SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs.

COURT OF
APPEALS, MOTORICH SALES CORPORATION, NENITA LEE GRUENBERG, ACL
DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents.

May a corporate treasurer, by herself and without any authorization from the board of
directors, validly sell a parcel of land owned by the corporation? May the veil of corporate fiction
be pierced on the mere ground that almost all of the shares of stock of the corporation are
owned by said treasurer and her husband?

The Case

These questions are answered in the negative by this Court in resolving the Petition for
Review on Certiorari before us, assailing the March 18, 1997 Decision[1] of the Court of
Appeals[2] in CA GR CV No. 46801 which, in turn, modified the July 18, 1994 Decision of the
Regional Trial Court of Makati, Metro Manila, Branch 63[3] in Civil Case No. 89-3511. The RTC
dismissed both the Complaint and the Counterclaim filed by the parties. On the other hand, the
Court of Appeals ruled:
WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH
MODIFICATION ordering defendant-appellee Nenita Lee Gruenberg to REFUND or
return to plaintiff-appellant the downpayment of P100,000.00 which she received from
plaintiff-appellant. There is no pronouncement as to costs.[4]
The petition also challenges the June 10, 1997 CA Resolution denying reconsideration.[5]

The Facts

The facts as found by the Court of Appeals are as follows:

Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.s amended complaint alleged
that on 14 February 1989, plaintiff-appellant entered into an agreement with defendant-
appellee Motorich Sales Corporation for the transfer to it of a parcel of land identified as Lot 30,
Block 1 of the Acropolis Greens Subdivision located in the District of Murphy, Quezon City,
Metro Manila, containing an area of Four Hundred Fourteen (414) square meters, covered by
TCT No. (362909) 2876; that as stipulated in the Agreement of 14 February 1989, plaintiff-
appellant paid the down payment in the sum of One Hundred Thousand (P100,000.00) Pesos,
the balance to be paid on or before March 2, 1989; that on March 1, 1989, Mr. Andres T. Co,
president of plaintiff-appellant corporation, wrote a letter to defendant-appellee Motorich Sales
Corporation requesting for a computation of the balance to be paid; that said letter was
coursed through defendant-appellees broker, Linda Aduca, who wrote the computation of the
balance; that on March 2, 1989, plaintiff-appellant was ready with the amount corresponding to
the balance, covered by Metrobank Cashiers Check No. 004223, payable to defendant-
appellee Motorich Sales Corporation; that plaintiff-appellant and defendant-appellee Motorich
Sales Corporation were supposed to meet in the office of plaintiff-appellant but defendant-
appellees treasurer, Nenita Lee Gruenberg, did not appear; that defendant-appellee Motorich
Sales Corporation despite repeated demands and in utter disregard of its commitments had
refused to execute the Transfer of Rights/Deed of Assignment which is necessary to transfer
the certificate of title; that defendant ACL Development Corp. is impleaded as a necessary
party since Transfer Certificate of Title No. (362909) 2876 is still in the name of said defendant;
while defendant JNM Realty & Development Corp. is likewise impleaded as a necessary party
in view of the fact that it is the transferor of right in favor of defendant-appellee Motorich Sales
Corporation; that on April 6, 1989, defendant ACL Development Corporation and Motorich
Sales Corporation entered into a Deed of Absolute Sale whereby the former transferred to the
latter the subject property; that by reason of said transfer, the Registry of Deeds of Quezon City
issued a new title in the name of Motorich Sales Corporation, represented by defendant-
appellee Nenita Lee Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of Title
No. 3571; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporations bad faith in refusing to execute a formal Transfer of Rights/Deed of Assignment,
plaintiff-appellant suffered moral and nominal damages which may be assessed against
defendants-appellees in the sum of Five Hundred Thousand (500,000.00) Pesos; that as a
result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporations
unjustified and unwarranted failure to execute the required Transfer of Rights/Deed of
Assignment or formal deed of sale in favor of plaintiff-appellant, defendants-appellees should
be assessed exemplary damages in the sum of One Hundred Thousand (P100,000.00) Pesos;
that by reason of defendants-appellees bad faith in refusing to execute a Transfer of
Rights/Deed of Assignment in favor of plaintiff-appellant, the latter lost the opportunity to
construct a residential building in the sum of One Hundred Thousand (P100,000.00) Pesos;
and that as a consequence of defendants-appellees Nenita Lee Gruenberg and Motorich Sales
Corporations bad faith in refusing to execute a deed of sale in favor of plaintiff-appellant, it has
been constrained to obtain the services of counsel at an agreed fee of One Hundred Thousand
(P100,000.00) Pesos plus appearance fee for every appearance in court hearings.
In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee
Gruenberg interposed as affirmative defense that the President and Chairman of
Motorich did not sign the agreement adverted to in par. 3 of the amended complaint;
that Mrs. Gruenbergs signature on the agreement (ref: par. 3 of Amended Complaint)
is inadequate to bind Motorich. The other signature, that of Mr. Reynaldo Gruenberg,
President and Chairman of Motorich, is required; that plaintiff knew this from the very
beginning as it was presented a copy of the Transfer of Rights (Annex B of amended
complaint) at the time the Agreement (Annex B of amended complaint) was signed;
that plaintiff-appellant itself drafted the Agreement and insisted that Mrs. Gruenberg
accept the P100,000.00 as earnest money; that granting, without admitting, the
enforceability of the agreement, plaintiff-appellant nonetheless failed to pay in legal
tender within the stipulated period (up to March 2, 1989); that it was the understanding
between Mrs. Gruenberg and plaintiff-appellant that the Transfer of Rights/Deed of
Assignment will be signed only upon receipt of cash payment; thus they agreed that if
the payment be in check, they will meet at a bank designated by plaintiff-appellant
where they will encash the check and sign the Transfer of Rights/Deed. However,
plaintiff-appellant informed Mrs. Gruenberg of the alleged availability of the check, by
phone, only after banking hours.
On the basis of the evidence, the court a quo rendered the judgment appealed from[,]
dismissing plaintiff-appellants complaint, ruling that:
'The issue to be resolved is: whether plaintiff had the right to compel
defendants to execute a deed of absolute sale in accordance with the
agreement of February 14, 1989; and if so, whether plaintiff is entitled to
damages.
 As to the first question, there is no evidence to show that defendant Nenita Lee
Gruenberg was indeed authorized by defendant corporation, Motorich Sales, to
dispose of that property covered by T.C.T. No. (362909) 2876. Since the
property is clearly owned by the corporation, Motorich Sales, then its
disposition should be governed by the requirement laid down in Sec. 40, of the
Corporation Code of the Philippines, to wit:
Sec. 40, Sale or other disposition of assets. Subject to the provisions of
existing laws on illegal combination and monopolies, a corporation may
by a majority vote of its board of directors xxx sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill xxx when authorized by the
vote of the stockholders representing at least two third (2/3) of the
outstanding capital stock x x x.
No such vote was obtained by defendant Nenita Lee Gruenberg for that
proposed sale[;] neither was there evidence to show that the supposed
transaction was ratified by the corporation. Plaintiff should have been on the
look out under these circumstances. More so, plaintiff himself [owns] several
corporations (tsn dated August 16, 1993, p. 3) which makes him
knowledgeable on corporation matters.
Regarding the question of damages, the Court likewise, does not find
substantial evidence to hold defendant Nenita Lee Gruenberg liable
considering that she did not in anyway misrepresent herself to be authorized by
the corporation to sell the property to plaintiff (tsn dated September 27, 1991,
p. 8).
In the light of the foregoing, the Court hereby renders judgment DISMISSING
the complaint at instance for lack of merit.
Defendants counterclaim is also DISMISSED for lack of basis. (Decision, pp. 7-
8; Rollo, pp. 34-35)

The Issues

Before this Court, petitioner raises the following issues:

I. Whether or not the doctrine of piercing the veil of corporate fiction is applicable
in the instant case
II. Whether or not the appellate court may consider matters which the parties
failed to raise in the lower court
III. Whether or not there is a valid and enforceable contract between the petitioner
and the respondent corporation
IV. Whether or not the Court of Appeals erred in holding that there is a valid
correction/substitution of answer in the transcript of stenographic note[s]
V. Whether or not respondents are liable for damages and attorneys fees[9]
The Court synthesized the foregoing and will thus discuss them seriatim as follows:
 1. Was there a valid contract of sale between petitioner and Motorich?
2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?
3. Is the alleged alteration of Gruenbergs testimony as recorded in the transcript of
stenographic notes material to the disposition of this case?
4. Are respondents liable for damages and attorneys fees?

The Courts Ruling

The petition is devoid of merit.

First Issue: Validity of Agreement

Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14,
1989, it entered through its president, Andres Co, into the disputed Agreement with Respondent
Motorich Sales Corporation, which was in turn allegedly represented by its treasurer, Nenita Lee
Gruenberg. Petitioner insists that [w]hen Gruenberg and Co affixed their signatures on the
contract they both consented to be bound by the terms thereof. Ergo, petitioner contends that
the contract is binding on the two corporations. We do not agree.
True, Gruenberg and Co signed on February 14, 1989, the Agreement according to which a
lot owned by Motorich Sales Corporation was purportedly sold. Such contract, however, cannot
bind Motorich, because it never authorized or ratified such sale.
A corporation is a juridical person separate and distinct from its stockholders or
members. Accordingly, the property of the corporation is not the property of its stockholders or
members and may not be sold by the stockholders or members without express authorization
from the corporations board of directors.[10] Section 23 of BP 68, otherwise known as the
Corporation Code of the Philippines, provides:
SEC. 23. The Board of Directors or Trustees. -- Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations controlled and
held by the board of directors or trustees to be elected from among the holders of
stocks, or where there is no stock, from among the members of the corporation, who
shall hold office for one (1) year and until their successors are elected and qualified.
Indubitably, a corporation may act only through its board of directors, or, when authorized
either by its bylaws or by its board resolution, through its officers or agents in the normal course
of business. The general principles of agency govern the relation between the corporation and
its officers or agents, subject to the articles of incorporation, bylaws, or relevant provisions of
law.[11]Thus, this Court has held that a corporate officer or agent may represent and bind the
corporation in transactions with third persons to the extent that the authority to do so has been
conferred upon him, and this includes powers which have been intentionally conferred, and also
such powers as, in the usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent powers as the corporation
has caused persons dealing with the officer or agent to believe that it has conferred.[12]
 Furthermore, the Court has also recognized the rule that persons dealing with an assumed
agent, whether the assumed agency be a general or special one, are bound at their peril, if they
would hold the principal liable, to ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden of proof is upon them to
establish it (Harry Keeler v. Rodriguez, 4 Phil. 19).[13] Unless duly authorized, a treasurer, whose
powers are limited, cannot bind the corporation in a sale of its assets.[14]
In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita
Gruenberg, its treasurer, to sell the subject parcel of land.[15] Consequently, petitioner had the
burden of proving that Nenita Gruenberg was in fact authorized to represent and bind Motorich
in the transaction. Petitioner failed to discharge this burden. Its offer of evidence before the trial
court contained no proof of such authority.[16] It has not shown any provision of said respondents
articles of incorporation, bylaws or board resolution to prove that Nenita Gruenberg possessed
such power.
That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the
responsibility of ascertaining the extent of her authority to represent the corporation. Petitioner
cannot assume that she, by virtue of her position, was authorized to sell the property of the
corporation. Selling is obviously foreign to a corporate treasurers function, which generally has
been described as to receive and keep the funds of the corporation, and to disburse them in
accordance with the authority given him by the board or the properly authorized officers.[17]
Neither was such real estate sale shown to be a normal business activity of Motorich. The
primary purpose of Motorich is marketing, distribution, export and import in relation to a general
merchandising business.[18] Unmistakably, its treasurer is not cloaked with actual or apparent
authority to buy or sell real property, an activity which falls way beyond the scope of her general
authority.
Articles 1874 and 1878 of the Civil Code of the Philippines provides:
ART. 1874. When a sale of a piece of land or any interest therein is through an agent,
the authority of the latter shall be in writing; otherwise, the sale shall be void.
ART. 1878 Special powers of attorney are necessary in the following case:
xxxxxxxxx
(5) To enter any contract by which the ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable consideration;
x x x x x x x x x.
Petitioner further contends that Respondent Motorich has ratified said contract of sale
because of its acceptance of benefits, as evidenced by the receipt issued by Respondent
Gruenberg.[19]Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope of their authority are
binding on the corporation. But when these officers exceed their authority, their actions cannot
bind the corporation, unless it has ratified such acts or is estopped from disclaiming them.[20]
In this case, there is a clear absence of proof that Motorich ever authorized Nenita
Gruenberg, or made it appear to any third person that she had the authority, to sell its land or to
receive the earnest money. Neither was there any proof that Motorich ratified, expressly or
impliedly, the contract. Petitioner rests its argument on the receipt, which, however, does not
prove the fact of ratification. The document is a hand-written one, not a corporate receipt, and it
bears only Nenita Gruenbergs signature. Certainly, this document alone does not prove that her
acts were authorized or ratified by Motorich.
Article 1318 of the Civil Code lists the requisites of a valid and perfected contract: (1)
consent of the contracting parties; (2) object certain which is the subject matter of the
contract; (3) cause of the obligation which is established. As found by the trial court[21] and
affirmed by the Court of Appeals,[22] there is no evidence that Gruenberg was authorized to
enter into the contract of sale, or that the said contract was ratified by Motorich. This factual
finding of the two courts is binding on this Court.[23] As the consent of the seller was not
obtained, no contract to bind the obligor was perfected. Therefore, there can be no valid
contract of sale between petitioner and Motorich.
Because Motorich had never given a written authorization to Respondent Gruenberg to sell
its parcel of land, we hold that the February 14, 1989 Agreement entered into by the latter with
petitioner is void under Article 1874 of the Civil Code. Being inexistent and void from the
beginning, said contract cannot be ratified.[24]

Second Issue:
Piercing the Corporate Veil Not Justified

Petitioner also argues that the veil of corporate fiction of Motorich should be pierced,
because the latter is a close corporation. Since Spouses Reynaldo L. Gruenberg and Nenita R.
Gruenberg owned all or almost all or 99.866% to be accurate, of the subscribed capital
stock[25] of Motorich, petitioner argues that Gruenberg needed no authorization from the board to
enter into the subject contract.[26] It adds that, being solely owned by the Spouses Gruenberg,
the company can be treated as a close corporation which can be bound by the acts of its
principal stockholder who needs no specific authority. The Court is not persuaded.
First, petitioner itself concedes having raised the issue belatedly,[27] not having done so
during the trial, but only when it filed its sur-rejoinder before the Court of Appeals.[28] Thus, this
Court cannot entertain said issue at this late stage of the proceedings. It is well-settled that
points of law, theories and arguments not brought to the attention of the trial court need not be,
and ordinarily will not be, considered by a reviewing court, as they cannot be raised for the first
time on appeal.[29] Allowing petitioner to change horses in midstream, as it were, is to run
roughshod over the basic principles of fair play, justice and due process.
Second, even if the above-mentioned argument were to be addressed at this time, the
Court still finds no reason to uphold it. True, one of the advantages of a corporate form of
business organization is the limitation of an investors liability to the amount of the
investment.[30] This feature flows from the legal theory that a corporate entity is separate and
distinct from its stockholders. However, the statutorily granted privilege of a corporate veil may
be used only for legitimate purposes.[31] On equitable considerations, the veil can be
disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public
convenience; confuse legitimate issues; or serve as a mere alter ego or business conduit of a
person or an instrumentality, agency or adjunct of another corporation.[32]
Thus, the Court has consistently ruled that [w]hen the fiction is used as a means of
perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the
circumvention of statutes, the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime, the veil with which the law covers and isolates the corporation
from the members or stockholders who compose it will be lifted to allow for its consideration
merely as an aggregation of individuals.[33]
We stress that the corporate fiction should be set aside when it becomes a shield against
liability for fraud, illegality or inequity committed on third persons. The question of piercing the
veil of corporate fiction is essentially, then, a matter of proof. In the present case, however, the
Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner utterly
failed to establish that said corporation was formed, or that it is operated, for the purpose of
shielding any alleged fraudulent or illegal activities of its officers or stockholders; or that the said
veil was used to conceal fraud, illegality or inequity at the expense of third persons, like
petitioner.
Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the
Corporation Code defines a close corporation as follows:
SEC. 96. Definition and Applicability of Title. -- A close corporation, within the meaning
of this Code, is one whose articles of incorporation provide that: (1) All of the
corporations issued stock of all classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of persons, not exceeding twenty (20); (2)
All of the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title; and (3) The corporation shall not list in
any stock exchange or make any public offering of any of its stock of any
class. Notwithstanding the foregoing, a corporation shall be deemed not a close
corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or
controlled by another corporation which is not a close corporation within the meaning
of this Code. xxx.
The articles of incorporation[34] of Motorich Sales Corporation does not contain any
provision stating that (1) the number of stockholders shall not exceed 20, or (2) a preemption of
shares is restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in
any stock exchange or making a public offering of such stocks is prohibited. From its articles, it
is clear that Respondent Motorich is not a close corporation.[35] Motorich does not become one
either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of its subscribed
capital stock. The [m]ere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personalities.[36] So too, a narrow distribution of ownership does not, by
itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals[37] wherein the Court
ruled that xxx petitioner corporation is classified as a close corporation and, consequently, a
board resolution authorizing the sale or mortgage of the subject property is not necessary to
bind the corporation for the action of its president.[38] But the factual milieu in Dulay is not on all
fours with the present case. In Dulay, the sale of real property was contracted by the president
of a close corporation with the knowledge and acquiescence of its board of directors. [39] In the
present case, Motorich is not a close corporation, as previously discussed, and the agreement
was entered into by the corporate treasurer without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where an action by a director,
who singly is the controlling stockholder, may be considered as a binding corporate act and a
board action as nothing more than a mere formality.[40] The present case, however, is not one of
them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own almost 99.866% of
Respondent Motorich.[41] Since Nenita is not the sole controlling stockholder of Motorich, the
aforementioned exception does not apply. Granting arguendo that the corporate veil of Motorich
is to be disregarded, the subject parcel of land would then be treated as conjugal property of
Spouses Gruenberg, because the same was acquired during their marriage. There being no
indication that said spouses, who appear to have been married before the effectivity of the
Family Code, have agreed to a different property regime, their property relations would be
governed by conjugal partnership of gains.[42] As a consequence, Nenita Gruenberg could not
have effected a sale of the subject lot because [t]here is no co-ownership between the spouses
in the properties of the conjugal partnership of gains. Hence, neither spouse can alienate in
favor of another his or her interest in the partnership or in any property belonging to it; neither
spouse can ask for a partition of the properties before the partnership has been legally
dissolved.[43]
Assuming further, for the sake of argument, that the spouses property regime is the
absolute community of property, the sale would still be invalid. Under this regime, alienation of
community property must have the written consent of the other spouse or the authority of the
court without which the disposition or encumbrance is void.[44] Both requirements are manifestly
absent in the instant case.

Third Issue: Challenged Portion of TSN Immaterial

Petitioner calls our attention to the following excerpt of the transcript of stenographic
notes(TSN):
Q Did you ever represent to Mr. Co that you were authorized by the corporation to sell the
property?
A Yes, sir.[45]
Petitioner claims that the answer Yes was crossed out, and, in its place was written a No
with an initial scribbled above it.[46] This, however, is insufficient to prove that Nenita Gruenberg
was authorized to represent Respondent Motorich in the sale of its immovable property. Said
excerpt should be understood in the context of her whole testimony. During her cross-
examination, Respondent Gruenberg testified:
Q So, you signed in your capacity as the treasurer?
[A] Yes, sir.
Q Even then you kn[e]w all along that you [were] not authorized?
A Yes, sir.
Q You stated on direct examination that you did not represent that you were authorized to
sell the property?
A Yes, sir.
Q But you also did not say that you were not authorized to sell the property, you did not tell
that to Mr. Co, is that correct?
A That was not asked of me.
Q Yes, just answer it.
 A I just told them that I was the treasurer of the corporation and it [was] also the president
who [was] also authorized to sign on behalf of the corporation.
Q You did not say that you were not authorized nor did you say that you were authorized?
A Mr. Co was very interested to purchase the property and he offered to put up
a P100,000.00 earnest money at that time. That was our first meeting.[47]
Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its
property. On the other hand, her testimony demonstrates that the president of Petitioner
Corporation, in his great desire to buy the property, threw caution to the wind by offering and
paying the earnest money without first verifying Gruenbergs authority to sell the lot.
Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He
has been the president of Petitioner Corporation for more than ten years and has also served as
chief executive of two other corporate entities.[53] Co cannot feign ignorance of the scope of the
authority of a corporate treasurer such as Gruenberg. Neither can he be oblivious to his duty to
ascertain the scope of Gruenbergs authorization to enter into a contract to sell a parcel of land
belonging to Motorich.
Indeed, petitioners claim of fraud and bad faith is unsubstantiated and fails to persuade the
Court. Indubitably, petitioner appears to be the victim of its own officers negligence in entering
into a contract with and paying an unauthorized officer of another corporation.
As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered
to return to petitioner the amount she received as earnest money, as no one shall enrich himself
at the expense of another,[54] a principle embodied in Article 2154 of the Civil Code.[55] Although
there was no binding relation between them, petitioner paid Gruenberg on the mistaken belief
that she had the authority to sell the property of Motorich.[56] Article 2155 of the Civil Code
provides that [p]ayment by reason of a mistake in the construction or application of a difficult
question of law may come within the scope of the preceding article.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.
SO ORDERED.
Calatagan Golf Club v Clemente

Facts: Clemente applied to purchase one share stock of Calatagan, indicating in his application
his mailing address, complete residential address, office and residence telephone numbers as
well as the company with which he was connected. Calatagan issued to him a Certificate of
Stock. Calatagan charges monthly dues to meet expenses for general operations, costs for
upkeep and improvement of grounds and facilities as provided for by its Articles of
Incorporation. After paying the monthly dues initially, Clemente failed to pay and Calatagan
demanded payment for the monthly dues through letters which were sent to his mailing address
but were sent back to sender with the postal note that the address has been closed , twice.
Calatagan declared Clemente delinquent for failing to pay his monthly dues and included him in
its list of delinquent members. Calatagan's board of directors adopted a resolution authorizing
the foreclosure of shares of delinquent members and the public acution of these shares.
Calatagan sent a third and final letter to the same address containing a warning that unless
Clemente settles his outstanding dues, his share will be included among the shares to be sold
at the public auction. Clemente's share was sold with the notice of foreclosure published in the
issue of Business World. Clemente learned of the sale after 4 years and filed a claim with SEC
seeking to restore his shareholding in Calatagan with damages. SEC dismissed the complaint,
citing Sec. 69 of the Corporation Code which provides that the sale of share at an auction sale
can only be questioned within 6 months and Clemente's claim was filed long after the period
provided. SEC further held hat Calatagan complied with all the requirements for a valid sale of
the share, Clemente failing to inform Calatagan that the address he supplied was no longer his
address and that Clemente acted in bad faith assuming as he claimed that his non-payment of
dues would merely render his share inactive. CA reversed SEC's ruling, restoring the share and
awarded damages minnus the unpaid monthly dues Clemente owed. CA found that SEC erred
in citing a case it decided, Caram v Valley Golf Country Club that Sec. 69 specifically refers to
unpaid subscriptions to capital stock and not to any other debt of stockholders. CA employed
Art. 1140 of the Civil Code as the proper rule of prescription which is at 8 years since Sec. 69
does not apply to unpaid membership dues in non-stock corporations. Also Calatagan knew that
the previous 2 letters it sent were sent back to them and so the demand letter would not be
received by Clemente.

Issue: W/N Calatagan is liable for damages under Art. 19 of the Civil Code.

Ruling: Sec. 69 of the Corporation Code refers specifically to unpaid subscriptions to capital
stock. The sale of delinquent stock is the non-payment of the subscription price for the share of
stock itself and the stockholder has yet to fully pay for the value of the shares subscribed.
Clemente had already fully paid for the share and Calatagan no longer had any outstanding
obligation to deprive him of full title to his share. Section 69 will only be applicable if Clemente
still has not fully paid for the share and the non-stock corporation decided to sell such share as
a consequence which is not the case at bar. Sec. 91 of the Corp. Code provides that
termination of membership in non-stock corporations are governed by its articles of
incorporation or by-laws. In accordance with it's by-laws, Calatagan sent the third and final
demand letter with the warning but it was sent ot the mailing address which Calatagan knew
was already closed. The Corporate Secretary under its by-laws is required by law to keep a
record of the addresses of all stockholder and that the Secretary needs to notify the shareholder
of the order to sell at auction of said shareholder's stock. The Corporate Secretary being a
lawyer is knowledgeable on the law and of corporate records and should have known that the
third demand letter would still have been sent back to them. Due diligence was not exercised by
the Corporate Secretary, there was even no inquiry as to the mailing address or verification of
the other addresses on record provided by Clemente and knowing that the PO box was already
closed it still persisted in sending the final demand and warning letter to the same PO box which
constituted bad faith. Calatagan's bad faith and failure to observe its own by-laws resulted not
merely in the loss of Clemente's privilege to enjoy Calatagan's facilities but also in significant
pecuniary damage to him. Knowing as Clemente did that Calatagan was in possession of his
home address as well as residence and office telephone numbers, he had every reason to
assume that the club would not be at a loss should it need to contact him. A non-stock
corporation like Calatagan is not exempt from the obligation laid down by Articles 19-21 which
obliges under law every person to act fairly and in good faith towards one another. Clemente
has sustained pecuniary injry by reason of Calatagan's wrongful violation of its own by-laws and
CA's award of moral and exemplary damages as well as attorney's fees are warranted.
Calatagan was cited in violation of Art. 32 of the CC by CA which allows recovery of damages
from any private individual who directly or indirectly obstructs, defeats, violates or in any manner
impeded or impairs the right against deprivation of property without due process of laws. CA's
decision is affirmed with costs against Calatagan.
VALLEY GOLF & COUNTRY CLUB, INC., Petitioner,vs.ROSA O. VDA. DE CARAM,
Respondent.

G.R. No. 158805 | April 16, 2009

FACTS:

Petitioner is a duly constituted non-stock, non-profit corporation which operates a golf course.
The members and their guests are entitled to play golf on the said course and avail of the
facilities and privilege. The shareholders are likewise assessed monthly membership dues.

Cong. Fermin Z. Caram, Jr., respondent’s husband, subscribed and paid in full 1Golf Shareof
the petitioner and was subsequently issued with a stock certificate which indicated a par value
of P9,000.00. It was alleged by the petitioner that Caram stopped paying his monthly dues and
that it has sent 5 letters to Caram concerning his delinquent account. The Golf Share was
subsequently sold at public auction for P25,000.00 after the BOD had authorized the sale and
the Notice of Auction Sale was published in the Philippine Daily Inquirer

Caram thereafter died and hiis wife initiated intestate proceedings before the RTC of
IloIlo. Unaware of the pending controversy over the Golf Share, the Caram family and
the RTC included the Golf Share as part of Caram’s estate. The RTC approved a project of
partition of Caram’s estate and the Golf Share was adjudicated to the wife, who paid the
corresponding estate tax due, including that on the golf Share.

It was only through a letter that the heirs of Caram learned of the sale of the Golf Share
following their inquiry with Valley Golf about the Golf Share. After a series of correspondence,
the Caram heirs were subsequently informed in a letter that they were entitled to the refund
ofP11,066.52 out of the proceeds of the sale of the Golf Share, which amount had been in the
custody of the petitioner.

Caram’s wife filed an action for reconveyance of the Golf Share with damages before the SEC
against Valley Golf. The SEC Hearing Officer rendered a decision in favor of the wife, ordering
Valley Golf to convey ownership of the Golf Share, or in the alternative. to issue one fully paid
share of stock of Valley Golf of the same class as the Golf Share to the wife. Damages
totaling P90,000.00 were also awarded to the wife.

The SEC hearing officer ruled that under Section 67, paragraph 2 of the Corporation Code, a
share stock could only be deemed delinquent and sold in an extrajudicial sale at public auction
only upon the failure of the stockholder to pay the unpaid subscription or balance for the share.
However, the section could not have applied in Caram’s case since he had fully paid for the Golf
Share and he had been assessed not for the share itself but for his delinquent club dues.
Proceeding from the foregoing premises, the SEC hearing officer concluded that the auction
sale had no basis in law and was thus a nullity. The SEC en banc and the Court of Appeals
affirmed the hearing officer’s decision, and so the petitioner appealed before SC.

ISSUE:

WON a non-stock corporation seize and dispose of the membership share of a fully-paid
member on account of its unpaid debts to the corporation when it is authorized to do so
under the corporate by-laws but not by the Articles of Incorporation?

RULING:

The Supreme Court ruled that there is a specific provision under Title XI on Non-Stock
Corporations of the Corporation Code dealing with thetermination of membership in a non-stock
corporation such as Valley Golf.

Section 91 of the Corporation Code provides:

SEC. 91. Termination of membership.—Membership shall be terminated in the manner

and for the causes provided in the articles of incorporation or the by-laws. Termination of
membership shall have the effect of extinguishing all rights of a member in the
corporation or in its property, unless otherwise provided in the articles of incorporation or
the by-laws. (Emphasis supplied)

A share can only be deemed delinquent and sold at public auction only upon the failure of the
stockholder to pay the unpaid subscription. Delinquency in monthly club dues was merely an
ordinary debt enforceable by judicial action in a civil case. A provision creating a lien upon
shares of stock for unpaid debts, liabilities, or assessments of stockholders to the corporation,
should be embodied in the Articles of Incorporation, and not merely in the by-laws. Moreover,
the by-laws of petitioner should have provided formal notice and hearing procedure
before a member’s share may be seized and sold.

The procedure for stock corporation’s recourse on unpaid subscription is not applicable
in member’s shares in a non-stock corporation.

SC proceeded to declare the sale as invalid. SC found that Valley Golf acted in bad faith when
it sent the final notice to Caram under the pretense they believed him to be still alive, when in
fact they had very well known that he had already died. The Court stated:
 Whatever the reason Caram was unable to respond to the earlier notices, the fact
remains that at the time of the final notice, Valley Golf knew that Caram, having died and
gone, would not be able to settle the obligation himself, yet they persisted in sending him
notice to provide a color of regularity to the resulting sale.

That reason alone, evocative as it is of the absence of substantial justice in the sale of the Golf
Share, is sufficient to nullify the sale and sustain the rulings of the SEC and the Court of
Appeals.

Moreover, the utter and appalling bad faith exhibited by Valley Golf in sending out the final
notice to Caram on the deliberate pretense that he was still alive could bring into operation
Articles 19, 20 and 21 under the Chapter on Human Relations of the Civil Code. These
provisions enunciate a general obligation under law for every person to act fairly and in good
faith towards one another. Non-stock corporations and its officers are not exempt from that
obligation.

MINDANAO SAVINGS AND LOAN ASSOCIATION, INC., represented by its Liquidator, THE
PHILIPPINE DEPOSIT INSURANCE CORPORATION, Petitioner,
vs.
EDWARD WILLKOM; GILDA GO; REMEDIOS UY; MALAYO BANTUAS, in his capacity as
the Deputy Sheriff of Regional Trial Court, Branch 3, Iligan City; and the REGISTER OF
DEEDS of Cagayan de Oro City,Respondent.

DECISION

NACHURA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court filed by Mindanao
Savings and Loan Association, Inc. (MSLAI), represented by its liquidator, Philippine Deposit
Insurance Corporation (PDIC), against respondents Edward R. Willkom (Willkom); Gilda Go
(Go); Remedios Uy (Uy); Malayo Bantuas (sheriff Bantuas), in his capacity as sheriff of the
Regional Trial Court (RTC), Branch 3 of Iligan City; and the Register of Deeds of Cagayan de
Oro City. MSLAI seeks the reversal and setting aside of the Court of Appeals1 (CA)
Decision2 dated March 21, 2007 and Resolution3 dated June 1, 2007 in CA-G.R. CV No. 58337.

The controversy stemmed from the following facts:

The First Iligan Savings and Loan Association, Inc. (FISLAI) and the Davao Savings and Loan
Association, Inc. (DSLAI) are entities duly registered with the Securities and Exchange
Commission (SEC) under Registry Nos. 34869 and 32388, respectively, primarily engaged in
the business of granting loans and receiving deposits from the general public, and treated as
banks.4

Sometime in 1985, FISLAI and DSLAI entered into a merger, with DSLAI as the surviving
corporation.5 The articles of merger were not registered with the SEC due to incomplete
documentation.6 On August 12, 1985, DSLAI changed its corporate name to MSLAI by way of
an amendment to Article 1 of its Articles of Incorporation, but the amendment was approved by
the SEC only on April 3, 1987.7

Meanwhile, on May 26, 1986, the Board of Directors of FISLAI passed and approved Board
Resolution No. 86-002, assigning its assets in favor of DSLAI which in turn assumed the
former’s liabilities.8

The business of MSLAI, however, failed. Hence, the Monetary Board of the Central Bank of the
Philippines ordered its closure and placed it under receivership per Monetary Board Resolution
No. 922 dated August 31, 1990. The Monetary Board found that MSLAI’s financial condition was
one of insolvency, and for it to continue in business would involve probable loss to its depositors
and creditors. On May 24, 1991, the Monetary Board ordered the liquidation of MSLAI, with
PDIC as its liquidator.9

It appears that prior to the closure of MSLAI, Uy filed with the RTC, Branch 3 of Iligan City, an
action for collection of sum of money against FISLAI, docketed as Civil Case No. 111-697. On
October 19, 1989, the RTC issued a summary decision in favor of Uy, directing defendants
therein (which included FISLAI) to pay the former the sum of ₱136,801.70, plus interest until full
payment, 25% as attorney’s fees, and the costs of suit. The decision was modified by the CA by
further ordering the third-party defendant therein to reimburse the payments that would be made
by the defendants. The decision became final and executory on February 21, 1992. A writ of
execution was thereafter issued.10

On April 28, 1993, sheriff Bantuas levied on six (6) parcels of land owned by FISLAI located in
Cagayan de Oro City, and the notice of sale was subsequently published. During the public
auction on May 17, 1993, Willkom was the highest bidder. A certificate of sale was issued and
eventually registered with the Register of Deeds of Cagayan de Oro City. Upon the expiration of
the redemption period, sheriff Bantuas issued the sheriff’s definite deed of sale. New certificates
of title covering the subject properties were issued in favor of Willkom. On September 20, 1994,
Willkom sold one of the subject parcels of land to Go.11

On June 14, 1995, MSLAI, represented by PDIC, filed before the RTC, Branch 41 of Cagayan
de Oro City, a complaint for Annulment of Sheriff’s Sale, Cancellation of Title and
Reconveyance of Properties against respondents.12 MSLAI alleged that the sale on execution of
the subject properties was conducted without notice to it and PDIC; that PDIC only came to
know about the sale for the first time in February 1995 while discharging its mandate of
liquidating MSLAI’s assets; that the execution of the RTC decision in Civil Case No. 111-697
was illegal and contrary to law and jurisprudence, not only because PDIC was not notified of the
execution sale, but also because the assets of an institution placed under receivership or
liquidation such as MSLAI should be deemed in custodia legis and should be exempt from any
order of garnishment, levy, attachment, or execution.13

In answer, respondents averred that MSLAI had no cause of action against them or the right to
recover the subject properties because MSLAI is a separate and distinct entity from FISLAI.
They further contended that the "unofficial merger" between FISLAI and DSLAI (now MSLAI) did
not take effect considering that the merging companies did not comply with the formalities and
procedure for merger or consolidation as prescribed by the Corporation Code of the Philippines.
Finally, they claimed that FISLAI is still a SEC registered corporation and could not have been
absorbed by petitioner.14
On March 13, 1997, the RTC issued a resolution dismissing the case for lack of jurisdiction. The
RTC declared that it could not annul the decision in Civil Case No. 111-697, having been
rendered by a court of coordinate jurisdiction.15

On appeal, MSLAI failed to obtain a favorable decision when the CA affirmed the RTC
resolution. The dispositive portion of the assailed CA Decision reads:

WHEREFORE, premises considered, the instant appeal is DENIED. The decision assailed is
AFFIRMED.

We REFER Sheriff Malayo B. Bantuas’ violation of the Supreme Court Administrative Circular
No. 12 to the Office of the Court Administrator for appropriate action. The Division Clerk of Court
is hereby DIRECTED to furnish the Office of the Court Administrator a copy of this decision.

SO ORDERED.16

The appellate court sustained the dismissal of petitioner’s complaint not because it had no
jurisdiction over the case, as held by the RTC, but on a different ground. Citing Associated Bank
v. CA,17 the CA ruled that there was no merger between FISLAI and MSLAI (formerly DSLAI) for
their failure to follow the procedure laid down by the Corporation Code for a valid merger or
consolidation. The CA then concluded that the two corporations retained their separate
personalities; consequently, the claim against FISLAI is warranted, and the subsequent sale of
the levied properties at public auction is valid. The CA went on to say that even if there had
been a de facto merger between FISLAI and MSLAI (formerly DSLAI), Willkom, having relied on
the clean certificates of title, was an innocent purchaser for value, whose right is superior to that
of MSLAI. Furthermore, the alleged assignment of assets and liabilities executed by FISLAI in
favor of MSLAI was not binding on third parties because it was not registered. Finally, the CA
said that the validity of the auction sale could not be invalidated by the fact that the sheriff had
no authority to conduct the execution sale.18

Petitioner’s motion for reconsideration was denied in a Resolution dated June 1, 2007. Hence,
the instant petition anchored on the following grounds:

THE HONORABLE COURT OF APPEALS, CAGAYAN DE ORO COMMITTED GRAVE

AND REVERSIBLE ERROR WHEN:

(1)

IT PASSED UPON THE EXISTENCE AND STATUS OF DSLAI (now MSLAI) AS THE
SURVIVING ENTITY IN THE MERGER BETWEEN DSLAI AND FISLAI AS A DEFENSE
IN AN ACTION OTHER THAN IN A QUO WARRANTO PROCEEDING UPON THE
INSTITUTION OF THE SOLICITOR GENERAL AS MANDATED UNDER SECTION 20
OF BATAS PAMBANSA BLG. 68.

(2)

IT REFUSED TO RECOGNIZE THE MERGER BETWEEN F[I]SLAI AND DSLAI WITH

DSLAI AS THE SURVIVING CORPORATION.
 (3)

IT HELD THAT THE PROPERTIES SUBJECT OF THE CASE ARE NOT IN CUSTODIA
LEGIS AND THEREFORE, EXEMPT FROM GARNISHMENT, LEVY, ATTACHMENT
OR EXECUTION.19

To resolve this petition, we must address two basic questions: (1) Was the merger between
FISLAI and DSLAI (now MSLAI) valid and effective; and (2) Was there novation of the obligation
by substituting the person of the debtor?

We answer both questions in the negative.

Ordinarily, in the merger of two or more existing corporations, one of the corporations survives
and continues the combined business, while the rest are dissolved and all their rights,
properties, and liabilities are acquired by the surviving corporation.20 Although there is a
dissolution of the absorbed or merged corporations, there is no winding up of their affairs or
liquidation of their assets because the surviving corporation automatically acquires all their
rights, privileges, and powers, as well as their liabilities.21

The merger, however, does not become effective upon the mere agreement of the constituent
corporations.22 Since a merger or consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders and creditors, there must be an express
provision of law authorizing them.23

The steps necessary to accomplish a merger or consolidation, as provided for in Sections

76,24 77,25 78,26 and 7927 of the Corporation Code, are:

(1) The board of each corporation draws up a plan of merger or consolidation. Such plan
must include any amendment, if necessary, to the articles of incorporation of the
surviving corporation, or in case of consolidation, all the statements required in the
articles of incorporation of a corporation.

(2) Submission of plan to stockholders or members of each corporation for approval. A

meeting must be called and at least two (2) weeks’ notice must be sent to all
stockholders or members, personally or by registered mail. A summary of the plan must
be attached to the notice. Vote of two-thirds of the members or of stockholders
representing two-thirds of the outstanding capital stock will be needed. Appraisal rights,
when proper, must be respected.

(3) Execution of the formal agreement, referred to as the articles of merger o[r]
consolidation, by the corporate officers of each constituent corporation. These take the
place of the articles of incorporation of the consolidated corporation, or amend the
articles of incorporation of the surviving corporation.

(4) Submission of said articles of merger or consolidation to the SEC for approval.

(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at
least two weeks before.
 (6) Issuance of certificate of merger or consolidation.28

Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the
SEC, subject to its prior determination that the merger is not inconsistent with the Corporation
Code or existing laws.29 Where a party to the merger is a special corporation governed by its
own charter, the Code particularly mandates that a favorable recommendation of the
appropriate government agency should first be obtained.30

In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not
registered with the SEC due to incomplete documentation. Consequently, the SEC did not issue
the required certificate of merger. Even if it is true that the Monetary Board of the Central Bank
of the Philippines recognized such merger, the fact remains that no certificate was issued by the
SEC. Such merger is still incomplete without the certification.

The issuance of the certificate of merger is crucial because not only does it bear out SEC’s
approval but it also marks the moment when the consequences of a merger take place. By
operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but
its rights and properties, as well as liabilities, shall be taken and deemed transferred to and
vested in the surviving corporation.31

The same rule applies to consolidation which becomes effective not upon mere agreement of
the members but only upon issuance of the certificate of consolidation by the SEC.32 When the
SEC, upon processing and examining the articles of consolidation, is satisfied that the
consolidation of the corporations is not inconsistent with the provisions of the Corporation Code
and existing laws, it issues a certificate of consolidation which makes the reorganization
official.33 The new consolidated corporation comes into existence and the constituent
corporations are dissolved and cease to exist.34

There being no merger between FISLAI and DSLAI (now MSLAI), for third parties such as
respondents, the two corporations shall not be considered as one but two separate
corporations. A corporation is an artificial being created by operation of law. It possesses the
right of succession and such powers, attributes, and properties expressly authorized by law or
incident to its existence.35 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.36 Being separate entities, the
property of one cannot be considered the property of the other.

Thus, in the instant case, as far as third parties are concerned, the assets of FISLAI remain as
its assets and cannot be considered as belonging to DSLAI and MSLAI, notwithstanding the
Deed of Assignment wherein FISLAI assigned its assets and properties to DSLAI, and the latter
assumed all the liabilities of the former. As provided in Article 1625 of the Civil Code, "an
assignment of credit, right or action shall produce no effect as against third persons, unless it
appears in a public instrument, or the instrument is recorded in the Registry of Property in case
the assignment involves real property." The certificates of title of the subject properties were
clean and contained no annotation of the fact of assignment. Respondents cannot, therefore, be
faulted for enforcing their claim against FISLAI on the properties registered under its name.
Accordingly, MSLAI, as the successor-in-interest of DSLAI, has no legal standing to annul the
execution sale over the properties of FISLAI. With more reason can it not cause the cancellation
of the title to the subject properties of Willkom and Go.
Petitioner cannot also anchor its right to annul the execution sale on the principle of
novation.1avvphi1 While it is true that DSLAI (now MSLAI) assumed all the liabilities of FISLAI,
such assumption did not result in novation as would release the latter from liability, thereby
exempting its properties from execution. Novation is the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one which extinguishes or modifies the
first, either by changing the object or principal conditions, by substituting another in place of the
debtor, or by subrogating a third person in the rights of the creditor.37

It is a rule that novation by substitution of debtor must always be made with the consent of the
creditor.38 Article 1293 of the Civil Code is explicit, thus:

Art. 1293. Novation which consists in substituting a new debtor in the place of the original one,
may be made even without the knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him the rights mentioned in Articles
1236 and 1237.

In this case, there was no showing that Uy, the creditor, gave her consent to the agreement that
DSLAI (now MSLAI) would assume the liabilities of FISLAI. Such agreement cannot prejudice
Uy. Thus, the assets that FISLAI transferred to DSLAI remained subject to execution to satisfy
the judgment claim of Uy against FISLAI. The subsequent sale of the properties by Uy to
Willkom, and of one of the properties by Willkom to Go, cannot, therefore, be questioned by
MSLAI.

The consent of the creditor to a novation by change of debtor is as indispensable as the

creditor’s consent in conventional subrogation in order that a novation shall legally take
place.39 Since novation implies a waiver of the right which the creditor had before the novation,
such waiver must be express.40

WHEREFORE, premises considered, the petition is DENIED. The Court of Appeals Decision
dated March 21, 2007 and Resolution dated June 1, 2007 in CA-G.R. CV No. 58337 are
AFFIRMED.

SO ORDERED.

BANK OF THE PHILIPPINE ISLANDS, PETITIONER, VS. BPI EMPLOYEES UNION-DAVAO

CHAPTER-FEDERATION OF UNIONS IN BPI UNIBANK, RESPONDENT.

RESOLUTION

LEONARDO-DE CASTRO, J.:

In the present incident, petitioner Bank of the Philippine Islands (BPI) moves for
reconsideration[1] of our Decision dated August 10, 2010, holding that former employees of the
Far East Bank and Trust Company (FEBTC) "absorbed" by BPI pursuant to the two banks'
merger in 2000 were covered by the Union Shop Clause in the then existing collective
bargaining agreement (CBA)[2] of BPI with respondent BPI Employees Union-Davao Chapter-
Federation of Unions in BPI Unibank (the Union).

To recall, the Union Shop Clause involved in this long standing controversy provided, thus:
 ARTICLE II

xxxx

Section 2. Union Shop - New employees falling within the bargaining unit as defined in Article I
of this Agreement, who may hereafter be regularly employed by the Bank shall, within
thirty (30) days after they become regular employees, join the Union as a condition of
their continued employment. It is understood that membership in good standing in the Union
is a condition of their continued employment with the Bank.[3] (Emphases supplied.)

The bone of contention between the parties was whether or not the "absorbed" FEBTC
employees fell within the definition of "new employees" under the Union Shop Clause, such that
they may be required to join respondent union and if they fail to do so, the Union may request
BPI to terminate their employment, as the Union in fact did in the present case. Needless to
state, BPI refused to accede to the Union's request. Although BPI won the initial battle at the
Voluntary Arbitrator level, BPI's position was rejected by the Court of Appeals which ruled that
the Voluntary Arbitrator's interpretation of the Union Shop Clause was at war with the spirit and
rationale why the Labor Code allows the existence of such provision. On review with this Court,
we upheld the appellate court's ruling and disposed of the case as follows:

WHEREFORE, the petition is hereby DENIED, and the Decision dated September 30, 2003 of
the Court of Appeals is AFFIRMED, subject to the thirty (30) day notice requirement imposed
herein. Former FEBTC employees who opt not to become union members but who qualify for
retirement shall receive their retirement benefits in accordance with law, the applicable
retirement plan, or the CBA, as the case may be.[4]

Notwithstanding our affirmation of the applicability of the Union Shop Clause to former FEBTC
employees, for reasons already extensively discussed in the August 10, 2010 Decision, even
now BPI continues to protest the inclusion of said employees in the Union Shop Clause.

In seeking the reversal of our August 10, 2010 Decision, petitioner insists that the parties to the
CBA clearly intended to limit the application of the Union Shop Clause only to new employees
who were hired as non-regular employees but later attained regular status at some point after
hiring. FEBTC employees cannot be considered new employees as BPI merely stepped into the
shoes of FEBTC as an employer purely as a consequence of the merger.[5]

Petitioner likewise relies heavily on the dissenting opinions of our respected colleagues,
Associate Justices Antonio T. Carpio and Arturo D. Brion. From both dissenting opinions,
petitioner derives its contention that "the situation of absorbed employees can be likened to old
employees of BPI, insofar as their full tenure with FEBTC was recognized by BPI and their
salaries were maintained and safeguarded from diminution" but such absorbed employees
"cannot and should not be treated in exactly the same way as old BPI employees for there are
substantial differences between them."[6] Although petitioner admits that there are similarities
between absorbed and new employees, they insist there are marked differences between them
as well. Thus, adopting Justice Brion's stance, petitioner contends that the absorbed FEBTC
employees should be considered "a sui generis group of employees whose classification will not
be duplicated until BPI has another merger where it would be the surviving corporation."[7]
Apparently borrowing from Justice Carpio, petitioner propounds that the Union Shop Clause
should be strictly construed since it purportedly curtails the right of the absorbed employees to
abstain from joining labor organizations.[8]
Pursuant to our directive, the Union filed its Comment[9] on the Motion for Reconsideration. In
opposition to petitioner's arguments, the Union, in turn, adverts to our discussion in the August
10, 2010 Decision regarding the voluntary nature of the merger between BPI and FEBTC, the
lack of an express stipulation in the Articles of Merger regarding the transfer of employment
contracts to the surviving corporation, and the consensual nature of employment contracts as
valid bases for the conclusion that former FEBTC employees should be deemed new
employees.[10] The Union argues that the creation of employment relations between former
FEBTC employees and BPI (i.e., BPI's selection and engagement of former FEBTC employees,
its payment of their wages, power of dismissal and of control over the employees' conduct)
occurred after the merger, or to be more precise, after the Securities and Exchange
Commission's (SEC) approval of the merger.[11] The Union likewise points out that BPI failed to
offer any counterargument to the Court's reasoning that:

The rationale for upholding the validity of union shop clauses in a CBA, even if they impinge
upon the individual employee's right or freedom of association, is not to protect the union for the
union's sake. Laws and jurisprudence promote unionism and afford certain protections to the
certified bargaining agent in a unionized company because a strong and effective union
presumably benefits all employees in the bargaining unit since such a union would be in a better
position to demand improved benefits and conditions of work from the employer. x x x.

x x x Nonetheless, settled jurisprudence has already swung the balance in favor of unionism, in
recognition that ultimately the individual employee will be benefited by that policy. In the
hierarchy of constitutional values, this Court has repeatedly held that the right to abstain from
joining a labor organization is subordinate to the policy of encouraging unionism as an
instrument of social justice.[12]

While most of the arguments offered by BPI have already been thoroughly addressed in the
August 10, 2010 Decision, we find that a qualification of our ruling is in order only with respect to
the interpretation of the provisions of the Articles of Merger and its implications on the former
FEBTC employees' security of tenure.

Taking a second look on this point, we have come to agree with Justice Brion's view that it is
more in keeping with the dictates of social justice and the State policy of according full
protection to labor to deem employment contracts as automatically assumed by the surviving
corporation in a merger, even in the absence of an express stipulation in the articles of merger
or the merger plan. In his dissenting opinion, Justice Brion reasoned that:

To my mind, due consideration of Section 80 of the Corporation Code, the constitutionally

declared policies on work, labor and employment, and the specific FEBTC-BPI situation -- i.e., a
merger with complete "body and soul" transfer of all that FEBTC embodied and possessed and
where both participating banks were willing (albeit by deed, not by their written agreement) to
provide for the affected human resources by recognizing continuity of employment -- should
point this Court to a declaration that in a complete merger situation where there is total takeover
by one corporation over another and there is silence in the merger agreement on what the fate
of the human resource complement shall be, the latter should not be left in legal limbo and
should be properly provided for, by compelling the surviving entity to absorb these employees.
This is what Section 80 of the Corporation Code commands, as the surviving corporation has
the legal obligation to assume all the obligations and liabilities of the merged constituent
corporation.

Not to be forgotten is that the affected employees managed, operated and worked on the
transferred assets and properties as their means of livelihood; they constituted a basic
component of their corporation during its existence. In a merger and consolidation situation,
they cannot be treated without consideration of the applicable constitutional declarations and
directives, or, worse, be simply disregarded. If they are so treated, it is up to this Court to read
and interpret the law so that they are treated in accordance with the legal requirements of
mergers and consolidation, read in light of the social justice, economic and social provisions of
our Constitution. Hence, there is a need for the surviving corporation to take responsibility for
the affected employees and to absorb them into its workforce where no appropriate provision for
the merged corporation's human resources component is made in the Merger Plan. [13]

By upholding the automatic assumption of the non-surviving corporation's existing employment

contracts by the surviving corporation in a merger, the Court strengthens judicial protection of
the right to security of tenure of employees affected by a merger and avoids confusion regarding
the status of their various benefits which were among the chief objections of our dissenting
colleagues. However, nothing in this Resolution shall impair the right of an employer to
terminate the employment of the absorbed employees for a lawful or authorized cause or the
right of such an employee to resign, retire or otherwise sever his employment, whether before or
after the merger, subject to existing contractual obligations. In this manner, Justice Brion's
theory of automatic assumption may be reconciled with the majority's concerns with the
successor employer's prerogative to choose its employees and the prohibition against
involuntary servitude.

Notwithstanding this concession, we find no reason to reverse our previous pronouncement that
the absorbed FEBTC employees are covered by the Union Shop Clause.

Even in our August 10, 2010 Decision, we already observed that the legal fiction in the law on
mergers (that the surviving corporation continues the corporate existence of the non-surviving
corporation) is mainly a tool to adjudicate the rights and obligations between and among the
merged corporations and the persons that deal with them.[14] Such a legal fiction cannot be
unduly extended to an interpretation of a Union Shop Clause so as to defeat its purpose under
labor law. Hence, we stated in the Decision that:

In any event, it is of no moment that the former FEBTC employees retained the regular status
that they possessed while working for their former employer upon their absorption by petitioner.
This fact would not remove them from the scope of the phrase "new employees" as
contemplated in the Union Shop Clause of the CBA, contrary to petitioner's insistence that the
term "new employees" only refers to those who are initially hired as non-regular employees for
possible regular employment.

The Union Shop Clause in the CBA simply states that "new employees" who during the
effectivity of the CBA "may be regularly employed" by the Bank must join the union within thirty
(30) days from their regularization. There is nothing in the said clause that limits its application
to only new employees who possess non-regular status, meaning probationary status, at the
start of their employment. Petitioner likewise failed to point to any provision in the CBA
expressly excluding from the Union Shop Clause new employees who are "absorbed" as regular
employees from the beginning of their employment. What is indubitable from the Union Shop
Clause is that upon the effectivity of the CBA, petitioner's new regular employees (regardless of
the manner by which they became employees of BPI) are required to join the Union as a
condition of their continued employment.[15]

Although by virtue of the merger BPI steps into the shoes of FEBTC as a successor employer
as if the former had been the employer of the latter's employees from the beginning it must be
emphasized that, in reality, the legal consequences of the merger only occur at a specific
date, i.e., upon its effectivity which is the date of approval of the merger by the SEC. Thus, we
observed in the Decision that BPI and FEBTC stipulated in the Articles of Merger that they will
both continue their respective business operations until the SEC issues the certificate of merger
and in the event no such certificate is issued, they shall hold each other blameless for the non-
consummation of the merger.[16] We likewise previously noted that BPI made its assignments of
the former FEBTC employees effective on April 10, 2000, or after the SEC approved the
merger.[17] In other words, the obligation of BPI to pay the salaries and benefits of the former
FEBTC employees and its right of discipline and control over them only arose with the effectivity
of the merger. Concomitantly, the obligation of former FEBTC employees to render service to
BPI and their right to receive benefits from the latter also arose upon the effectivity of the
merger. What is material is that all of these legal consequences of the merger took place during
the life of an existing and valid CBA between BPI and the Union wherein they have mutually
consented to include a Union Shop Clause.

From the plain, ordinary meaning of the terms of the Union Shop Clause, it covers employees
who (a) enter the employ of BPI during the term of the CBA; (b) are part of the bargaining unit
(defined in the CBA as comprised of BPI's rank and file employees); and (c) become regular
employees without distinguishing as to the manner they acquire their regular status.
Consequently, the number of such employees may adversely affect the majority status of the
Union and even its existence itself, as already amply explained in the Decision.

Indeed, there are differences between (a) new employees who are hired as probationary or
temporary but later regularized, and (b) new employees who, by virtue of a merger, are
absorbed from another company as regular and permanent from the beginning of their
employment with the surviving corporation. It bears reiterating here that these differences are
too insubstantial to warrant the exclusion of the absorbed employees from the application of the
Union Shop Clause. In the Decision, we noted that:

Verily, we agree with the Court of Appeals that there are no substantial differences between a
newly hired non-regular employee who was regularized weeks or months after his hiring and a
new employee who was absorbed from another bank as a regular employee pursuant to a
merger, for purposes of applying the Union Shop Clause. Both employees were hired/employed
only after the CBA was signed. At the time they are being required to join the Union, they are
both already regular rank and file employees of BPI. They belong to the same bargaining unit
being represented by the Union. They both enjoy benefits that the Union was able to secure for
them under the CBA. When they both entered the employ of BPI, the CBA and the Union Shop
Clause therein were already in effect and neither of them had the opportunity to express their
preference for unionism or not. We see no cogent reason why the Union Shop Clause should
not be applied equally to these two types of new employees, for they are undeniably similarly
situated.[18]

Again, it is worthwhile to highlight that a contrary interpretation of the Union Shop Clause would
dilute its efficacy and put the certified union that is supposedly being protected thereby at the
mercy of management. For if the former FEBTC employees had no say in the merger of its
former employer with another bank, as petitioner BPI repeatedly decries on their behalf, the
Union likewise could not prevent BPI from proceeding with the merger which undisputedly
affected the number of employees in the bargaining unit that the Union represents and may
negatively impact on the Union's majority status. In this instance, we should be guided by the
principle that courts must place a practical and realistic construction upon a CBA, giving due
consideration to the context in which it is negotiated and purpose which it is intended to
serve.[19]

We now come to the question: Does our affirmance of our ruling that former FEBTC employees
absorbed by BPI are covered by the Union Shop Clause violate their right to security of tenure
which we expressly upheld in this Resolution? We answer in the negative.

In Rance v. National Labor Relations Commission,[20] we held that:

It is the policy of the state to assure the right of workers to "security of tenure" (Article XIII, Sec.
3 of the New Constitution, Section 9, Article II of the 1973 Constitution). The guarantee is an act
of social justice. When a person has no property, his job may possibly be his only possession or
means of livelihood. Therefore, he should be protected against any arbitrary deprivation of his
job. Article 280 of the Labor Code has construed security of tenure as meaning that "the
employer shall not terminate the services of an employee except for a just cause or when
authorized by" the Code. x x x (Emphasis supplied.)

We have also previously held that the fundamental guarantee of security of tenure and due
process dictates that no worker shall be dismissed except for a just and authorized cause
provided by law and after due process is observed.[21] Even as we now recognize the right to
continuous, unbroken employment of workers who are absorbed into a new company pursuant
to a merger, it is but logical that their employment may be terminated for any causes provided
for under the law or in jurisprudence without violating their right to security of tenure. As Justice
Carpio discussed in his dissenting opinion, it is well-settled that termination of employment by
virtue of a union security clause embodied in a CBA is recognized in our jurisdiction.[22] In Del
Monte Philippines, Inc. v. Saldivar,[23] we explained the rationale for this policy in this wise:

Article 279 of the Labor Code ordains that "in cases of regular employment, the employer shall
not terminate the services of an employee except for a just cause or when authorized by [Title I,
Book Six of the Labor Code]." Admittedly, the enforcement of a closed-shop or union
security provision in the CBA as a ground for termination finds no extension within any
of the provisions under Title I, Book Six of the Labor Code. Yet jurisprudence has
consistently recognized, thus: "It is State policy to promote unionism to enable workers to
negotiate with management on an even playing field and with more persuasiveness than if they
were to individually and separately bargain with the employer. For this reason, the law has
allowed stipulations for 'union shop' and 'closed shop' as means of encouraging workers to join
and support the union of their choice in the protection of their rights and interests vis-a-vis the
employer."[24] (Emphasis supplied.)

Although it is accepted that non-compliance with a union security clause is a valid ground for an
employee's dismissal, jurisprudence dictates that such a dismissal must still be done in
accordance with due process. This much we decreed in General Milling Corporation v.
Casio,[25] to wit:

The Court reiterated in Malayang Samahan ng mga Manggagawa sa M. Greenfield v.

Ramos that:

While respondent company may validly dismiss the employees expelled by the union for
disloyalty under the union security clause of the collective bargaining agreement upon the
recommendation by the union, this dismissal should not be done hastily and summarily thereby
eroding the employees' right to due process, self-organization and security of tenure. The
enforcement of union security clauses is authorized by law provided such enforcement is not
characterized by arbitrariness, and always with due process. Even on the assumption that
the federation had valid grounds to expel the union officers, due process requires that these
union officers be accorded a separate hearing by respondent company.

The twin requirements of notice and hearing constitute the essential elements of procedural due
process. The law requires the employer to furnish the employee sought to be dismissed with
two written notices before termination of employment can be legally effected: (1) a written notice
apprising the employee of the particular acts or omissions for which his dismissal is sought in
order to afford him an opportunity to be heard and to defend himself with the assistance of
counsel, if he desires, and (2) a subsequent notice informing the employee of the employer's
decision to dismiss him. This procedure is mandatory and its absence taints the dismissal with
illegality.

Irrefragably, GMC cannot dispense with the requirements of notice and hearing before
dismissing Casio, et al. even when said dismissal is pursuant to the closed shop
provision in the CBA. The rights of an employee to be informed of the charges against him
and to reasonable opportunity to present his side in a controversy with either the company or his
own union are not wiped away by a union security clause or a union shop clause in a collective
bargaining agreement. x x x[26] (Emphases supplied.)

In light of the foregoing, we find it appropriate to state that, apart from the fresh thirty (30)-day
period from notice of finality of the Decision given to the affected FEBTC employees to join the
Union before the latter can request petitioner to terminate the former's employment, petitioner
must still accord said employees the twin requirements of notice and hearing on the possibility
that they may have other justifications for not joining the Union. Similar to our August 10, 2010
Decision, we reiterate that our ruling presupposes there has been no material change in the
situation of the parties in the interim.

WHEREFORE, the Motion for Reconsideration is DENIED. The Decision dated August 10,
2010 is AFFIRMED, subject to the qualifications that:

(a) Petitioner is deemed to have assumed the employment contracts of the Far East Bank and
Trust Company (FEBTC) employees upon effectivity of the merger without break in the
continuity of their employment, even without express stipulation in the Articles of Merger; and

(b) Aside from the thirty (30) days, counted from notice of finality of the August 10, 2010
Decision, given to former FEBTC employees to join the respondent, said employees shall be
accorded full procedural due process before their employment may be terminated.

SO ORDERED.
 PHILIPPINE BANK OF COMMUNICATIONS, Petitioner, vs.

BASIC POLYPRINTERS AND PACKAGING CORPORATION, Respondent.

G.R. No. 187581 October 20, 2014

FACTS:

Basic Polyprinters, along with the eight other corporations belonging to the Limtong Group of
Companies filed a joint petition for suspension of payments with approval of the proposed
rehabilitation in the RTC. The RTC issued a stay order, and eventually approved the
rehabilitation plan, but the CA reversed the RTC and directed the petitioning corporations to file
their individual petitions for suspension of payments and rehabilitation in the appropriate courts.

Accordingly, Basic Polyprinters brought its individual petition, averring therein that: (a) its
business since incorporation had been very viable and financially profitable; (b) it had obtained
loans from various banks, and had owed accounts payable to various creditors; (c) the Asian
currency crisis, devaluation of the Philippine peso, and the current state of affairs of the
Philippine economy; (d) its operations would be hampered and would render rehabilitation
difficult should its creditors enforce their claims through legal actions, including foreclosure
proceedings; (e) included in its overall Rehabilitation Program was the full payment of its
outstanding loans in favor of petitioner PBCOM and other banks

ISSUES:

1. Whether or not liquidity is an issue in a petition for rehabilitation

2. Whether or not material financial commitment is required in a rehabilitation plan

HELD:

FIRST ISSUE: No.

The Court held that liquidity is not an issue in a petition for rehabilitation.

Under the Interim Rules, rehabilitation is the process of restoring “the debtor to a position of
successful operation and solvency, if it is shown that its continuance of operation is
economically feasible and its creditors can recover by way of the present value of payments
projected in the plan more if the corporation continues as a going concern that if it is
immediately liquidated.” It contemplates a continuance of corporate life and activities in an effort
to restore and reinstate the corporation to its former position of successful operation and
solvency.

Two-pronged purpose of rehabilitation proceedings

1. Equitable purpose: To efficiently and equitably distribute the assets of the insolvent debtor to
its creditors; and
2. Rehabilitative purpose: To provide the debtor with a fresh start
On the one hand, they attempt to provide for the efficient and equitable distribution of an
insolvent debtor’s remaining assets to its creditors; and on the other, to provide debtors with a
“fresh start” by relieving them of the weight of their outstanding debts and permitting them to
reorganize their affairs. The purpose of rehabilitation proceedings is to enable the company to
gain a new lease on life and thereby allow creditors to be paid their claims from its earnings.

Consequently, the basic issues in rehabilitation proceedings concern the viability and desirability
of continuing the business operations of the petitioning corporation. The determination of such
issues was to be carried out by the court-appointed rehabilitation receiver.

Moreover, Republic Act No. 10142 (FRIA of 2010), a law that is applicable hereto, has defined a
corporate debtor as a corporation duly organized and existing under Philippine laws that has
become insolvent. The term insolvent is defined in said law as “the financial condition of a
debtor that is generally unable to pay its or his liabilities as they fall due in the ordinary course of
business or has liabilities that are greater than its or his assets.”

As such, the contention that rehabilitation becomes inappropriate because of the perceived
insolvency of Basic Polyprinters was incorrect.

SECOND ISSUE: Yes.

The Court held that a material financial commitment is significant in a rehabilitation plan.

A material financial commitment becomes significant in gauging the resolve, determination,

earnestness and good faith of the distressed corporation in financing the proposed rehabilitation
plan. This commitment may include the voluntary undertakings of the stockholders or the would-
be investors of the debtor-corporation indicating their readiness, willingness and ability to
contribute funds or property to guarantee the continued successful operation of the debtor
corporation during the period of rehabilitation.

However, the Court held that Basic Polyprinters commitment was insufficient for the following
reasons:

The commitment to add P10,000,000.00 working capital appeared to be doubtful considering

that the insurance claim from which said working capital would be sourced had already been
written-off by Basic Polyprinters’s affiliate, Wonder Book Corporation.

The conversion of all deposits for future subscriptions to common stock and the treatment of all
payables to officers and stockholders as trade payables was hardly constituting material
financial commitments. Such “conversion” of cash advances to trade payables was, in fact, a
mere re-classification of the liability entry and had no effect on the shareholders’ deficit.

Basic Polyprinters’s rehabilitation plan likewise failed to offer any proposal on how it intended to
address the low demands for their products and the effect of direct competition from stores like
SM, Gaisano, Robinsons, and other malls.
 Basic Polyprinters’s proposal to enter into the dacion en pagoto create a source of “fresh
capital” was not feasible because the object thereof would not be its own property but one
belonging to its affiliate, TOL Realty and Development Corporation, a corporation also
undergoing rehabilitation.

Hence, the Court held that the rehabilitation plan for Basic Polyprinters to be genuine and in
good faith, for it was, in fact, unilateral and detrimental to its creditors and the public.