1. Feliciano vs Commission on Audit
The
GR No. 147402 January 14, 2004
Facts: A special audit team from COA Regional office
no. VIII audited the accounts of LMWD.
Subsequently, LMWD received a letter from COA
dated July 19, 1999 requesting payment of auditing
fees. As general manager of LMWD, petitioner sent a
reply dated October 12, 1999 informing COA’s
regional director that the water district could not pay
the auditing fees. Petitioner cited as basis for his
action section 6 and 20 of Presidential Decree no.
198 as well as section 18 of RA 6758. The regional
director referred petitioner to reply o the COA
Chairman on October 18, 1999. On October 19, 1999,
petitioner wrote COA through the Regional Director
asking for refund of all auditing fees LMWD previously
paid to COA. On March 16, 2000, petitioner received
COA Chairman Celso D. Gangans resolution dated
January 3, 2o00 denying his requests. Petitioner filed
a motion for reconsideration on March 31, 2000,
which COA denied on January 30, 2001.
Issue: Whether or not petitioner LMWD is a private
corporation exempt from the auditing jurisdiction of
COA.
Held: No. Private corporations may exist only under a
general law. If the corporation is private, it must
necessarily exist under a general law. Stated
differently, only corporations created under a general
law can qualify as private corporations under existing
laws, that general law is the corporation code, except
that the cooperative code governs the incorporation of
cooperatives.
Obviously, LWDs are not private corporations
because they are not created under the corporation
code. LWDs are registered with the Securities and
Exchange Commission (SEC). Section 14 of the
corporation code states that all corporations under
this code shall file with the SEC articles of
incorporation. LWDs have no articles of incorporation,
no incorporators and no stockholders or members.
There are no stockholders or members to elect the
board of directors of LWDs as in the case of all
corporations registered with the SEC. The local mayor
or the provincial governor appoints the directors of
LWDs for a fixed term of office. This court has ruled
that LWDs are not created under the corporation
code.
The determining factor of COA’s audit jurisdiction is
government ownership or control of the corporation.
The criterion of ownership and control is more
important than the issue of original charter.
Certainly, the government owns and controls LWDs.
The government organizes LWDs in accordance with
a specific law, PD 198. There is no private party
involved as co-owner in the creation of and LWD. Just
prior to the creation of LWDs, the national or local
government owns and controls all their assets. The
government controls LWDs because under PD 198
the municipal or city mayor, or the provincial
governor, appoints all the board of directors of an
LWD for a fixed term of six (6) years. The board of
directors of LWDs are not co-owners of the LWDs.
LWD have no private stockholders or members.
board of directors and other personnel of LWDs are
government employees subject to civil service laws,
anti-graft laws.
Section 18 of RA 6758 prohibits COA Personnel from
receiving any kind of compensation from any
government except compensation paid directly by
COA out of its appropriations and contributions. Thus,
RA 6758 itself recognizes an exception to the
statutory ban by COA personnel receiving
compensation from GOCCs.
2. MANILA INTERNATIONAL AIRPORT
AUTHORITY v. CA, GR NO. 155650, 2006-07-20
Facts:
Petitioner Manila International Airport Authority
(MIAA) operates the Ninoy Aquino International
Airport (NAIA)
As operator of the international airport, MIAA
administers the land, improvements and equipment
within the NAIA Complex. The MIAA Charter
transferred to MIAA approximately 600 hectares of
land,... The MIAA Charter further provides that no
portion of the land transferred to MIAA shall be
disposed of through sale or any other mode unless
specifically approved by the President of the
Philippines.
The OGCC opined that the Local Government Code
of 1991 withdrew the exemption from real estate tax
granted to MIAA under Section 21 of the MIAA
Charter. Thus, MIAA negotiated with... respondent
City of Parañaque to pay the real estate tax imposed
by the City. MIAA then paid some of the real estate
tax already due.
MIAA received Final Notices of Real Estate Tax
Delinquency from the City of Parañaque
The Mayor of the City of Parañaque threatened to sell
at public auction the Airport Lands and Buildings
should MIAA fail to pay the... real estate tax
delinquency.
MIAA filed with the Court of Appeals an original
petition for prohibition and injunction
The petition sought to restrain the City of Parañaque
from imposing real estate tax on, levying... against,
and auctioning for public sale the Airport Lands and
Buildings.
Court of Appeals dismissed the petition because
MIAA filed it beyond the 60-day reglementary period.
Court of Appeals also denied... motion for
reconsideration... the present petition for review.
MIAA insists that it is... exempt from real estate tax
under Section 234 of the Local Government Code
because the Airport Lands and Buildings are owned
by... the Republic.
To justify the exemption, MIAA invokes the principle
that the government cannot tax itself.
1
Respondents invoke Section 193 of the Local
Government Code, which expressly withdrew the tax
exemption privileges of "government-owned and-
controlled corporations" upon the effectivity of the
Local Government Code.
Issues:
whether the Airport Lands and Buildings of MIAA are
exempt from real estate tax under existing laws.
Ruling:
We rule that MIAA's Airport Lands and Buildings are
exempt from real estate tax imposed by local
governments.
First, MIAA is not a government-owned or controlled
corporation but an instrumentality of the National
Government and thus exempt from local taxation.
Second, the real properties of MIAA are owned by the
Republic of the Philippines and thus... exempt from
real estate tax.
There is no dispute that a government-owned or
controlled corporation is not exempt from real estate
tax. However, MIAA is not a government-owned or
controlled corporation.
Since MIAA is neither a stock nor a non-stock
corporation, MIAA does not qualify as a government-
owned or controlled corporation.
MIAA is a government instrumentality vested with
corporate powers to perform efficiently its
governmental functions. MIAA is like any other
government instrumentality, the only difference is that
MIAA is vested with corporate powers.
When the law vests in a government instrumentality
corporate powers, the instrumentality does not
become a corporation. Unless the government
instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality
exercising not only... governmental but also corporate
powers. Thus, MIAA exercises the governmental
powers of eminent domain,... police authority... and
the levying of fees and charges.
At the same time, MIAA exercises "all the... powers of
a corporation under the Corporation Law, insofar as
these powers are not inconsistent with the provisions
of this Executive Order."
When local governments invoke the power to tax on
national government instrumentalities, such power is
construed strictly against local governments. The rule
is that a tax is never presumed and there must be
clear language in the law imposing the tax. Any doubt
whether a person,... article or activity is taxable is
resolved against taxation. This rule applies with
greater force when local governments seek to tax
national government instrumentalities.
Another rule is that a tax exemption is strictly
construed against the taxpayer claiming the
exemption. However, when Congress grants an
exemption to a national government instrumentality
from local taxation, such exemption is construed
liberally in favor of the national... government
instrumentality.
There must be express language in the law
empowering local governments to tax national
government instrumentalities. Any doubt whether
such power exists is resolved against local...
governments.
3. Magsaysay-Labrador, et. al. vs. Court of
Appeals
[GR 58168, 19 December 1989]
Facts: On 9 February 1979, Adelaida Rodriguez-
Magsaysay, widow and special administratix of the
estate of the late Senator Genaro Magsaysay,
brought before the then Court of First Instance of
Olongapo an action against Artemio Panganiban,
Subic Land Corporation (SUBIC), Filipinas
Manufacturer's Bank (FILMANBANK) and the
Register of Deeds of Zambales, for the annulment of
the Deed of Assignment executed by the late Senator
in favor of SUBIC (as a result of which TCT 3258 was
cancelled and TCT 22431 issued in the name of
SUBIC), for the annulment of the Deed of Mortgage
executed by SUBIC in favor of FILMANBANK (dated
28 April 1977 in the amount of P 2,700,000.00), and
cancellation of TCT 22431 by the Register of Deeds,
and for the latter to issue a new title in her favor. On 7
March 1979, Concepcion Magsaysay-Labrador,
Soledad Magsaysay-Cabrera, Luisa Magsaysay-
Corpuz, Felicidad Magsaysay, and Mercedes
Magsaysay-Diaz, sisters of the late senator, filed a
motion for intervention on the ground that on 20 June
1978, their brother conveyed to them 1/2 of his
shareholdings in SUBIC or a total of 416,566.6 shares
and as assignees of around 41 % of the total
outstanding shares of such stocks of SUBIC, they
have a substantial and legal interest in the subject
matter of litigation and that they have a legal interest
in the success of the suit with respect to SUBIC. On
26 July 1979, the trial court denied the motion for
intervention, and ruled that petitioners have no legal
interest whatsoever in the matter in litigation and their
being alleged assignees or transferees of certain
shares in SUBIC cannot legally entitle them to
intervene because SUBIC has a personality separate
and distinct from its stockholders.
On appeal, the Court of Appeals found no factual or
legal justification to disturb the findings of the lower
court. The appellate court further stated that whatever
claims the Magsaysay sisters have against the late
Senator or against SUBIC for that matter can be
ventilated in a separate proceeding. The motion for
reconsideration of the Magsaysay sisters was denied.
Hence, the petition for review on certiorari.
Issue: Whether the Magsaysay sister, allegedly
stockholders of SUBIC, are interested parties in a
case where corporate properties are in dispute.
Held: Viewed in the light of Section 2, Rule 12 of the
Revised Rules of Court, the Magsaysay sisters have
2
no legal interest in the subject matter in litigation so
as to entitle them to intervene in the proceedings. To
be permitted to intervene in a pending action, the
party must have a legal interest in the matter in
litigation, or in the success of either of the parties or
an interest against both, or he must be so situated as
to be adversely affected by a distribution or other
disposition of the property in the custody of the court
or an officer thereof . Here, the interest, if it exists at
all, of the Magsaysay sisters is indirect, contingent,
remote, conjectural, consequential and collateral. At
the very least, their interest is purely inchoate, or in
sheer expectancy of a right in the management of the
corporation and to share in the profits thereof and in
the properties and assets thereof on dissolution, after
payment of the corporate debts and obligations. While
a share of stock represents a proportionate or aliquot
interest in the property of the corporation, it does not
vest the owner thereof with any legal right or title to
any of the property, his interest in the corporate
property being equitable or beneficial in nature.
Shareholders are in no legal sense the owners of
corporate property, which is owned by the corporation
as a distinct legal person
4. Sulo ng Bayan vs. Araneta
[GR L-31061, 17 August 1976]
Facts: On 26 April 1966, Sulo ng Bayan, Inc. filed an
accion de revindicacion with the Court of First
Instance of Bulacan, Fifth Judicial District,
Valenzuela, Bulacan, against Gregorio Araneta Inc.
(GAI), Paradise Farms Inc., National Waterworks &
Sewerage Authority (NAWASA), Hacienda Caretas
Inc., and the Register of Deeds of Bulacan to recover
the ownership and possession of a large tract of land
in San Jose del Monte, Bulacan, containing an area of
27,982,250 sq. ms., more or less, registered under
the Torrens System in the name of GAI, et. al.'s
predecessors-in-interest (who are members of the
corporation). On 2 September 1966, GAI filed a
motion to dismiss the amended complaint on the
grounds that (1) the complaint states no cause of
action; and (2) the cause of action, if any, is barred by
prescription and laches. Paradise Farms, Inc. and
Hacienda Caretas, Inc. filed motions to dismiss based
on the same grounds. NAWASA did not file any
motion to dismiss. However, it pleaded in its answer
as special and affirmative defenses lack of cause of
action by Sulo ng Bayan Inc. and the barring of such
action by prescription and laches. On 24 January
1967, the trial court issued an Order dismissing the
(amended) complaint. On 14 February 1967, Sulo ng
Bayan filed a motion to reconsider the Order of
dismissal, arguing among others that the complaint
states a sufficient cause of action because the subject
matter of the controversy in one of common interest to
the members of the corporation who are so numerous
that the present complaint should be treated as a
class suit. The motion was denied by the trial court in
its Order dated 22 February 1967.
Sulo ng Bayan appealed to the Court of Appeals. On
3 September 1969, the Court of Appeals, upon finding
that no question of fact was involved in the appeal but
only questions of law and jurisdiction, certified the
case to the Supreme Court for resolution of the legal
issues involved in the controversy.
Issue:
Whether the corporation (non-stock) may institute an
action in behalf of its individual members for the
recovery of certain parcels of land allegedly owned by
said members, among others.
Whether the complaint filed by the corporation in
behalf of its members may be treated as a class suit
Held:
1. It is a doctrine well-established and obtains both at
law and in equity that a corporation is a distinct legal
entity to be considered as separate and apart from
the individual stockholders or members who compose
it, and is not affected by the personal rights,
obligations and transactions of its stockholders or
members. The property of the corporation is its
property and not that of the stockholders, as owners,
although they have equities in it. Properties registered
in the name of the corporation are owned by it as an
entity separate and distinct from its members.
Conversely, a corporation ordinarily has no interest in
the individual property of its stockholders unless
transferred to the corporation, "even in the case of a
one-man corporation." The mere fact that one is
president of a corporation does not render the
property which he owns or possesses the property of
the corporation, since the president, as individual, and
the corporation are separate similarities. Similarly,
stockholders in a corporation engaged in buying and
dealing in real estate whose certificates of stock
entitled the holder thereof to an allotment in the
distribution of the land of the corporation upon
surrender of their stock certificates were considered
not to have such legal or equitable title or interest in
the land, as would support a suit for title, especially
against parties other than the corporation. It must be
noted, however, that the juridical personality of the
corporation, as separate and distinct from the persons
composing it, is but a legal fiction introduced for the
purpose of convenience and to subserve the ends of
justice. This separate personality of the corporation
may be disregarded, or the veil of corporate fiction
pierced, in cases where it is used as a cloak or cover
for fraud or illegality, or to work -an injustice, or where
necessary to achieve equity. It has not been claimed
that the members have assigned or transferred
whatever rights they may have on the land in question
to the corporation. Absent any showing of interest,
therefore, a corporation, has no personality to bring
an action for and in behalf of its stockholders or
members for the purpose of recovering property
which belongs to said stockholders or members in
their personal capacities.
3
2. In order that a class suit may prosper, the following
requisites must be present: (1) that the subject matter
of the controversy is one of common or general
interest to many persons; and (2) that the parties are
so numerous that it is impracticable to bring them all
before the court. Here, there is only one party plaintiff,
and the corporation does not even have an interest in
the subject matter of the controversy, and cannot,
therefore, represent its members or stockholders who
claim to own in their individual capacities ownership of
the said property. Moreover, a class suit does not lie
in actions for the recovery of property where several
persons claim partnership of their respective portions
of the property, as each one could alleged and prove
his respective right in a different way for each portion
of the land, so that they cannot all be held to have
identical title through acquisition/prescription.
5. Bataan Shipyard & Engineering Co., Inc. vs
Presidential Commission on Good Government
150 SCRA 181 – Business Organization –
Corporation Law – A Corporation Cannot Invoke the
Right Against Self-Incrimination
When President Corazon Aquino took power, the
Presidential Commission on Good Government
(PCGG) was formed in order to recover ill gotten
wealth allegedly acquired by former President Marcos
and his cronies. Aquino then issued two executive
orders in 1986 and pursuant thereto, a sequestration
and a takeover order were issued against Bataan
Shipyard & engineering Co., Inc. (BASECO).
BASECO was alleged to be in actuality owned and
controlled by the Marcoses through the Romualdez
family, and in turn, through dummy stockholders.
The sequestration order issued in 1986 required,
among others, that BASECO produce corporate
records from 1973 to 1986 under pain of contempt of
the PCGG if it fails to do so. BASECO assails this
order as it avers, among others, that it is against
BASECO’s right against self incrimination and
unreasonable searches and seizures.
ISSUE: Whether or not BASECO is correct.
HELD: No. First of all, PCGG has the right to require
the production of such documents pursuant to the
power granted to it. Second, and more importantly,
right against self-incrimination has no application to
juridical persons. There is a reserve right in the
legislature to investigate the contracts of a corporation
and find out whether it has exceeded its powers. It
would be a strange anomaly to hold that a state,
having chartered a corporation like BASECO to make
use of certain franchises, could not, in the exercise of
sovereignty, inquire how these franchises had been
employed, and whether they had been abused, and
demand the production of the corporate books and
papers for that purpose.
Neither is the right against unreasonable searches
and seizures applicable here. There were no
searches made and no seizure pursuant to any
search was ever made. BASECO was merely ordered
to produce the corporate records.
6. Luxuria Homes, Inc. vs Court of Appeals
302 SCRA 315 – Business Organization –
Corporation Law – Piercing the Veil of Corporate
Fiction
Aida Posadas was the owner of a 1.6 hectare land in
Sucat, Muntinlupa. In 1989, she entered into an
agreement with Jaime Bravo for the latter to draft a
development and architectural design for the said
property. The contract price was P450,000.00.
Posadas gave a down payment of P25,000.00. Later,
Posadas assigned her property to Luxuria Homes,
Inc. One of the witnesses to the deed of assignment
and articles of incorporation was Jaime Bravo.
In 1992, Bravo finished the architectural design so he
proposed that he and his company manage the
development of the property. But Posadas turned
down the proposal and thereafter the business
relationship between the two went sour. Bravo then
demanded Posadas to pay them the balance of their
agreement as regards the architectural design
(P425k). Bravo also demanded payment for some
other expenses and fees he incurred i.e., negotiating
and relocating the informal settlers then occupying the
land of Posadas. Posadas refused to make payment.
Bravo then filed a complaint for specific performance
against Posadas but he included Luxuria Homes as a
co-defendant as he alleged that Luxuria Homes was a
mere conduit of Posadas; that the said corporation
was created in order to defraud Bravo and avoid the
payment of debt.
ISSUE: Whether or not Luxuria Homes should be
impleaded.
HELD: No. It was Posadas who entered into a
contract with Bravo in her personal capacity. Bravo
was not able to prove that Luxuria Homes was a mere
conduit of Posadas. Posadas owns just 33% of
Luxuria Homes. Further, when Luxuria Homes was
created, Bravo was there as a witness. So how can
he claim that the creation of said corporation was to
defraud him. The eventual transfer of Posadas’
property to Luxuria was with the full knowledge of
Bravo. The agreement between Posadas and Bravo
was entered into even before Luxuria existed hence
Luxuria was never a party thereto. Whatever liability
Posadas incurred arising from said agreement must
be borne by her solely and not in solidum with
Luxuria. To disregard the separate juridical
personality of a corporation, the wrongdoing must be
clearly and convincingly established. It cannot be
presumed.
7. Concept Builders Inc. vs National Labor
Relations Commission
257 SCRA 149 [G.R. No. 108734. May 29, 1996]
Facts: Petitioner Concept Builders Inc., a domestic
corporation with principal office at 355 Maysan Road,
Valenzuela, Metro Manila is engaged in the
4
construction business. Private respondents were
employed by said company as laborers, carpenters,
and niggers. On November 1981, private respondents
were served with individual written notices of
termination of employment by petitioner, effective on
November 30, 1981. It was stated in the individual
notices that their contracts of employment had
expired and the project in which they were hired had
been completed. Public respondent found it to be the
fact, however, at the time of the termination of private
respondents’ employment, the project in which they
were hired had not yet been finished and completed.
Petitioner had to engage the services of the
subcontractors whose workers performed the
functions of private respondents. Aggrieved, private
respondents filed a complaint for illegal dismissal,
unfair labor practices and non-payment of their
holiday pay, overtime pay, and 13th month pay
against petitioners. The labor arbiter rendered
decision in favor of the private respondents. When the
same became final and executory, a writ of execution
was issued, however, the same was refused by the
security guard on duty on the ground that the
petitioners no longer occupied the premises. A break-
open order was then recommended.
Issue: Whether or not the alias writ of execution can
be issued against the sister company of the
petitioners, HPPI.
Held: Yes. It is a fundamental principle of corporation
law that a corporation is an entity separate and
distinct from its stockholders and from other
corporations to which it may be connected. But, this
separate and distinct personality of a corporation is
merely a fiction created by law for convenience and to
promote justice. So, when the notion of separate
juridical personality is used to defeat public
convenience, justify wrong, protect fraud, or defend
crime, or is used as a device to defeat labor laws, this
separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced.
This is true likewise when the corporation is merely an
adjunct, a business conduit or an alter ego of another
corporation.
The conditions under which the juridical entity may be
disregarded vary according to the peculiar facts and
in circumstances laid down, but certainly there are
some probative factors of identity that will justify the
application of the doctrine of piercing the corporate
veil, to wit:
Stock ownership by one or common ownership of
both corporations.
Identity of directors and officers.
The names of keeping corporate books and records
Methods of conducting the business.
Where one corporation is so organized and controlled
and its affairs are conducted so that, it is in fact, a
mere instrumentality or adjunct of the other, the fiction
of the corporate entity of the instrumentality may be
disregarded. The control necessary to invoke the rule
is not majority or even complete stock control but
such domination of instances, policies and practices
that the controlled corporation has, so to speak, no
separate mind, will or existence of its own and is but a
conduit for its principal. It must be kept in mind that
the control must be shown to have been exercised at
the time the acts complained of took place. Moreover,
the control and breach of duty must proximately
cause the injury or unjust loss for which the complaint
is made.
The test in determining the applicability of the doctrine
of piercing the veil of corporate fiction as follows:
Control, not mere majority or complete stock control
but complete domination, not only of finances but of
policy and business practice in respect to the
transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind, will
on exercise of its own;
Such control must have been used by the defendant
to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty or dishonest
and unjust act in contravention of plaintiff’s legal
rights.
The aforesaid control and breach of duty must
proximately cause the injury or unjust loss complained
of.
The absence of any of these elements prevents
“piercing the corporate veil” of the corporation. In
applying the instrumentality or “alter ego” doctrine, the
courts are concerned with reality and not form, with
how the corporation operated and the individual
defendant’s relationship to that operation.
8. VILLA REY TRANSIT vs. FERRER
This is a corporation law case. A fraud piercing case
with an alter-ego issue. No not the Batman-Bruce
Wayne type. And 'fraud piercing' meaning, in order to
get into the bottom of it all and expose the corporate
fraud the court decides to pierce its veil of corporate
fiction of what it seems to be.
Question: Is the DOCTRINE THAT A
CORPORATION IS A LEGAL ENTITY DISTINCT
AND SEPARATE FROM THE MEMBERS AND
STOCKHOLDERS A hard fast rule? Well not all the
time.
It's kinda bit complicated when you read this case. But
here's what's its all about. It's all about FOUR
CONTRACTS OF SALE:
1. Villarama → PANTRANCO (Conditional Sale - 2
Certificates)
2. CORPORATION ← Fernando ( 5 Certificates)
3. SHERIFF → Ferrer (Public Bidding - 2
Certificates)
4. Ferrer → PANTRANCO (Subsequent Sale - 2
Certificates)
5
Just pay attention to the first one, co'z the crux of this
case lies in it. Let me give you an overview of this
case:
Jose Villarama was a bus operator, under the
business name of Villa Rey Transit. He operated 32
bus units on various route lines from Pangasinan to
Manila, vice-versa, by virtue of 2 certificates of public
convenience granted him by the Public Service
Commission (PSC).
Now, he sold the 2 certificates of public convenience
to the Pangasinan Transportation Company, Inc.
(PANTRANCO), for P350 grand. PANTRANCO?
remember? Fisherman's Mall? (NOW TAKE NOTE)
this is a conditional sale with a stipulated condition
that the seller (Villarama) "shall not for a period of 10
years from the date of this sale, apply for any TPU
service identical or competing with the buyer." This
simply means NO COMPETITION WITH BUYER
FOR 10 YEARS.
But barely 3 months thereafter, a corporation called
VILLA REY TRANSIT INC. (let's call this 'the
Corporation' as differentiated from the previous Villa
Rey Transit ) was organized with a capital stock of
P500,000.00 where Natividad Villarama (wife of
JoseVillarama) was one of the incorporators other
than the brother and sister-in-law of Jose Villarama.
And in less than a month after its registration with the
SEC the Corporation, bought 5 certificates of public
convenience, 49 buses, tools and equipment from
one Valentin Fernando, for the sum of P249
grand. Wow. So there you go, sold at high bought at
low. The guy really knows what he's doing.
So, the very same day the contract of sale was
executed, the parties to the sale immediately applied
with the PSC for approval of the sale coupled with a
permit to operate provisionally while the case is
pending. (Q: Why approval of the sale? A: Because
public transport involves public interest therefore the
government must come in to regulate)
But before PSC could take final action on said
application for approval, however, the Sheriff of
Manila, pursuant to a writ of execution issued by the
CFI of Pangasinan, levied on 2 of the 5 certificates of
public convenience in favor of Eusebio Ferrer
(respondent in this case) against Valentin Fernando
(vendor of 5 certificates). So.. simply, the 2 of 5
certificates sold by Fernando to the Corporation was
under litigation in a pending case which was newly
decided and now executed. (Bummer huh? Too bad
for Villarama).
So consequently the Sheriff conducted a public sale
for the said 2 certificates of public convenience. And
Ferrer was the highest bidder, therefore a certificate
of sale was issued in his name.
And here's what Ferrer did. He sold the 2 certificates
of public convenience to none other than
PANTRANCO.
So.. nagsabay ngayon... the applications for approval
of sale, filed before the PSC, by Fernando and the
Corporation, for the supposed 5 certificates and that
of Ferrer and Pantranco, for the subsequent 2
certificate sale, and both were scheduled for a joint
hearing.
And here's what irked Villarama. In the meantime
during the pendency of the case the PSC issued an
order disposing that before a final resolution on the
aforesaid applications, PANTRANCO shall be the one
to operate provisionally the service under the two
certificates embraced in the contract between Ferrer
and Pantranco.
The Corporation took issue with this particular ruling
of the PSC and elevated the matter to the Supreme
Court, which decreed, that until the issue on the
ownership of the disputed certificates shall have been
finally settled by the proper court, the
CORPORATION should be the one to operate the
lines provisionally.
So the PSC was pro-PANTRANCO and the SC was
pro-CORPORATION.
Now to get an upper-hand on this case, the
Corporation filed in the CFI of Manila, a complaint
praying for the annulment of the :
1. sheriff's sale of the aforesaid two certificates of
public convenience in favor of Ferrer,
2. the subsequent sale thereof by the latter to
Pantranco.
3. that all the orders of the PSC relative to the parties'
dispute over the said certificates
And BOOM! The CFI of Manila declared the sheriff's
sale of two certificates of public convenience in favor
of Ferrer and the subsequent sale thereof by the latter
to Pantranco NULL AND VOID; declared the
Corporation to be the lawful owner of the said
certificates of public convenience; and ordered Ferrer
and Pantranco, jointly and severally, to pay the
Corporation, the sum of P5,000.00 as and for
attorney's fees.
The case against the PSC was dismissed. All parties
appealed. And PANTRANCO rested it's defense on
the very first contract of sale zeroing in on the 10 year
prescriptive period of competition between vendor
and vendee stipulated in the very first conditional
sale, assailing the DISTINCT AND SEPARATE
PERSONALITY and therefore LIMITED LIABILITY
of the members and stockholders of the corporation
from the corporation it self, since the seller of the 2
certificates in the conditional sale are one and the
same with their competitor CORPORATION (Villa Rey
Transit Inc.)
So clearly this is an alter-ego issue. And Villarama
committed fraud by creating another company which
is merely a fictional corporation in order to evade the
10 year prescriptive period stipulated in the
conditional sale.
Issue:
6
Whether the stipulation, "SHALL NOT FOR A
PERIOD OF 10 YEARS FROM THE DATE OF THIS
SALE, APPLY FOR ANY TPU SERVICE IDENTICAL
OR COMPETING WITH THE BUYER" in the contract
between Villarama and Pantranco, binds the
Corporation (the Villa Rey Transit, Inc.).
Held:
The court answered YES. And therefore PIERCED
THE VEIL OF CORPORATE FICTION.
1. Villarama supplied the organization expenses and
the assets of the Corporation, where he himself made
use of the money of the Corporation and deposited
them to his private accounts. The Corporation
furthermore paid his personal accounts.
Villarama himself admitted that HE MINGLED THE
CORPORATE FUNDS WITH HIS OWN MONEY.
These circumstances are strong persuasive evidence
showing that Villarama has been too much involved in
the affairs of the Corporation to altogether negative
the claim that he was only a part-time general
manager.
2. They show beyond doubt that the Corporation is his
alter ego. The interference of Villarama in the
complex affairs of the corporation, and particularly its
finances, are much too inconsistent with the ends and
purposes of the Corporation law, which, precisely,
seeks to separate personal responsibilities from
corporate undertakings.
3. It is the very essence of incorporation that the acts
and conduct of the corporation be carried out in its
own corporate name because it has its own
personality. The doctrine that a corporation is a legal
entity distinct and separate from the members and
stockholders who compose it is recognized and
respected in all cases which are within reason and the
law.
4. When the fiction is urged 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.
5. Hence, the Villa Rey Transit, Inc. is an alter ego of
Jose Villarama, and that the restrictive clause in the
contract entered into by the latter and Pantranco is
also enforceable and binding against the said
Corporation.
9. Francisco Motors Corporation vs CA
309 SCRA 72 – Business Organization – Corporation
Law – Piercing the Veil of Corporate Fiction (Upside
Down)
In 1985, Francisco Motors Corporation (FMC) sued
Atty. Gregorio Manuel to recover from a him a sum of
money in the amount of P23,000.00+. Said amount
was allegedly owed to them by Manuel for the
purchase of a jeep body plus repairs thereto. Manuel
filed a counterclaim in the amount of P50,000.00. In
his counterclaim, Manuel alleged that he was the
Assistant Legal Officer for FMC; that the Francisco
Family, owners of FMC, engaged his services for the
intestate estate proceedings of one Benita Trinidad;
that he was not paid for his legal services; that he is
filing the counterclaim against FMC because said
corporation was merely a conduit of the Francisco
Family. The trial court as well as the Court of Appeals
granted Manuel’s counterclaim on the ground that the
legal fees were owed by the incorporators of FMC (an
application of the doctrine of piercing the veil of
corporation fiction in a reversed manner).
ISSUE: Whether or not the doctrine of piercing the
veil of corporate fiction was properly used by the
Court of Appeals.
HELD: No. In the first place, the doctrine is to be used
in disregarding corporate fiction and making the
incorporators liable in appropriate circumstances. In
the case at bar, the doctrine is applied upside down
where the corporation is held liable for the personal
obligations of the incorporators – such was uncalled
for and erroneous. It must be noted that that Atty.
Manuel’s legal services were secured by the
Francisco Family to represent them in the intestate
proceedings over Benita Trinidad’s estate. The
indebtedness was incurred by the Francisco Family in
their separate and personal capacity. These estate
proceedings did not involve any business of FMC.
The proper remedy is for Manuel to sue the
concerned members of the Francisco Family in their
individual capacity.
10. SPS. LIPAT V. PACIFIC BANKING
CORPORATION (G.R. NO. 142435)
Facts:
Petitioner spouses Lipat owned Bela’s Export Trading
(BET) a single proprietorship engaged in the
manufacture of garments for domestic and foreign
consumption. The spouses by virtue of an SPA
appointed and authorized their daughter to obtain
loan from respondent Pacific Bank. A loan was
secured and as security therefore a REM was
executed over the property of the spouses. Sometime
after, BET was incorporated into a family corporation
named Bela’s Export Corporation (BEC) and the loan
was restructured in its name. Subsequent loans were
obtained in behalf of BEC all secured by the previous
REM. BEC defaulted in its payments which led to the
foreclosure and sale of the mortgaged property. The
spouses moved to annul the sale alleging that BEC is
a distinct and separate personality from them and that
7
the REM was executed only to secure BET’s loan.
Both trial court and CA ruled to pierce the corporate
veil to hold petitioner spouses liable for BEC’s
obligations.
Issue:
Whether or not the doctrine of piercing the veil of
corporate fiction is applicable in this case.
Ruling: YES.
We find that the evidence on record demolishes,
rather than buttresses, petitioners’ contention that
BET and BEC are separate business entities. Note
that Estelita Lipat admitted that she and her husband,
Alfredo, were the owners of BET and were two of the
incorporators and majority stockholders of BEC. It is
also undisputed that Estelita Lipat executed a special
power of attorney in favor of her daughter, Teresita, to
obtain loans and credit lines from Pacific Bank on her
behalf. Incidentally, Teresita was designated as
executive-vice president and general manager of both
BET and BEC, respectively.
It could not have been coincidental that BET and BEC
are so intertwined with each other in terms of
ownership, business purpose, and management.
Apparently, BET and BEC are one and the same and
the latter is a conduit of and merely succeeded the
former. Petitioners’ attempt to isolate themselves from
and hide behind the corporate personality of BEC so
as to evade their liabilities to Pacific Bank is precisely
what the classical doctrine of piercing the veil of
corporate entity seeks to prevent and remedy.
In our view, BEC is a mere continuation and
successor of BET and petitioners cannot evade their
obligations in the mortgage contract secured under
the name of BEC on the pretext that it was signed for
the benefit and under the name of BET. We are thus
constrained to rule that the Court of Appeals did not
err when it applied the instrumentality doctrine in
piercing the corporate veil of BEC.
13. ARNOLD HALL vs. EDMUNDO PICCIO
G.R. No. L-2598 / June 29, 1950
FACTS:
On May 28, 1947, the petitioners C. Arnold Hall and
Bradley P. Hall, and the respondents Fred Brown,
Emma Brown, Hipolita D. Chapman and Ceferino S.
Abella, signed and acknowledged in Leyte, the
articles of incorporation of the Far Eastern Lumber
and Commercial Co., Inc., organized to engage in a
general lumber business to carry on as general
contractors, operators and managers, etc. Attached to
the articles was an affidavit of the treasurer stating
that 23,428 shares of stock had been subscribed and
fully paid with certain properties transferred to the
corporation described in a list appended thereto.
Immediately after the execution of said articles of
incorporation, the corporation proceeded to do
business with the adoption of by-laws and the election
of its officers. On December 2, 1947, the said articles
of incorporation were filed in the office of the
Securities and Exchange Commission for the
issuance of the corresponding certificate of
incorporation.
On March 22, 1948, pending action on the articles of
incorporation by the SEC, respondents Fred Brown,
Emma Brown, Hipolita D. Chapman and Ceferino S.
Abella filed a suit against petitioners before the Court
of First Instance of Leyte alleging among other things
that the Far Eastern Lumber and Commercial Co. was
an unregistered partnership; that they wished to have
it dissolved because of bitter dissension among the
members, mismanagement and fraud by the
managers and heavy financial losses.
The defendants in the suit, namely, C. Arnold Hall and
Bradley P. Hall, filed a motion to dismiss, contesting
the court’s jurisdiction and the sufficiency of the cause
of action.
After hearing the parties, the Hon. Edmundo S. Piccio
ordered the dissolution of the company; and at the
request of plaintiffs, appointed the respondent Pedro
A. Capuciong as receiver of the properties thereof,
upon the filing of a P20,000 bond.
The defendants therein (petitioners herein) offered to
file a counter-bond for the discharge of the receiver,
but the respondent judge refused to accept the offer
and to discharge the receiver.
Hence, this petition.
ISSUE:
Whether or not the trial court has jurisdiction over the
case?
HELD:
No. The court had no jurisdiction in civil case No. 381
to decree the dissolution of the company, because it
being a de facto corporation, dissolution thereof may
only be ordered in a quo warranto proceeding
instituted in accordance with section 19 of the
Corporation Law.
Under our statute it is to be noted that it is the
issuance of a certificate of incorporation by the
Director of the Bureau of Commerce and Industry
which calls a corporation into being. The immunity of
collateral attack is granted to corporations ‘claiming in
good faith to be a corporation under this act.’
Further, this is not a suit in which the corporation is a
party. This is a litigation between stockholders of the
alleged corporation, for the purpose of obtaining its
dissolution. Even the existence of a de
jure corporation may be terminated in a private suit for
its dissolution between stockholders, without the
intervention of the state.
WHEREFORE, the petition is dismissed.
8
15. Lim Tong Lim vs Philippine Fishing Gear
Industries, Inc
Business Organization – Partnership, Agency,
Trust – Corporation by Estoppel
It was established that Lim Tong Lim requested Peter
Yao to engage in commercial fishing with him and one
Antonio Chua. The three agreed to purchase two
fishing boats but since they do not have the money
they borrowed from one Jesus Lim (brother of Lim
Tong Lim). They again borrowed money and they
agreed to purchase fishing nets and other fishing
equipments. Now, Yao and Chua represented
themselves as acting in behalf of “Ocean Quest
Fishing Corporation” (OQFC) they contracted with
Philippine Fishing Gear Industries (PFGI) for the
purchase of fishing nets amounting to more than
P500k.
They were however unable to pay PFGI and so they
were sued in their own names because apparently
OQFC is a non-existent corporation. Chua admitted
liability and asked for some time to pay. Yao waived
his rights. Lim Tong Lim however argued that he’s not
liable because he was not aware that Chua and Yao
represented themselves as a corporation; that the two
acted without his knowledge and consent.
ISSUE: Whether or not Lim Tong Lim is liable.
HELD: Yes. From the factual findings of both lower
courts, it is clear that Chua, Yao and Lim had decided
to engage in a fishing business, which they started by
buying boats worth P3.35 million, financed by a loan
secured from Jesus Lim. In their Compromise
Agreement, they subsequently revealed their intention
to pay the loan with the proceeds of the sale of the
boats, and to divide equally among them the excess
or loss. These boats, the purchase and the repair of
which were financed with borrowed money, fell under
the term “common fund” under Article 1767. The
contribution to such fund need not be cash or fixed
assets; it could be an intangible like credit or industry.
That the parties agreed that any loss or profit from the
sale and operation of the boats would be divided
equally among them also shows that they had indeed
formed a partnership.
Lim Tong Lim cannot argue that the principle of
corporation by estoppels can only be imputed to Yao
and Chua. Unquestionably, Lim Tong Lim benefited
from the use of the nets found in his boats, the boat
which has earlier been proven to be an asset of the
partnership. Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for
unknown reasons, this fact alone does not preclude
the liabilities of the three as contracting parties in
representation of it. Clearly, under the law on
estoppel, those acting on behalf of a corporation and
those benefited by it, knowing it to be without valid
existence, are held liable as general partners.
16. International Express Travel & Tour Services,
Inc. vs Court of Appeals
343 SCRA 674 – Business Organization –
Corporation Law – Corporation by Estoppel –
When Applied
In 1989, International Express Travel & Tour
Services, Inc. (IETTI), offered to the Philippine
Football Federation (PFF) its travel services for the
South East Asian Games. PFF, through Henri Kahn,
its president, agreed. IETTI then delivered the plane
tickets to PFF, PFF in turn made a down payment.
However, PFF was not able to complete the full
payment in subsequent installments despite repeated
demands from IETTI. IETTI then sued PFF and Kahn
was impleaded as a co-defendant.
Kahn averred that he should not be impleaded
because he merely acted as an agent of PFF which
he averred is a corporation with separate and distinct
personality from him. The trial court ruled against
Kahn and held him personally liable for the said
obligation (PFF was declared in default for failing to
file an answer). The trial court ruled that Kahn failed
to prove that PFF is a corporation. The Court of
Appeals however reversed the decision of the trial
court. The Court of Appeals took judicial notice of the
existence of PFF as a national sports association; that
as such, PFF is empowered to enter into contracts
through its agents; that PFF is therefore liable for the
contract entered into by its agent Kahn. The CA
further ruled that IETTI is in estoppel; that it cannot
now deny the corporate existence of PFF because it
had contracted and dealt with PFF in such a manner
as to recognize and in effect admit its existence.
ISSUE: Whether or not the Court of Appeals is
correct.
HELD: No. PFF, upon its creation, is not automatically
considered a national sports association. It must first
be recognized and accredited by the Philippine
Amateur Athletic Federation and the Department of
Youth and Sports Development. This fact was never
substantiated by Kahn. As such, PFF is considered as
an unincorporated sports association. And under the
law, any person acting or purporting to act on behalf
of a corporation which has no valid existence
assumes such privileges and becomes personally
liable for contract entered into or for other acts
performed as such agent. Kahn is therefore
personally liable for the contract entered into by
PFF with IETTI.
There is also no merit on the finding of the CA that
IETTI is in estoppel. The application of the doctrine of
corporation by estoppel applies to a third party only
when he tries to escape liability on a contract from
which he has benefited on the irrelevant ground of
defective incorporation. In the case at bar, IETTI is
not trying to escape liability from the contract but
rather is the one claiming from the contract.
9
17. FILIPINAS BROADCASTING NETWORK, NOTE: CASES 11, 12, 14, and 18 are printed in full
INC., petitioner, vs. AGO MEDICAL AND text no CASE DIGEST AVAILABLE
EDUCATIONAL CENTER-BICOL CHRISTIAN
COLLEGE OF MEDICINE, (AMEC-BCCM)
and ANGELITA F. AGO,respondents. G.R. No.
141994. January 17, 2005

Facts:

Rima & Alegre were host of FBNI radio program

“Expose”. Respondent Ago was the owner of the
Medical & Educational center, subject of the radio
program “Expose”. AMEC claimed that the broadcasts
were defamatory and owner Ago and school AMEC
claimed for damages. The complaint further alleged
that AMEC is a reputable learning institution. With the
supposed expose, FBNI, Rima and Alegre
“transmitted malicious imputations and as such,
destroyed plaintiff’s reputation. FBNI was included as
defendant for allegedly failing to exercise due
diligence in the selection and supervision of its
employees. The trial court found Rima’s statements to
be within the bounds of freedom of speech and ruled
that the broadcast was libelous. It ordered the
defendants Alegre and FBNI to pay AMEC 300k for
moral damages.”

ISSUE: Whether or not AMEC is entitled to moral

damages.

RULING: YES.
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. Nevertheless, AMEC’s claim, or moral
damages fall under item 7 of Art – 2219 of the NCC.
This provision expressly authorizes the recovery of
moral damages in cases of libel, slander or any other
form of defamation. Art 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. Moreover,
where the broadcast is libelous per se, the law implied
damages. 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. In
this case, the broadcasts are libelous per se. thus,
AMEC is entitled to moral damages. However, we find
the award P500,000 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 to
P150k.

10