscription Agreement since the said obligation (to
provide executive offices) pertained to FLADC itself. Such obligation arose from the relations between the said officers
and the corporation and not any of the individual parties such as the Ongs. Likewise, the alleged failure of the Ongs to
credit shares of stock in favor of the Tius for their property contributions also pertained to the corporation and not to the
Ongs. Just the same, it could not be done in view of the Tius refusal to pay the necessary transfer taxes which in turn
resulted in the inability to secure SEC approval for the property contributions and the issuance of a new TCT in the name
of FLADC.
Besides, according to the Ongs, the principal objective of both parties in entering into the Pre-Subscription
Agreement in 1994 was to raise the P190 million desperately needed for the payment of FLADCs loan to PNB. Hence, in
this light, the alleged failure to provide office space for the two corporate officers was no more than an inconsequential
infringement. For rescission to be justified, the law requires that the breach of contract should be so substantial or
fundamental as to defeat the primary objective of the parties in making the agreement. At any rate, the Ongs claim that it
was the Tius who were guilty of fundamental violations in failing to remit funds due to FLADC and diverting the same to
their MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that both parties were guilty of violating the Pre-
Subscription Agreement, neither of them could resort to rescission under the principle of pari delicto. In addition, since
the cash and other contributions now sought to be returned already belong to FLADC, an innocent third party, said remedy
may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs should be given their proportionate share of the
mall), movants Ong vehemently take exception to the second item in the dispositive portion of the questioned Decision
insofar as it decreed that whatever remains of the assets of FLADC and the management thereof (after liquidation) shall
be transferred to the Tius. They point out that the mall itself, which would have been foreclosed by PNB if not for their
timely investment of P190 million in 1994 and which is now worth about P1 billion mainly because of their efforts,
should be included in any partition and distribution. They (the Ongs) should not merely be given interest on their capital
investments. The said portion of our Decision, according to them, amounted to the unjust enrichment of the Tius and ran
contrary to our own pronouncement that the act of the Tius in unilaterally rescinding the agreement was the height of
ingratitude and an attempt to pull a fast one as it would prevent the Ongs from enjoying the fruits of their P190 million
investment in FLADC. It also contravenes this Courts assurance in the questioned Decision that the Ongs and Tius will
have a bountiful return of their respective investments derived from the profits of the corporation.
Willie Ong filed a separate Motion for Partial Reconsideration dated March 8, 2002, pointing out that there was no
violation of the Pre-Subscription Agreement on the part of the Ongs;that, after more than seven years since the mall began
its operations, rescission had become not only impractical but would also adversely affect the rights of innocent parties;
and that it would be highly inequitable and unfair to simply return the P100 million investment of the Ongs and give the
remaining assets now amounting to about P1 billion to the Tius.
The Tius, in their opposition to the Ongs motion for reconsideration, counter that the arguments therein are a mere re-
hash of the contentions in the Ongs petition for review and previous motion for reconsideration of the Court of Appeals
decision. The Tius compare the arguments in said pleadings to prove that the Ongs do not raise new issues, and, based on
well-settled jurisprudence,[12] the Ongs present motion is therefore pro-forma and did not prevent the Decision of this
Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral arguments on the respective positions of the
parties. On February 27, 2003, Dr. Willie Ong and the rest of the movants Ong filed their respective memoranda. On
February 28, 2003, the Tius submitted their memorandum.
We grant the Ongs motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for reconsideration. In Philippine Consumers
Foundation, Inc. vs. National Telecommunications Commission, [13]this Court, through then Chief Justice Felix V.
Makasiar, said that its members may and do change their minds, after a re-study of the facts and the law, illuminated by a
mutual exchange of views.[14] After a thorough re-examination of the case, we find that our Decision of February 1, 2002
overlooked certain aspects which, if not corrected, will cause extreme and irreparable damage and prejudice to the Ongs,
FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be blindly applied to meritorious
motions for reconsideration. As long as the same adequately raises a valid ground [15] (i.e., the decision or final order is
contrary to law), this Court has to evaluate the merits of the arguments to prevent an unjust decision from attaining
finality. In Security Bank and Trust Company vs. Cuenca,[16] we ruled that a motion for reconsideration is not pro-
forma for the reason alone that it reiterates the arguments earlier passed upon and rejected by the appellate court. We
explained there that a movant may raise the same arguments, if only to convince this Court that its ruling was erroneous.
Moreover, the rule (that a motion is pro-formaif it only repeats the arguments in the previous pleadings) will not apply if
said arguments were not squarely passed upon and answered in the decision sought to be reconsidered. In the case at bar,
no ruling was made on some of the petitioner Ongs arguments. For instance, no clear ruling was made on why an order
distributing corporate assets and property to the stockholders would not violate the statutory preconditions for corporate
dissolution or decrease of authorized capital stock. Thus, it would serve the ends of justice to entertain the subject motion
for reconsideration since some important issues therein, although mere repetitions, were not considered or clearly resolved
by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the Pre-Subscription Agreement. We rule
that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000 shares with the Tius owning 450,200
shares representing the paid-up capital. When the Tius invited the Ongs to invest in FLADC as stockholders, an increase
of the authorized capital stock became necessary to give each group equal (50-50) shareholdings as agreed upon in the
Pre-Subscription Agreement. The authorized capital stock was thus increased from 500,000 shares to 2,000,000 shares
with a par value of P100 each, with the Ongs subscribing to 1,000,000 shares and the Tius to 549,800 more shares in
addition to their 450,200 shares to complete 1,000,000 shares. Thus, the subject matter of the contract was the
1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these were unissued shares, the parties Pre-
Subscription Agreement was in fact a subscription contract as defined under Section 60, Title VII of the Corporation
Code:

Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be
deemed a subscription within the meaning of this Title, notwithstanding the fact that theparties refer to it as a purchase or
some other contract (Italics supplied).

A subscription contract necessarily involves the corporation as one of the contracting parties since the subject matter
of the transaction is property owned by the corporation its shares of stock. Thus, the subscription contract (denominated
by the parties as a Pre-Subscription Agreement) whereby the Ongs invested P100 million for 1,000,000 shares of stock
was, from the viewpoint of the law, one between the Ongs and FLADC, not between the Ongs and the Tius. Otherwise
stated, the Tius did not contract in their personal capacities with the Ongs since they were not selling any of their own
shares to them. It was FLADC that did.
Considering therefore that the real contracting parties to the subscription agreement were FLADC and the Ongs
alone, a civil case for rescission on the ground of breach of contract filed by the Tius in their personal capacities will not
prosper. Assuming it had valid reasons to do so, only FLADC (and certainly not the Tius) had the legal personality to file
suit rescinding the subscription agreement with the Ongs inasmuch as it was the real party in interest therein. Article 1311
of the Civil Code provides that contracts take effect only between the parties, their assigns and heirs Therefore, a party
who has not taken part in the transaction cannot sue or be sued for performance or for cancellation thereof, unless he
shows that he has a real interest affected thereby. [17]
In their February 28, 2003 Memorandum, the Tius claim that there are two contracts embodied in the Pre-
Subscription Agreement: a shareholders agreement between the Tius and the Ongs defining and governing their
relationship and a subscription contract between the Tius, the Ongs and FLADC regarding the subscription of the parties
to the corporation. They point out that these two component parts form one whole agreement and that their terms and
conditions are intrinsically related and dependent on each other. Thus, the breach of the shareholders agreement, which
was allegedly the consideration for the subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their previous pleadings until after the
oral arguments on January 29, 2003, we find this argument too strained for comfort. It is obviously intended to remedy
and cover up the Tius lack of legal personality to rescind an agreement in which they were personally not parties-in-
interest. Assumingarguendo that there were two sub-agreements embodied in the Pre-Subscription Agreement, this Court
fails to see how the shareholders agreement between the Ongs and Tius can, within the bounds of reason, be interpreted as
the consideration of the subscription contract between FLADC and the Ongs. There was nothing in the Pre-Subscription
Agreement even remotely suggesting such alleged interdependence. Be that as it may, however, the Tius are nevertheless
not the proper parties to raise this point because they were not parties to the subscription contract between FLADC and
the Ongs. Thus, they are not in a position to claim that the shareholders agreement between them and the Ongs was what
induced FLADC and the Ongs to enter into the subscription contract. It is the Ongs alone who can say that. Though
FLADC was represented by the Tius in the subscription contract, FLADC had a separate juridical personality from the
Tius. The case before us does not warrant piercing the veil of corporate fiction since there is no proof that the corporation
is being used as a cloak or cover for fraud or illegality, or to work injustice. [18]
The Tius also argue that, since the Ongs represent FLADC as its management, breach by the Ongs is breach by
FLADC. This must also fail because such an argument disregards the separate juridical personality of FLADC.
The Tius allege that they were prevented from participating in the management of the corporation. There is evidence
that the Ongs did prevent the rightfully elected Treasurer, Cely Tiu, from exercising her function as such. The records
show that the President, Wilson Ong, supervised the collection and receipt of rentals in the Masagana Citimall; [19] that he
ordered the same to be deposited in the bank; [20] and that he held on to the cash and properties of the corporation.
[21]
Section 25 of the Corporation Code prohibits the President from acting concurrently as Treasurer of the corporation.
The rationale behind the provision is to ensure the effective monitoring of each officers separate functions.
However, although the Tius were adversely affected by the Ongs unwillingness to let them assume their positions,
rescission due to breach of contract is definitely the wrong remedy for their personal grievances. The Corporation Code,
SEC rules and even the Rules of Court provide for appropriate and adequate intra-corporate remedies, other than
rescission, in situations like this. Rescission is certainly not one of them, specially if the party asking for it has no legal
personality to do so and the requirements of the law therefor have not been met.A contrary doctrine will tread on
extremely dangerous ground because it will allow just any stockholder, for just about any real or imagined offense, to
demand rescission of his subscription and call for the distribution of some part of the corporate assets to him without
complying with the requirements of the Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate and extraordinary remedy of rescission of the
subject agreement based on a less than substantial breach of subscription contract. Not only are they not parties to the
subscription contract between the Ongs and FLADC; they also have other available and effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the legal standing to sue for rescission
based on breach of contract, said action will nevertheless still not prosper since rescission will violate the Trust Fund
Doctrine and the procedures for the valid distribution of assets and property under the Corporation Code.
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case of Philippine Trust Co. vs. Rivera,
[22]
provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a right to
look for the satisfaction of their claims. [23] This doctrine is the underlying principle in the procedure for the distribution of
capital assets, embodied in the Corporation Code, which allows the distribution of corporate capital only in three
instances: (1) amendment of the Articles of Incorporation to reduce the authorized capital stock, [24] (2) purchase of
redeemable shares by the corporation, regardless of the existence of unrestricted retained earnings, [25] and (3) dissolution
and eventual liquidation of the corporation. Furthermore, the doctrine is articulated in Section 41 on the power of a
corporation to acquire its own shares [26] and in Section 122 on the prohibition against the distribution of corporate assets
and property unless the stringent requirements therefor are complied with. [27]
The distribution of corporate assets and property cannot be made to depend on the whims and caprices of the
stockholders, officers or directors of the corporation, or even, for that matter, on the earnest desire of the court a quo to
prevent further squabbles and future litigations unless the indispensable conditions and procedures for the protection of
corporate creditors are followed. Otherwise, the corporate peace laudably hoped for by the court will remain nothing but a
dream because this time, it will be the creditors turn to engage in squabbles and litigations should the court order an
unlawful distribution in blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will effectively result in the unauthorized
distribution of the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since rescission of a subscription agreement is not one of the instances when distribution of capital
assets and property of the corporation is allowed.
Contrary to the Tius allegation, rescission will, in the final analysis, result in the premature liquidation of the
corporation without the benefit of prior dissolution in accordance with Sections 117, 118, 119 and 120 of the Corporation
Code.[28] The Tius maintain that rescinding the subscription contract is not synonymous to corporate liquidation because
all rescission will entail would be the simple restoration of the status quo ante and a return to the two groups of their cash
and property contributions. We wish it were that simple. Very noticeable is the fact that the Tius do not explain why
rescission in the instant case will not effectively result in liquidation. The Tius merely refer in cavalier fashion to the end-
result of rescission (which incidentally is 100% favorable to them) but turn a blind eye to its unfair, inequitable and
disastrous effect on the corporation, its creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission of the agreement will not result in an
unauthorized liquidation of the corporation because their case is actually a petition to decrease capital stock pursuant to
Section 38 of the Corporation Code. Section 122 of the law provides that (e)xcept by decrease of capital stock, no
corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts
and liabilities. The Tius claim that their case for rescission, being a petition to decrease capital stock, does not violate the
liquidation procedures under our laws. All that needs to be done, according to them, is for this Court to order (1) FLADC
to file with the SEC a petition to issue a certificate of decrease of capital stock and (2) the SEC to approve said decrease.
This new argument has no merit.
The Tius case for rescission cannot validly be deemed a petition to decrease capital stock because such action never
complied with the formal requirements for decrease of capital stock under Section 33 of the Corporation Code. No
majority vote of the board of directors was ever taken. Neither was there any stockholders meeting at which the approval
of stockholders owning at least two-thirds of the outstanding capital stock was secured. There was no revised treasurers
affidavit and no proof that said decrease will not prejudice the creditors rights. On the contrary, all their pleadings
contained were alleged acts of violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the corporation to compel FLADC to file
at the SEC a petition for the issuance of a certificate of decrease of stock. Decreasing a corporations authorized capital
stock is an amendment of the Articles of Incorporation. It is a decision that only the stockholders and the directors can
make, considering that they are the contracting parties thereto. In this case, the Tius are actually not just asking for a
review of the legality and fairness of a corporate decision. They want this Court to make a corporate decision for FLADC .
We decline to intervene and order corporate structural changes not voluntarily agreed upon by its stockholders and
directors.
Truth to tell, a judicial order to decrease capital stock without the assent of FLADCs directors and stockholders is a
violation of the business judgment rule which states that:

xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are binding upon the corporation and courts will
not interfere unless such contracts are so unconscionable and oppressive as to amount to wanton destruction to the rights
of the minority, as when plaintiffs aver that the defendants (members of the board), have concluded a transaction among
themselves as will result in serious injury to the plaintiffs stockholders. [29]

The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an esteemed author in corporate law, thus:

Courts and other tribunals are wont to override the business judgment of the board mainly because, courts are not in the
business of business, and the laissez faire rule or the free enterprise system prevailing in our social and economic set-up
dictates that it is better for the State and its organs to leave business to the businessmen; especially so, when courts are ill-
equipped to make business decisions. More importantly, the social contract in the corporate family to decide the course of
the corporate business has been vested in the board and not with courts. [30]

Apparently, the Tius do not realize the illegal consequences of seeking rescission and control of the corporation to the
exclusion of the Ongs. Such an act infringes on the law on reduction of capital stock. Ordering the return and distribution
of the Ongs capital contribution without dissolving the corporation or decreasing its authorized capital stock is not only
against the law but is also prejudicial to corporate creditors who enjoy absolute priority of payment over and above any
individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not difficult to understand. If rescission is
denied, will injustice be inflicted on any of the parties? The answer is no because the financial interests of both the Tius
and the Ongs will remain intact and safe within FLADC. On the other hand, if rescission is granted, will any of the parties
suffer an injustice?Definitely yes because the Ongs will find themselves out in the streets with nothing but the money they
had in 1994 while the Tius will not only enjoy a windfall estimated to be anywhere from P450 million to P900
million[31] but will also take over an extremely profitable business without much effort at all.
Another very important point follows. The Court of Appeals and, later on, our Decision dated February 1, 2002,
stated that both groups were in pari delicto, meaning, that both the Tius and the Ongs committed breaches of the Pre-
Subscription Agreement. This may be true to a certain extent but, judging from the comparative gravity of the acts
separately committed by each group, we find that the Ongs acts were relatively tame vis--vis those committed by the Tius
in not surrendering FLADC funds to the corporation and diverting corporate income to their own MATTERCO
account. The Ongs were right in not issuing to the Tius the shares corresponding to the four-story building and the
1,902.30 square-meter lot because no title for it could be issued in FLADCs name, owing to the Tius refusal to pay the
transfer taxes. And as far as the 151 square-meter lot was concerned, why should FLADC issue additional shares to the
Tius for property already owned by the corporation and which, in the final analysis, was already factored into the
shareholdings of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of Appeals, to pull a fast one on the Ongs
because that was where the problem precisely started. It is clear that, when the finances of FLADC improved considerably
after the equity infusion of the Ongs, the Tius started planning to take over the corporation again and exclude the Ongs
from it. It appears that the Tius refusal to pay transfer taxes might not have really been at all unintentional because, by
failing to pay that relatively small amount which they could easily afford, the Tius should have expected that they were
not going to be given the corresponding shares. It was, from every angle, the perfect excuse for blackballing the Ongs. In
other words, the Tius created a problem then used that same problem as their pretext for showing their partners the
door. In the process, they stood to be rewarded with a bonanza of anywhere between P450 million to P900 million in
assets (from an investment of only P45 million which was nearly foreclosed by PNB), to the extreme and irreparable
damage of the Ongs, FLADC and its creditors.
After all is said and done, no one can close his eyes to the fact that the Masagana Citimall would not be what it has
become today were it not for the timely infusion of P190 million by the Ongs in 1994. There are no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they originally invested in said mall. If only for this and the
fact that this Resolution can truly pave the way for both groups to enjoy the fruits of their investments assuming good
faith and honest intentions we cannot allow the rescission of the subject subscription agreement. The Ongs shortcomings
were far from serious and certainly less than substantial; they were in fact remediable and correctable under the law. It
would be totally against all rules of justice, fairness and equity to deprive the Ongs of their interests on petty and tenuous
grounds.
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of petitioners Ong Yong, Juanita Tan Ong,
Wilson Ong, Anna Ong, William Ong, Willie Ong and Julie Ong Alonzo and the motion for partial reconsideration, dated
March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The Petition for Confirmation of the Rescission of the
Pre-Subscription Agreement docketed as SEC Case No. 02-96-5269 is hereby DISMISSED for lack of merit. The
unilateral rescission by the Tius of the subject Pre-Subscription Agreement, dated August 15, 1994, is hereby declared as
null and void.
The motion for the issuance of a writ of execution, dated March 15, 2002, of petitioners David S. Tiu, Cely Y. Tiu,
Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu is hereby DENIED for being moot.
Accordingly, the Decision of this Court, dated February 1, 2002, affirming with modification the decision of the
Court of Appeals, dated October 5, 1999, and the SEC en banc, dated September 11, 1998, is hereby REVERSED.
Costs against the petitioner Tius.
SO ORDERED.

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