[G.R. No. 147402.

January 14, 2004]

ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the
Leyte Metropolitan Water District (LMWD), Tacloban City, petitioner, vs.
COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners
RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional Director of
COA Region VIII, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for certiorari[ to annul the Commission on Audits (COA)
Resolution dated 3 January 2000 and the Decision dated 30 January 2001
denying the Motion for Reconsideration. The COA denied petitioner Ranulfo C.
Felicianos request for COA to cease all audit services, and to stop charging
auditing fees, to Leyte Metropolitan Water District (LMWD). The COA also denied
petitioners request for COA to refund all auditing fees previously paid by LMWD.
Antecedent Facts
A Special Audit Team from COA Regional Office No. VIII audited the accounts of
LMWD. Subsequently, LMWD received a letter from COA dated 19 July 1999
requesting payment of auditing fees. As General Manager of LMWD, petitioner
sent a reply dated 12 October 1999 informing COAs Regional Director that the
water district could not pay the auditing fees. Petitioner cited as basis for his
action Sections 6 and 20 of Presidential Decree 198 (PD 198), as well as Section
18 of Republic Act No. 6758 (RA 6758). The Regional Director referred
petitioners reply to the COA Chairman on 18 October 1999.
On 19 October 1999, petitioner wrote COA through the Regional Director asking
for refund of all auditing fees LMWD previously paid to COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangans
Resolution dated 3 January 2000 denying his requests. Petitioner filed a motion
for reconsideration on 31 March 2000, which COA denied on 30 January 2001.
On 13 March 2001, petitioner filed this instant petition. Attached to the petition
were resolutions of the Visayas Association of Water Districts (VAWD) and the
Philippine Association of Water Districts (PAWD) supporting the petition.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COAs audit jurisdiction over
local water districts in Davao City Water District v. Civil Service Commission
and Commission on Audit, as follows:
The above-quoted provision [referring to Section 3(b) PD 198] definitely sets to
naught petitioners contention that they are private corporations. It is clear
therefrom that the power to appoint the members who will comprise the members
of the Board of Directors belong to the local executives of the local subdivision
unit where such districts are located. In contrast, the members of the Board of
Directors or the trustees of a private corporation are elected from among
members or stockholders thereof. It would not be amiss at this point to
emphasize that a private corporation is created for the private purpose, benefit,
aim and end of its members or stockholders. Necessarily, said members or
stockholders should be given a free hand to choose who will compose the
governing body of their corporation. But this is not the case here and this clearly
indicates that petitioners are not private corporations.
The COA also denied petitioners request for COA to stop charging auditing fees
as well as petitioners request for COA to refund all auditing fees already paid.
The Issues
Petitioner contends that COA committed grave abuse of discretion amounting to
lack or excess of jurisdiction by auditing LMWD and requiring it to pay auditing
fees. Petitioner raises the following issues for resolution:
1. Whether a Local Water District (LWD) created under PD 198, as amended, is
a government-owned or controlled corporation subject to the audit jurisdiction of
COA;
2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public
accountants from auditing local water districts; and
3. Whether Section 18 of RA 6758 prohibits the COA from charging government-
owned and controlled corporations auditing fees.
The Ruling of the Court
The petition lacks merit.
The Constitution and existing laws[if !supportFootnotes][4][endif] mandate COA
to audit all government agencies, including government-owned and controlled
corporations (GOCCs) with original charters. An LWD is a GOCC with an original
charter. Section 2(1), Article IX-D of the Constitution provides for COAs audit
jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the power, authority and
duty to examine, audit, and settle all accounts pertaining to the revenue and
receipts of, and expenditures or uses of funds and property, owned or held in
trust by, or pertaining to, the Government, or any of its subdivisions, agencies, or
instrumentalities, including government-owned and controlled corporations
with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this
Constitution; (b) autonomous state colleges and universities; (c) other
government-owned or controlled corporations and their subsidiaries; and (d) such
non-governmental entities receiving subsidy or equity, directly or indirectly, from
or through the government, which are required by law or the granting institution to
submit to such audit as a condition of subsidy or equity. However, where the
internal control system of the audited agencies is inadequate, the Commission
may adopt such measures, including temporary or special pre-audit, as are
necessary and appropriate to correct the deficiencies. It shall keep the general
accounts of the Government and, for such period as may be provided by law,
preserve the vouchers and other supporting papers pertaining thereto. (Emphasis
supplied)
The COAs audit jurisdiction extends not only to government agencies or
instrumentalities, but also to government-owned and controlled corporations with
original charters as well as other government-owned or controlled corporations
without original charters.
Whether LWDs are Private or Government-Owned
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-
examination of a doctrine backed by a long line of cases culminating in Davao
City Water District v. Civil Service Commission and just recently reiterated in
De Jesus v. Commission on Audit. Petitioner maintains that LWDs are not
government-owned and controlled corporations with original charters. Petitioner
even argues that LWDs are private corporations. Petitioner asks the Court to
consider certain interpretations of the applicable laws, which would give a new
perspective to the issue of the true character of water districts.
Petitioner theorizes that what PD 198 created was the Local Waters Utilities
Administration (LWUA) and not the LWDs. Petitioner claims that LWDs are
created pursuant to and not created directly by PD 198. Thus, petitioner
concludes that PD 198 is not an original charter that would place LWDs within the
audit jurisdiction of COA as defined in Section 2(1), Article IX-D of the
Constitution. Petitioner elaborates that PD 198 does not create LWDs since it
does not expressly direct the creation of such entities, but only provides for their
formation on an optional or voluntary basis. Petitioner adds that the operative act
that creates an LWD is the approval of the Sanggunian Resolution as specified in
PD 198.
Petitioners contention deserves scant consideration.
We begin by explaining the general framework under the fundamental law. The
Constitution recognizes two classes of corporations. The first refers to private
corporations created under a general law. The second refers to government-
owned or controlled corporations created by special charters. Section 16, Article
XII of the Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Government-owned
or controlled corporations may be created or established by special charters in
the interest of the common good and subject to the test of economic viability.
The Constitution emphatically prohibits the creation of private corporations
except by a general law applicable to all citizens.[if !supportFootnotes][9][endif]
The purpose of this constitutional provision is to ban private corporations created
by special charters, which historically gave certain individuals, families or groups
special privileges denied to other citizens.[if !supportFootnotes][10][endif]
In short, Congress cannot enact a law creating a private corporation with a
special charter. Such legislation would be unconstitutional. 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.
The Constitution authorizes Congress to create government-owned or controlled
corporations through special charters. Since private corporations cannot have
special charters, it follows that Congress can create corporations with special
charters only if such corporations are government-owned or controlled.
Obviously, LWDs are not private corporations because they are not created
under the Corporation Code. LWDs are not registered with the Securities and
Exchange Commission. Section 14 of the Corporation Code states that [A]ll
corporations organized under this code shall file with the Securities and
Exchange Commission articles of incorporation x x x. LWDs have no articles of
incorporation, no incorporators and no stockholders or members. There are no
stockholders or members to elect the board directors of LWDs as in the case of
all corporations registered with the Securities and Exchange Commission. 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, thus:
From the foregoing pronouncement, it is clear that what has been excluded from
the coverage of the CSC are those corporations created pursuant to the
Corporation Code. Significantly, petitioners are not created under the said
code, but on the contrary, they were created pursuant to a special law and
are governed primarily by its provision.
LWDs exist by virtue of PD 198, which constitutes their special charter. Since
under the Constitution only government-owned or controlled corporations may
have special charters, LWDs can validly exist only if they are government-owned
or controlled. To claim that LWDs are private corporations with a special charter
is to admit that their existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence and power from the
Corporation Code, LWDs derive their legal existence and power from PD 198.
Sections 6 and 25 of PD 198 provide:
Section 6. Formation of District. This Act is the source of authorization and
power to form and maintain a district. For purposes of this Act, a district
shall be considered as a quasi-public corporation performing public
service and supplying public wants. As such, a district shall exercise the
powers, rights and privileges given to private corporations under existing
laws, in addition to the powers granted in, and subject to such restrictions
imposed, under this Act.
(a) The name of the local water district, which shall include the name of the city,
municipality, or province, or region thereof, served by said system, followed by
the words Water District.
(b) A description of the boundary of the district. In the case of a city or
municipality, such boundary may include all lands within the city or municipality.
A district may include one or more municipalities, cities or provinces, or portions
thereof.
(c) A statement completely transferring any and all waterworks and/or sewerage
facilities managed, operated by or under the control of such city, municipality or
province to such district upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is formed, which
shall include those purposes outlined in Section 5 above.
(e) The names of the initial directors of the district with the date of expiration of
term of office for each.
(f) A statement that the district may only be dissolved on the grounds and under
the conditions set forth in Section 44 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set forth in
Section 36 of this Title.
Nothing in the resolution of formation shall state or infer that the local legislative
body has the power to dissolve, alter or affect the district beyond that specifically
provided for in this Act.
If two or more cities, municipalities or provinces, or any combination thereof,
desire to form a single district, a similar resolution shall be adopted in each city,
municipality and province.
xxx
Sec. 25. Authorization. The district may exercise all the powers which are
expressly granted by this Title or which are necessarily implied from or
incidental to the powers and purposes herein stated. For the purpose of
carrying out the objectives of this Act, a district is hereby granted the power of
eminent domain, the exercise thereof shall, however, be subject to review by the
Administration. (Emphasis supplied)
Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly
confers on LWDs corporate powers. Section 6 of PD 198 provides that LWDs
shall exercise the powers, rights and privileges given to private corporations
under existing laws. Without PD 198, LWDs would have no corporate powers.
Thus, PD 198 constitutes the special enabling charter of LWDs. The ineluctable
conclusion is that LWDs are government-owned and controlled corporations with
a special charter.
The phrase government-owned and controlled corporations with original charters
means GOCCs created under special laws and not under the general
incorporation law. There is no difference between the term original charters and
special charters. The Court clarified this in National Service Corporation v.
NLRC citing the deliberations in the Constitutional Commission, as follows:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed
amendment to now read as follows: including government-owned or controlled
corporations WITH ORIGINAL CHARTERS. The purpose of this amendment is to
indicate that government corporations such as the GSIS and SSS, which have
original charters, fall within the ambit of the civil service. However, corporations
which are subsidiaries of these chartered agencies such as the Philippine
Airlines, Manila Hotel and Hyatt are excluded from the coverage of the civil
service.
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?
MR. FOZ. Just one question, Mr. Presiding Officer. By the term original
charters, what exactly do we mean?
MR. ROMULO. We mean that they were created by law, by an act of
Congress, or by special law.
MR. FOZ. And not under the general corporation law.
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the Committee accepts the
amendment.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general
corporation law are out.
MR. ROMULO. That is correct. (Emphasis supplied)
Again, in Davao City Water District v. Civil Service Commission, the Court
reiterated the meaning of the phrase government-owned and controlled
corporations with original charters in this wise:
By government-owned or controlled corporation with original charter, We
mean government owned or controlled corporation created by a special law
and not under the Corporation Code of the Philippines. Thus, in the case of
Lumanta v. NLRC (G.R. No. 82819, February 8, 1989, 170 SCRA 79, 82), We
held:
The Court, in National Service Corporation (NASECO) v. National Labor
Relations Commission, G.R. No. 69870, promulgated on 29 November 1988,
quoting extensively from the deliberations of the 1986 Constitutional
Commission in respect of the intent and meaning of the new phrase with
original charter, in effect held that government-owned and controlled
corporations with original charter refer to corporations chartered by special
law as distinguished from corporations organized under our general
incorporation statute the Corporation Code. In NASECO, the company
involved had been organized under the general incorporation statute and was a
subsidiary of the National Investment Development Corporation (NIDC) which in
turn was a subsidiary of the Philippine National Bank, a bank chartered by a
special statute. Thus, government-owned or controlled corporations like
NASECO are effectively, excluded from the scope of the Civil Service. (Emphasis
supplied)
Petitioners contention that the Sangguniang Bayan resolution creates the LWDs
assumes that the Sangguniang Bayan has the power to create corporations. This
is a patently baseless assumption. The Local Government Code[if
!supportFootnotes][17][endif] does not vest in the Sangguniang Bayan the power
to create corporations.[if !supportFootnotes][18][endif] What the Local
Government Code empowers the Sangguniang Bayan to do is to provide for the
establishment of a waterworks system subject to existing laws. Thus, Section
447(5)(vii) of the Local Government Code provides:
SECTION 447. Powers, Duties, Functions and Compensation. (a) The
sangguniang bayan, as the legislative body of the municipality, shall enact
ordinances, approve resolutions and appropriate funds for the general welfare of
the municipality and its inhabitants pursuant to Section 16 of this Code and in the
proper exercise of the corporate powers of the municipality as provided for under
Section 22 of this Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation,
maintenance, and repair of an efficient waterworks system to supply water for the
inhabitants; regulate the construction, maintenance, repair and use of hydrants,
pumps, cisterns and reservoirs; protect the purity and quantity of the water supply
of the municipality and, for this purpose, extend the coverage of appropriate
ordinances over all territory within the drainage area of said water supply and
within one hundred (100) meters of the reservoir, conduit, canal, aqueduct,
pumping station, or watershed used in connection with the water service; and
regulate the consumption, use or wastage of water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only in accordance
with the provisions of PD 198. The Sangguniang Bayan has no power to create a
corporate entity that will operate its waterworks system. However, the
Sangguniang Bayan may avail of existing enabling laws, like PD 198, to form and
incorporate a water district. Besides, even assuming for the sake of argument
that the Sangguniang Bayan has the power to create corporations, the LWDs
would remain government-owned or controlled corporations subject to COAs
audit jurisdiction. The resolution of the Sangguniang Bayan would constitute an
LWDs special charter, making the LWD a government-owned and controlled
corporation with an original charter. In any event, the Court has already ruled in
Baguio Water District v. Trajano[if !supportFootnotes][19][endif] that the
Sangguniang Bayan resolution is not the special charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is still necessary for the
final creation of a district, this Court is of the opinion that said resolution cannot
be considered as its charter, the same being intended only to implement the
provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC
in order that it may have an original charter. In short, petitioner argues that one
special law cannot serve as enabling law for several GOCCs but only for one
GOCC. Section 16, Article XII of the Constitution mandates that Congress shall
not, except by general law, provide for the creation of private corporations. Thus,
the Constitution prohibits one special law to create one private corporation,
requiring instead a general law to create private corporations. In contrast, the
same Section 16 states that Government-owned or controlled corporations may
be created or established by special charters. Thus, the Constitution permits
Congress to create a GOCC with a special charter. There is, however, no
prohibition on Congress to create several GOCCs of the same class under one
special enabling charter.
The rationale behind the prohibition on private corporations having special
charters does not apply to GOCCs. There is no danger of creating special
privileges to certain individuals, families or groups if there is one special law
creating each GOCC. Certainly, such danger will not exist whether one special
law creates one GOCC, or one special enabling law creates several GOCCs.
Thus, Congress may create GOCCs either by special charters specific to each
GOCC, or by one special enabling charter applicable to a class of GOCCs, like
PD 198 which applies only to LWDs.
Petitioner also contends that LWDs are private corporations because Section 6 of
PD 198[if !supportFootnotes][21][endif] declares that LWDs shall be considered
quasi-public in nature. Petitioners rationale is that only private corporations may
be deemed quasi-public and not public corporations. Put differently, petitioner
rationalizes that a public corporation cannot be deemed quasi-public because
such corporation is already public. Petitioner concludes that the term quasi-public
can only apply to private corporations. Petitioners argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs audit
jurisdiction depends on the governments ownership or control of a corporation.
The nature of the corporation, whether it is private, quasi-public, or public is
immaterial.
The Constitution vests in the COA audit jurisdiction over government-owned and
controlled corporations with original charters, as well as government-owned or
controlled corporations without original charters. GOCCs with original charters
are subject to COA pre-audit, while GOCCs without original charters are subject
to COA post-audit. GOCCs without original charters refer to corporations created
under the Corporation Code but are owned or controlled by the government. The
nature or purpose of the corporation is not material in determining COAs audit
jurisdiction. Neither is the manner of creation of a corporation, whether under a
general or special law.
The determining factor of COAs audit jurisdiction is government ownership or
control of the corporation. In Philippine Veterans Bank Employees Union-
NUBE v. Philippine Veterans Bank, the Court even ruled that the criterion of
ownership and control is more important than the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B,
Section 2(1) that the Civil Service embraces all branches, subdivisions,
instrumentalities, and agencies of the Government, including government-owned
or controlled corporations with original charters. As the Bank is not owned or
controlled by the Government although it does have an original charter in
the form of R.A. No. 3518, it clearly does not fall under the Civil Service and
should be regarded as an ordinary commercial corporation. Section 28 of
the said law so provides. The consequence is that the relations of the Bank with
its employees should be governed by the labor laws, under which in fact they
have already been paid some of their claims. (Emphasis supplied)
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 an 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 directors of an LWD for a fixed
term of six years. The board directors of LWDs are not co-owners of the LWDs.
LWDs have no private stockholders or members. The board directors and other
personnel of LWDs are government employees subject to civil service laws and
anti-graft laws.
While Section 8 of PD 198 states that [N]o public official shall serve as director of
an LWD, it only means that the appointees to the board of directors of LWDs
shall come from the private sector. Once such private sector representatives
assume office as directors, they become public officials governed by the civil
service law and anti-graft laws. Otherwise, Section 8 of PD 198 would contravene
Section 2(1), Article IX-B of the Constitution declaring that the civil service
includes government-owned or controlled corporations with original charters.
If LWDs are neither GOCCs with original charters nor GOCCs without original
charters, then they would fall under the term agencies or instrumentalities of the
government and thus still subject to COAs audit jurisdiction. However, the stark
and undeniable fact is that the government owns LWDs. Section 45 of PD 198
recognizes government ownership of LWDs when Section 45 states that the
board of directors may dissolve an LWD only on the condition that another
public entity has acquired the assets of the district and has assumed all
obligations and liabilities attached thereto. The implication is clear that an LWD is
a public and not a private entity.
Petitioner does not allege that some entity other than the government owns or
controls LWDs. Instead, petitioner advances the theory that the Water Districts
owner is the District itself.[ Assuming for the sake of argument that an LWD is
self-owned, as petitioner describes an LWD, the government in any event
controls all LWDs. First, government officials appoint all LWD directors to a fixed
term of office. Second, any per diem of LWD directors in excess of P50 is subject
to the approval of the Local Water Utilities Administration, and directors can
receive no other compensation for their services to the LWD. Third, the Local
Water Utilities Administration can require LWDs to merge or consolidate their
facilities or operations. This element of government control subjects LWDs to
COAs audit jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private
entities through the transfer of ownership of water facilities from local government
units to their respective water districts as mandated by PD 198. Petitioner is
grasping at straws. Privatization involves the transfer of government assets to a
private entity. Petitioner concedes that the owner of the assets transferred under
Section 6 (c) of PD 198 is no other than the LWD itself. The transfer of assets
mandated by PD 198 is a transfer of the water systems facilities managed,
operated by or under the control of such city, municipality or province to such
(water) district. In short, the transfer is from one government entity to another
government entity. PD 198 is bereft of any indication that the transfer is to
privatize the operation and control of water systems.
Finally, petitioner claims that even on the assumption that the government owns
and controls LWDs, Section 20 of PD 198 prevents COA from auditing LWDs. [if
!supportFootnotes][34][endif] Section 20 of PD 198 provides:
Sec. 20. System of Business Administration. The Board shall, as soon as
practicable, prescribe and define by resolution a system of business
administration and accounting for the district, which shall be patterned upon and
conform to the standards established by the Administration. Auditing shall be
performed by a certified public accountant not in the government service.
The Administration may, however, conduct annual audits of the fiscal operations
of the district to be performed by an auditor retained by the Administration.
Expenses incurred in connection therewith shall be borne equally by the water
district concerned and the Administration.[if !supportFootnotes][35][endif]
(Emphasis supplied)
Petitioner argues that PD 198 expressly prohibits COA auditors, or any
government auditor for that matter, from auditing LWDs. Petitioner asserts that
this is the import of the second sentence of Section 20 of PD 198 when it states
that [A]uditing shall be performed by a certified public accountant not in the
government service.[if !supportFootnotes][36][endif]
PD 198 cannot prevail over the Constitution. No amount of clever legislation can
exclude GOCCs like LWDs from COAs audit jurisdiction. Section 3, Article IX-C
of the Constitution outlaws any scheme or devise to escape COAs audit
jurisdiction, thus:
Sec. 3. No law shall be passed exempting any entity of the Government or its
subsidiary in any guise whatever, or any investment of public funds, from the
jurisdiction of the Commission on Audit. (Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the Constitution
precisely to annul provisions of Presidential Decrees, like that of Section 20 of
PD 198, that exempt GOCCs from COA audit. The following exchange in the
deliberations of the Constitutional Commission elucidates this intent of the
framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of the amended
committee report which reads: NO LAW SHALL BE PASSED EXEMPTING ANY
ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE
WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE
JURISDICTION OF THE COMMISSION ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took advantage of the
absence of a legislature in the past to obtain presidential decrees
exempting themselves from the jurisdiction of the Commission on Audit,
one notable example of which is the Philippine National Oil Company which is
really an empty shell. It is a holding corporation by itself, and strictly on its own
account. Its funds were not very impressive in quantity but underneath that shell
there were billions of pesos in a multiplicity of companies. The PNOC the empty
shell under a presidential decree was covered by the jurisdiction of the
Commission on Audit, but the billions of pesos invested in different corporations
underneath it were exempted from the coverage of the Commission on Audit.
Another example is the United Coconut Planters Bank. The Commission on Audit
has determined that the coconut levy is a form of taxation; and that, therefore,
these funds attributed to the shares of 1,400,000 coconut farmers are, in effect,
public funds. And that was, I think, the basis of the PCGG in undertaking that last
major sequestration of up to 94 percent of all the shares in the United Coconut
Planters Bank. The charter of the UCPB, through a presidential decree,
exempted it from the jurisdiction of the Commission on Audit, it being a private
organization.
So these are the fetuses of future abuse that we are slaying right here with this
additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED
EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN
ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM
THE JURISDICTION OF THE COMMISSION ON AUDIT.
THE PRESIDENT: May we know the position of the Committee on the proposed
amendment of Commissioner Ople?
MR. JAMIR: If the honorable Commissioner will change the number of the
section to 4, we will accept the amendment.
MR. OPLE: Gladly, Madam President. Thank you.
MR. DE CASTRO: Madam President, point of inquiry on the new amendment.
THE PRESIDENT: Commissioner de Castro is recognized.
MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner
Ople.
Is that not included in Section 2 (1) where it states: (c) government-owned or
controlled corporations and their subsidiaries? So that if these government-
owned and controlled corporations and their subsidiaries are subjected to the
audit of the COA, any law exempting certain government corporations or
subsidiaries will be already unconstitutional.
So I believe, Madam President, that the proposed amendment is unnecessary.
MR. MONSOD: Madam President, since this has been accepted, we would like
to reply to the point raised by Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the situation that
happened in the past, because the same provision was in the 1973 Constitution
and yet somehow a law or a decree was passed where certain institutions were
exempted from audit. We are just reaffirming, emphasizing, the role of the
Commission on Audit so that this problem will never arise in the future.[if
!supportFootnotes][37][endif]
There is an irreconcilable conflict between the second sentence of Section 20 of
PD 198 prohibiting COA auditors from auditing LWDs and Sections 2(1) and 3,
Article IX-D of the Constitution vesting in COA the power to audit all GOCCs. We
rule that the second sentence of Section 20 of PD 198 is unconstitutional since it
violates Sections 2(1) and 3, Article IX-D of the Constitution.
On the Legality of COAs
Practice of Charging Auditing Fees
Petitioner claims that the auditing fees COA charges LWDs for audit services
violate the prohibition in Section 18 of RA 6758,[if !supportFootnotes][38][endif]
which states:
Sec. 18. Additional Compensation of Commission on Audit Personnel and of
other Agencies. In order to preserve the independence and integrity of the
Commission on Audit (COA), its officials and employees are prohibited from
receiving salaries, honoraria, bonuses, allowances or other emoluments from any
government entity, local government unit, government-owned or controlled
corporations, and government financial institutions, except those compensation
paid directly by COA out of its appropriations and contributions.
Government entities, including government-owned or controlled corporations
including financial institutions and local government units are hereby prohibited
from assessing or billing other government entities, including government-owned
or controlled corporations including financial institutions or local government units
for services rendered by its officials and employees as part of their regular
functions for purposes of paying additional compensation to said officials and
employees. (Emphasis supplied)
Claiming that Section 18 is absolute and leaves no doubt,[if
!supportFootnotes][39][endif] petitioner asks COA to discontinue its practice of
charging auditing fees to LWDs since such practice allegedly violates the law.
Petitioners claim has no basis.
Section 18 of RA 6758 prohibits COA personnel from receiving any kind of
compensation from any government entity except compensation paid directly
by COA out of its appropriations and contributions. Thus, RA 6758 itself
recognizes an exception to the statutory ban on COA personnel receiving
compensation from GOCCs. In Tejada v. Domingo,[if
!supportFootnotes][40][endif] the Court declared:
There can be no question that Section 18 of Republic Act No. 6758 is designed
to strengthen further the policy x x x to preserve the independence and integrity
of the COA, by explicitly PROHIBITING: (1) COA officials and employees from
receiving salaries, honoraria, bonuses, allowances or other emoluments from any
government entity, local government unit, GOCCs and government financial
institutions, except such compensation paid directly by the COA out of its
appropriations and contributions, and (2) government entities, including
GOCCs, government financial institutions and local government units from
assessing or billing other government entities, GOCCs, government financial
institutions or local government units for services rendered by the latters officials
and employees as part of their regular functions for purposes of paying additional
compensation to said officials and employees.
xxx
The first aspect of the strategy is directed to the COA itself, while the second
aspect is addressed directly against the GOCCs and government financial
institutions. Under the first, COA personnel assigned to auditing units of
GOCCs or government financial institutions can receive only such salaries,
allowances or fringe benefits paid directly by the COA out of its
appropriations and contributions. The contributions referred to are the cost
of audit services earlier mentioned which cannot include the extra
emoluments or benefits now claimed by petitioners. The COA is further
barred from assessing or billing GOCCs and government financial institutions for
services rendered by its personnel as part of their regular audit functions for
purposes of paying additional compensation to such personnel. x x x. (Emphasis
supplied)
In Tejada, the Court explained the meaning of the word contributions in Section
18 of RA 6758, which allows COA to charge GOCCs the cost of its audit
services:
x x x the contributions from the GOCCs are limited to the cost of audit services
which are based on the actual cost of the audit function in the corporation
concerned plus a reasonable rate to cover overhead expenses. The actual audit
cost shall include personnel services, maintenance and other operating
expenses, depreciation on capital and equipment and out-of-pocket expenses. In
respect to the allowances and fringe benefits granted by the GOCCs to the COA
personnel assigned to the formers auditing units, the same shall be directly
defrayed by COA from its own appropriations x x x. [if
!supportFootnotes][41][endif]
COA may charge GOCCs actual audit cost but GOCCs must pay the same
directly to COA and not to COA auditors. Petitioner has not alleged that COA
charges LWDs auditing fees in excess of COAs actual audit cost. Neither has
petitioner alleged that the auditing fees are paid by LWDs directly to individual
COA auditors. Thus, petitioners contention must fail.
WHEREFORE, the Resolution of the Commission on Audit dated 3 January
2000 and the Decision dated 30 January 2001 denying petitioners Motion for
Reconsideration are AFFIRMED. The second sentence of Section 20 of
Presidential Decree No. 198 is declared VOID for being inconsistent with Sections
2 (1) and 3, Article IX-D of the Constitution. No costs.
SO ORDERED.
Davide, Jr., C.J., Puno, Vitug, Panganiban, Quisumbing, Ynares-Santiago,
Sandoval-Gutierrez, Austria-Martinez, Corona, Carpio-Morales, Callejo, Sr., and
Azcuna, and Tinga, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 155650 July 20, 2006
MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner,
vs.
COURT OF APPEALS, CITY OF PARAÑAQUE, CITY MAYOR OF
PARAÑAQUE, SANGGUNIANG PANGLUNGSOD NG PARAÑAQUE, CITY
ASSESSOR OF PARAÑAQUE, and CITY TREASURER OF PARAÑAQUE,
respondents.
DECISION
CARPIO, J.:
The Antecedents
Petitioner Manila International Airport Authority (MIAA) operates the Ninoy
Aquino International Airport (NAIA) Complex in Parañaque City under Executive
Order No. 903, otherwise known as the Revised Charter of the Manila
International Airport Authority ("MIAA Charter"). Executive Order No. 903 was
issued on 21 July 1983 by then President Ferdinand E. Marcos. Subsequently,
Executive Order Nos. 9091 and 2982 amended the MIAA Charter.
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,3 including the runways and buildings
("Airport Lands and Buildings") then under the Bureau of Air Transportation.4 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.5
On 21 March 1997, the Office of the Government Corporate Counsel (OGCC)
issued Opinion No. 061. 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.
On 28 June 2001, MIAA received Final Notices of Real Estate Tax Delinquency
from the City of Parañaque for the taxable years 1992 to 2001. MIAA's real
estate tax delinquency is broken down as follows:
TAX TAXABLE
TAX DUE PENALTY TOTAL
DECLARATION YEAR
E-016-01370 1992-2001 19,558,160.00 11,201,083.20 30,789,243.2
E-016-01374 1992-2001 111,689,424.90 68,149,479.59 179,838,904.
E-016-01375 1992-2001 20,276,058.00 12,371,832.00 32,647,890.0
E-016-01376 1992-2001 58,144,028.00 35,477,712.00 93,621,740.0
E-016-01377 1992-2001 18,134,614.65 11,065,188.59 29,199,803.2
E-016-01378 1992-2001 111,107,950.40 67,794,681.59 178,902,631.
E-016-01379 1992-2001 4,322,340.00 2,637,360.00 6,959,700.00
E-016-01380 1992-2001 7,776,436.00 4,744,944.00 12,521,380.0
*E-016-013-85 1998-2001 6,444,810.00 2,900,164.50 9,344,974.50
*E-016-01387 1998-2001 34,876,800.00 5,694,560.00 50,571,360.0
*E-016-01396 1998-2001 75,240.00 33,858.00 109,098.00
GRAND TOTAL P392,435,861.9 P232,070,863.4
5 7 624,506,72
1992-1997 RPT was paid on Dec. 24, 1997 as per O.R.#9476102 for
P4,207,028.75
#9476101 for P28,676,480.00
#9476103 for P49,115.006
On 17 July 2001, the City of Parañaque, through its City Treasurer, issued
notices of levy and warrants of levy on the Airport Lands and Buildings. 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 thus sought a clarification of OGCC Opinion No. 061.
On 9 August 2001, the OGCC issued Opinion No. 147 clarifying OGCC Opinion
No. 061. The OGCC pointed out that Section 206 of the Local Government Code
requires persons exempt from real estate tax to show proof of exemption. The
OGCC opined that Section 21 of the MIAA Charter is the proof that MIAA is
exempt from real estate tax.
On 1 October 2001, MIAA filed with the Court of Appeals an original petition for
prohibition and injunction, with prayer for preliminary injunction or temporary
restraining order. 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. The petition was docketed as CA-G.R. SP No.
66878.
On 5 October 2001, the Court of Appeals dismissed the petition because MIAA
filed it beyond the 60-day reglementary period. The Court of Appeals also denied
on 27 September 2002 MIAA's motion for reconsideration and supplemental
motion for reconsideration. Hence, MIAA filed on 5 December 2002 the present
petition for review.7
Meanwhile, in January 2003, the City of Parañaque posted notices of auction
sale at the Barangay Halls of Barangays Vitalez, Sto. Niño, and Tambo,
Parañaque City; in the public market of Barangay La Huerta; and in the main
lobby of the Parañaque City Hall. The City of Parañaque published the notices in
the 3 and 10 January 2003 issues of the Philippine Daily Inquirer, a newspaper of
general circulation in the Philippines. The notices announced the public auction
sale of the Airport Lands and Buildings to the highest bidder on 7 February 2003,
10:00 a.m., at the Legislative Session Hall Building of Parañaque City.
A day before the public auction, or on 6 February 2003, at 5:10 p.m., MIAA filed
before this Court an Urgent Ex-Parte and Reiteratory Motion for the Issuance of a
Temporary Restraining Order. The motion sought to restrain respondents — the
City of Parañaque, City Mayor of Parañaque, Sangguniang Panglungsod ng
Parañaque, City Treasurer of Parañaque, and the City Assessor of Parañaque
("respondents") — from auctioning the Airport Lands and Buildings.
On 7 February 2003, this Court issued a temporary restraining order (TRO)
effective immediately. The Court ordered respondents to cease and desist from
selling at public auction the Airport Lands and Buildings. Respondents received
the TRO on the same day that the Court issued it. However, respondents
received the TRO only at 1:25 p.m. or three hours after the conclusion of the
public auction.
On 10 February 2003, this Court issued a Resolution confirming nunc pro tunc
the TRO.
On 29 March 2005, the Court heard the parties in oral arguments. In compliance
with the directive issued during the hearing, MIAA, respondent City of
Parañaque, and the Solicitor General subsequently submitted their respective
Memoranda.
MIAA admits that the MIAA Charter has placed the title to the Airport Lands and
Buildings in the name of MIAA. However, MIAA points out that it cannot claim
ownership over these properties since the real owner of the Airport Lands and
Buildings is the Republic of the Philippines. The MIAA Charter mandates MIAA to
devote the Airport Lands and Buildings for the benefit of the general public. Since
the Airport Lands and Buildings are devoted to public use and public service, the
ownership of these properties remains with the State. The Airport Lands and
Buildings are thus inalienable and are not subject to real estate tax by local
governments.
MIAA also points out that Section 21 of the MIAA Charter specifically exempts
MIAA from the payment of real estate tax. MIAA insists that it is also 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. MIAA points out
that the reason for tax exemption of public property is that its taxation would not
inure to any public advantage, since in such a case the tax debtor is also the tax
creditor.
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.
Respondents also argue that a basic rule of statutory construction is that the
express mention of one person, thing, or act excludes all others. An international
airport is not among the exceptions mentioned in Section 193 of the Local
Government Code. Thus, respondents assert that MIAA cannot claim that the
Airport Lands and Buildings are exempt from real estate tax.
Respondents also cite the ruling of this Court in Mactan International Airport v.
Marcos8 where we held that the Local Government Code has withdrawn the
exemption from real estate tax granted to international airports. Respondents
further argue that since MIAA has already paid some of the real estate tax
assessments, it is now estopped from claiming that the Airport Lands and
Buildings are exempt from real estate tax.
The Issue
This petition raises the threshold issue of whether the Airport Lands and
Buildings of MIAA are exempt from real estate tax under existing laws. If so
exempt, then the real estate tax assessments issued by the City of Parañaque,
and all proceedings taken pursuant to such assessments, are void. In such
event, the other issues raised in this petition become moot.
The Court's 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.
1. MIAA is Not a Government-Owned or Controlled Corporation
Respondents argue that MIAA, being a government-owned or controlled
corporation, is not exempt from real estate tax. Respondents claim that the
deletion of the phrase "any government-owned or controlled so exempt by its
charter" in Section 234(e) of the Local Government Code withdrew the real
estate tax exemption of government-owned or controlled corporations. The
deleted phrase appeared in Section 40(a) of the 1974 Real Property Tax Code
enumerating the entities 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. Section 2(13) of the Introductory Provisions of the
Administrative Code of 1987 defines a government-owned or controlled
corporation as follows:
SEC. 2. General Terms Defined. – x x x x
(13) Government-owned or controlled corporation refers to any agency
organized as a stock or non-stock corporation, vested with functions relating
to public needs whether governmental or proprietary in nature, and owned by the
Government directly or through its instrumentalities either wholly, or, where
applicable as in the case of stock corporations, to the extent of at least fifty-one
(51) percent of its capital stock: x x x. (Emphasis supplied)
A government-owned or controlled corporation must be "organized as a stock
or non-stock corporation." MIAA is not organized as a stock or non-stock
corporation. MIAA is not a stock corporation because it has no capital stock
divided into shares. MIAA has no stockholders or voting shares. Section 10 of
the MIAA Charter9 provides:
SECTION 10. Capital. — The capital of the Authority to be contributed by the
National Government shall be increased from Two and One-half Billion
(P2,500,000,000.00) Pesos to Ten Billion (P10,000,000,000.00) Pesos to consist
of:
(a) The value of fixed assets including airport facilities, runways and equipment
and such other properties, movable and immovable[,] which may be contributed
by the National Government or transferred by it from any of its agencies, the
valuation of which shall be determined jointly with the Department of Budget and
Management and the Commission on Audit on the date of such contribution or
transfer after making due allowances for depreciation and other deductions
taking into account the loans and other liabilities of the Authority at the time of the
takeover of the assets and other properties;
(b) That the amount of P605 million as of December 31, 1986 representing about
seventy percentum (70%) of the unremitted share of the National Government
from 1983 to 1986 to be remitted to the National Treasury as provided for in
Section 11 of E. O. No. 903 as amended, shall be converted into the equity of the
National Government in the Authority. Thereafter, the Government contribution to
the capital of the Authority shall be provided in the General Appropriations Act.
Clearly, under its Charter, MIAA does not have capital stock that is divided into
shares.
Section 3 of the Corporation Code10 defines a stock corporation as one whose
"capital stock is divided into shares and x x x authorized to distribute to the
holders of such shares dividends x x x." MIAA has capital but it is not divided
into shares of stock. MIAA has no stockholders or voting shares. Hence, MIAA is
not a stock corporation.
MIAA is also not a non-stock corporation because it has no members. Section 87
of the Corporation Code defines a non-stock corporation as "one where no part
of its income is distributable as dividends to its members, trustees or officers." A
non-stock corporation must have members. Even if we assume that the
Government is considered as the sole member of MIAA, this will not make MIAA
a non-stock corporation. Non-stock corporations cannot distribute any part of
their income to their members. Section 11 of the MIAA Charter mandates MIAA
to remit 20% of its annual gross operating income to the National Treasury.11
This prevents MIAA from qualifying as a non-stock corporation.
Section 88 of the Corporation Code provides that non-stock corporations are
"organized for charitable, religious, educational, professional, cultural,
recreational, fraternal, literary, scientific, social, civil service, or similar purposes,
like trade, industry, agriculture and like chambers." MIAA is not organized for any
of these purposes. MIAA, a public utility, is organized to operate an international
and domestic airport for public use.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify
as a government-owned or controlled corporation. What then is the legal status of
MIAA within the National Government?
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.
Section 2(10) of the Introductory Provisions of the Administrative Code defines a
government "instrumentality" as follows:
SEC. 2. General Terms Defined. –– x x x x
(10) Instrumentality refers to any agency of the National Government, not
integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers,
administering special funds, and enjoying operational autonomy, usually through
a charter. x x x (Emphasis supplied)
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,12
police authority13 and the levying of fees and charges.14 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."15
Likewise, when the law makes a government instrumentality operationally
autonomous, the instrumentality remains part of the National Government
machinery although not integrated with the department framework. The MIAA
Charter expressly states that transforming MIAA into a "separate and
autonomous body"16 will make its operation more "financially viable."17
Many government instrumentalities are vested with corporate powers but they do
not become stock or non-stock corporations, which is a necessary condition
before an agency or instrumentality is deemed a government-owned or controlled
corporation. Examples are the Mactan International Airport Authority, the
Philippine Ports Authority, the University of the Philippines and Bangko Sentral
ng Pilipinas. All these government instrumentalities exercise corporate powers
but they are not organized as stock or non-stock corporations as required by
Section 2(13) of the Introductory Provisions of the Administrative Code. These
government instrumentalities are sometimes loosely called government corporate
entities. However, they are not government-owned or controlled corporations in
the strict sense as understood under the Administrative Code, which is the
governing law defining the legal relationship and status of government entities.
A government instrumentality like MIAA falls under Section 133(o) of the Local
Government Code, which states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government
Units. – Unless otherwise provided herein, the exercise of the taxing powers
of provinces, cities, municipalities, and barangays shall not extend to the
levy of the following:
xxxx
(o) Taxes, fees or charges of any kind on the National Government, its
agencies and instrumentalities and local government units.(Emphasis and
underscoring supplied)
Section 133(o) recognizes the basic principle that local governments cannot tax
the national government, which historically merely delegated to local
governments the power to tax. While the 1987 Constitution now includes taxation
as one of the powers of local governments, local governments may only exercise
such power "subject to such guidelines and limitations as the Congress may
provide."18
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. As this
Court declared in Maceda v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to the
benefit of the government itself or its agencies. In such case the practical effect
of an exemption is merely to reduce the amount of money that has to be handled
by government in the course of its operations. For these reasons, provisions
granting exemptions to government agencies may be construed liberally, in favor
of non tax-liability of such agencies.19
There is, moreover, no point in national and local governments taxing each other,
unless a sound and compelling policy requires such transfer of public funds from
one government pocket to another.
There is also no reason for local governments to tax national government
instrumentalities for rendering essential public services to inhabitants of local
governments. The only exception is when the legislature clearly intended to
tax government instrumentalities for the delivery of essential public
services for sound and compelling policy considerations. 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.
Thus, Section 133 of the Local Government Code states that "unless otherwise
provided" in the Code, local governments cannot tax national government
instrumentalities. As this Court held in Basco v. Philippine Amusements and
Gaming Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden or
in any manner control the operation of constitutional laws enacted by Congress
to carry into execution the powers vested in the federal government. (MC Culloch
v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over
local governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at
least, the instrumentalities of the United States (Johnson v. Maryland, 254 US
51) and it can be agreed that no state or political subdivision can regulate a
federal instrumentality in such a way as to prevent it from consummating its
federal responsibilities, or even to seriously burden it in the accomplishment of
them." (Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable activities
or enterprise using the power to tax as "a tool for regulation" (U.S. v. Sanchez,
340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy"
(Mc Culloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or
creation of the very entity which has the inherent power to wield it. 20
2. Airport Lands and Buildings of MIAA are Owned by the Republic
a. Airport Lands and Buildings are of Public Dominion
The Airport Lands and Buildings of MIAA are property of public dominion and
therefore owned by the State or the Republic of the Philippines. The Civil
Code provides:
ARTICLE 419. Property is either of public dominion or of private ownership.
ARTICLE 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents,
ports and bridges constructed by the State, banks, shores, roadsteads, and
others of similar character;
(2) Those which belong to the State, without being for public use, and are
intended for some public service or for the development of the national wealth.
(Emphasis supplied)
ARTICLE 421. All other property of the State, which is not of the character stated
in the preceding article, is patrimonial property.
ARTICLE 422. Property of public dominion, when no longer intended for public
use or for public service, shall form part of the patrimonial property of the State.
No one can dispute that properties of public dominion mentioned in Article 420 of
the Civil Code, like "roads, canals, rivers, torrents, ports and bridges
constructed by the State," are owned by the State. The term "ports" includes
seaports and airports. The MIAA Airport Lands and Buildings constitute a
"port" constructed by the State. Under Article 420 of the Civil Code, the MIAA
Airport Lands and Buildings are properties of public dominion and thus owned by
the State or the Republic of the Philippines.
The Airport Lands and Buildings are devoted to public use because they are
used by the public for international and domestic travel and transportation.
The fact that the MIAA collects terminal fees and other charges from the public
does not remove the character of the Airport Lands and Buildings as properties
for public use. The operation by the government of a tollway does not change the
character of the road as one for public use. Someone must pay for the
maintenance of the road, either the public indirectly through the taxes they pay
the government, or only those among the public who actually use the road
through the toll fees they pay upon using the road. The tollway system is even a
more efficient and equitable manner of taxing the public for the maintenance of
public roads.
The charging of fees to the public does not determine the character of the
property whether it is of public dominion or not. Article 420 of the Civil Code
defines property of public dominion as one "intended for public use." Even if the
government collects toll fees, the road is still "intended for public use" if anyone
can use the road under the same terms and conditions as the rest of the public.
The charging of fees, the limitation on the kind of vehicles that can use the road,
the speed restrictions and other conditions for the use of the road do not affect
the public character of the road.
The terminal fees MIAA charges to passengers, as well as the landing fees MIAA
charges to airlines, constitute the bulk of the income that maintains the
operations of MIAA. The collection of such fees does not change the character of
MIAA as an airport for public use. Such fees are often termed user's tax. This
means taxing those among the public who actually use a public facility instead of
taxing all the public including those who never use the particular public facility. A
user's tax is more equitable — a principle of taxation mandated in the 1987
Constitution.21
The Airport Lands and Buildings of MIAA, which its Charter calls the "principal
airport of the Philippines for both international and domestic air traffic,"22 are
properties of public dominion because they are intended for public use. As
properties of public dominion, they indisputably belong to the State or the
Republic of the Philippines.
b. Airport Lands and Buildings are Outside the Commerce of Man
The Airport Lands and Buildings of MIAA are devoted to public use and thus are
properties of public dominion. As properties of public dominion, the Airport
Lands and Buildings are outside the commerce of man. The Court has ruled
repeatedly that properties of public dominion are outside the commerce of man.
As early as 1915, this Court already ruled in Municipality of Cavite v. Rojas that
properties devoted to public use are outside the commerce of man, thus:
According to article 344 of the Civil Code: "Property for public use in provinces
and in towns comprises the provincial and town roads, the squares, streets,
fountains, and public waters, the promenades, and public works of general
service supported by said towns or provinces."
The said Plaza Soledad being a promenade for public use, the municipal council
of Cavite could not in 1907 withdraw or exclude from public use a portion thereof
in order to lease it for the sole benefit of the defendant Hilaria Rojas. In leasing a
portion of said plaza or public place to the defendant for private use the plaintiff
municipality exceeded its authority in the exercise of its powers by executing a
contract over a thing of which it could not dispose, nor is it empowered so to do.
The Civil Code, article 1271, prescribes that everything which is not outside the
commerce of man may be the object of a contract, and plazas and streets are
outside of this commerce, as was decided by the supreme court of Spain in its
decision of February 12, 1895, which says: "Communal things that cannot be
sold because they are by their very nature outside of commerce are those
for public use, such as the plazas, streets, common lands, rivers, fountains,
etc." (Emphasis supplied) 23
Again in Espiritu v. Municipal Council, the Court declared that properties of
public dominion are outside the commerce of man:
xxx Town plazas are properties of public dominion, to be devoted to public use
and to be made available to the public in general. They are outside the
commerce of man and cannot be disposed of or even leased by the municipality
to private parties. While in case of war or during an emergency, town plazas may
be occupied temporarily by private individuals, as was done and as was tolerated
by the Municipality of Pozorrubio, when the emergency has ceased, said
temporary occupation or use must also cease, and the town officials should see
to it that the town plazas should ever be kept open to the public and free from
encumbrances or illegal private constructions.24 (Emphasis supplied)
The Court has also ruled that property of public dominion, being outside the
commerce of man, cannot be the subject of an auction sale.25
Properties of public dominion, being for public use, are not subject to levy,
encumbrance or disposition through public or private sale. Any encumbrance,
levy on execution or auction sale of any property of public dominion is void for
being contrary to public policy. Essential public services will stop if properties of
public dominion are subject to encumbrances, foreclosures and auction sale.
This will happen if the City of Parañaque can foreclose and compel the auction
sale of the 600-hectare runway of the MIAA for non-payment of real estate tax.
Before MIAA can encumber26 the Airport Lands and Buildings, the President
must first withdraw from public use the Airport Lands and Buildings. Sections
83 and 88 of the Public Land Law or Commonwealth Act No. 141, which
"remains to this day the existing general law governing the classification and
disposition of lands of the public domain other than timber and mineral lands,"27
provide:
SECTION 83. Upon the recommendation of the Secretary of Agriculture and
Natural Resources, the President may designate by proclamation any tract or
tracts of land of the public domain as reservations for the use of the Republic of
the Philippines or of any of its branches, or of the inhabitants thereof, in
accordance with regulations prescribed for this purposes, or for quasi-public uses
or purposes when the public interest requires it, including reservations for
highways, rights of way for railroads, hydraulic power sites, irrigation systems,
communal pastures or lequas communales, public parks, public quarries, public
fishponds, working men's village and other improvements for the public benefit.
SECTION 88. The tract or tracts of land reserved under the provisions of
Section eighty-three shall be non-alienable and shall not be subject to
occupation, entry, sale, lease, or other disposition until again declared
alienable under the provisions of this Act or by proclamation of the
President. (Emphasis and underscoring supplied)
Thus, unless the President issues a proclamation withdrawing the Airport Lands
and Buildings from public use, these properties remain properties of public
dominion and are inalienable. Since the Airport Lands and Buildings are
inalienable in their present status as properties of public dominion, they are not
subject to levy on execution or foreclosure sale. As long as the Airport Lands and
Buildings are reserved for public use, their ownership remains with the State or
the Republic of the Philippines.
The authority of the President to reserve lands of the public domain for public
use, and to withdraw such public use, is reiterated in Section 14, Chapter 4, Title
I, Book III of the Administrative Code of 1987, which states:
SEC. 14. Power to Reserve Lands of the Public and Private Domain of the
Government. — (1) The President shall have the power to reserve for
settlement or public use, and for specific public purposes, any of the lands
of the public domain, the use of which is not otherwise directed by law. The
reserved land shall thereafter remain subject to the specific public purpose
indicated until otherwise provided by law or proclamation;
x x x x. (Emphasis supplied)
There is no question, therefore, that unless the Airport Lands and Buildings are
withdrawn by law or presidential proclamation from public use, they are
properties of public dominion, owned by the Republic and outside the commerce
of man.
c. MIAA is a Mere Trustee of the Republic
MIAA is merely holding title to the Airport Lands and Buildings in trust for the
Republic. Section 48, Chapter 12, Book I of the Administrative Code allows
instrumentalities like MIAA to hold title to real properties owned by the
Republic, thus:
SEC. 48. Official Authorized to Convey Real Property. — Whenever real property
of the Government is authorized by law to be conveyed, the deed of conveyance
shall be executed in behalf of the government by the following:
(1) For property belonging to and titled in the name of the Republic of the
Philippines, by the President, unless the authority therefor is expressly vested by
law in another officer.
(2) For property belonging to the Republic of the Philippines but titled in
the name of any political subdivision or of any corporate agency or
instrumentality, by the executive head of the agency or instrumentality.
(Emphasis supplied)
In MIAA's case, its status as a mere trustee of the Airport Lands and Buildings is
clearer because even its executive head cannot sign the deed of conveyance on
behalf of the Republic. Only the President of the Republic can sign such deed of
conveyance.28
d. Transfer to MIAA was Meant to Implement a Reorganization
The MIAA Charter, which is a law, transferred to MIAA the title to the Airport
Lands and Buildings from the Bureau of Air Transportation of the Department of
Transportation and Communications. The MIAA Charter provides:
SECTION 3. Creation of the Manila International Airport Authority. — x x x x
The land where the Airport is presently located as well as the surrounding
land area of approximately six hundred hectares, are hereby transferred,
conveyed and assigned to the ownership and administration of the
Authority, subject to existing rights, if any. The Bureau of Lands and other
appropriate government agencies shall undertake an actual survey of the area
transferred within one year from the promulgation of this Executive Order and the
corresponding title to be issued in the name of the Authority. Any portion thereof
shall not be disposed through sale or through any other mode unless
specifically approved by the President of the Philippines. (Emphasis supplied)
SECTION 22. Transfer of Existing Facilities and Intangible Assets. — All existing
public airport facilities, runways, lands, buildings and other property,
movable or immovable, belonging to the Airport, and all assets, powers, rights,
interests and privileges belonging to the Bureau of Air Transportation relating
to airport works or air operations, including all equipment which are necessary for
the operation of crash fire and rescue facilities, are hereby transferred to the
Authority. (Emphasis supplied)
SECTION 25. Abolition of the Manila International Airport as a Division in the
Bureau of Air Transportation and Transitory Provisions. — The Manila International
Airport including the Manila Domestic Airport as a division under the Bureau of Air
Transportation is hereby abolished.
x x x x.
The MIAA Charter transferred the Airport Lands and Buildings to MIAA without the
Republic receiving cash, promissory notes or even stock since MIAA is not a stock
corporation.
The whereas clauses of the MIAA Charter explain the rationale for the transfer of
the Airport Lands and Buildings to MIAA, thus:
WHEREAS, the Manila International Airport as the principal airport of the
Philippines for both international and domestic air traffic, is required to provide
standards of airport accommodation and service comparable with the best airports
in the world;
WHEREAS, domestic and other terminals, general aviation and other facilities,
have to be upgraded to meet the current and future air traffic and other demands
of aviation in Metro Manila;
WHEREAS, a management and organization study has indicated that the
objectives of providing high standards of accommodation and service within
the context of a financially viable operation, will best be achieved by a
separate and autonomous body; and
WHEREAS, under Presidential Decree No. 1416, as amended by Presidential
Decree No. 1772, the President of the Philippines is given continuing authority to
reorganize the National Government, which authority includes the creation
of new entities, agencies and instrumentalities of the Government[.]
(Emphasis supplied)
The transfer of the Airport Lands and Buildings from the Bureau of Air
Transportation to MIAA was not meant to transfer beneficial ownership of these
assets from the Republic to MIAA. The purpose was merely to reorganize a
division in the Bureau of Air Transportation into a separate and autonomous
body. The Republic remains the beneficial owner of the Airport Lands and
Buildings. MIAA itself is owned solely by the Republic. No party claims any
ownership rights over MIAA's assets adverse to the Republic.
The MIAA Charter expressly provides that the Airport Lands and Buildings "shall
not be disposed through sale or through any other mode unless specifically
approved by the President of the Philippines." This only means that the
Republic retained the beneficial ownership of the Airport Lands and Buildings
because under Article 428 of the Civil Code, only the "owner has the right to x x x
dispose of a thing." Since MIAA cannot dispose of the Airport Lands and Buildings,
MIAA does not own the Airport Lands and Buildings.
At any time, the President can transfer back to the Republic title to the Airport
Lands and Buildings without the Republic paying MIAA any consideration. Under
Section 3 of the MIAA Charter, the President is the only one who can authorize the
sale or disposition of the Airport Lands and Buildings. This only confirms that the
Airport Lands and Buildings belong to the Republic.
e. Real Property Owned by the Republic is Not Taxable
Section 234(a) of the Local Government Code exempts from real estate tax any
"[r]eal property owned by the Republic of the Philippines." Section 234(a)
provides:
SEC. 234. Exemptions from Real Property Tax. — The following are exempted
from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person;
x x x. (Emphasis supplied)
This exemption should be read in relation with Section 133(o) of the same Code,
which prohibits local governments from imposing "[t]axes, fees or charges of any
kind on the National Government, its agencies and instrumentalities x x x." The
real properties owned by the Republic are titled either in the name of the
Republic itself or in the name of agencies or instrumentalities of the National
Government. The Administrative Code allows real property owned by the
Republic to be titled in the name of agencies or instrumentalities of the national
government. Such real properties remain owned by the Republic and continue to
be exempt from real estate tax.
The Republic may grant the beneficial use of its real property to an agency or
instrumentality of the national government. This happens when title of the real
property is transferred to an agency or instrumentality even as the Republic
remains the owner of the real property. Such arrangement does not result in the
loss of the tax exemption. Section 234(a) of the Local Government Code states
that real property owned by the Republic loses its tax exemption only if the
"beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person." MIAA, as a government instrumentality, is not a taxable person
under Section 133(o) of the Local Government Code. Thus, even if we assume
that the Republic has granted to MIAA the beneficial use of the Airport Lands and
Buildings, such fact does not make these real properties subject to real estate
tax.
However, portions of the Airport Lands and Buildings that MIAA leases to private
entities are not exempt from real estate tax. For example, the land area occupied
by hangars that MIAA leases to private corporations is subject to real estate tax.
In such a case, MIAA has granted the beneficial use of such land area for a
consideration to a taxable person and therefore such land area is subject to real
estate tax. In Lung Center of the Philippines v. Quezon City, the Court ruled:
Accordingly, we hold that the portions of the land leased to private entities as well
as those parts of the hospital leased to private individuals are not exempt from
such taxes. On the other hand, the portions of the land occupied by the hospital
and portions of the hospital used for its patients, whether paying or non-paying,
are exempt from real property taxes.29
3. Refutation of Arguments of Minority
The minority asserts that the MIAA is not exempt from real estate tax because
Section 193 of the Local Government Code of 1991 withdrew the tax exemption of
"all persons, whether natural or juridical" upon the effectivity of the Code.
Section 193 provides:
SEC. 193. Withdrawal of Tax Exemption Privileges – Unless otherwise provided
in this Code, tax exemptions or incentives granted to, or presently enjoyed by
all persons, whether natural or juridical, including government-owned or
controlled corporations, except local water districts, cooperatives duly registered
under R.A. No. 6938, non-stock and non-profit hospitals and educational
institutions are hereby withdrawn upon effectivity of this Code. (Emphasis
supplied)
The minority states that MIAA is indisputably a juridical person. The minority
argues that since the Local Government Code withdrew the tax exemption of all
juridical persons, then MIAA is not exempt from real estate tax. Thus, the minority
declares:
It is evident from the quoted provisions of the Local Government Code that
the withdrawn exemptions from realty tax cover not just GOCCs, but all
persons. To repeat, the provisions lay down the explicit proposition that the
withdrawal of realty tax exemption applies to all persons. The reference to or the
inclusion of GOCCs is only clarificatory or illustrative of the explicit provision.
The term "All persons" encompasses the two classes of persons recognized
under our laws, natural and juridical persons. Obviously, MIAA is not a
natural person. Thus, the determinative test is not just whether MIAA is a
GOCC, but whether MIAA is a juridical person at all. (Emphasis and
underscoring in the original)
The minority posits that the "determinative test" whether MIAA is exempt from local
taxation is its status — whether MIAA is a juridical person or not. The minority also
insists that "Sections 193 and 234 may be examined in isolation from Section
133(o) to ascertain MIAA's claim of exemption."
The argument of the minority is fatally flawed. Section 193 of the Local Government
Code expressly withdrew the tax exemption of all juridical persons "[u]nless
otherwise provided in this Code." Now, Section 133(o) of the Local Government
Code expressly provides otherwise, specifically prohibiting local governments
from imposing any kind of tax on national government instrumentalities. Section
133(o) states:
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units.
– Unless otherwise provided herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to the levy of the following:
xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its agencies
and instrumentalities, and local government units. (Emphasis and underscoring
supplied)
By express mandate of the Local Government Code, local governments cannot
impose any kind of tax on national government instrumentalities like the MIAA.
Local governments are devoid of power to tax the national government, its
agencies and instrumentalities. The taxing powers of local governments do not
extend to the national government, its agencies and instrumentalities, "[u]nless
otherwise provided in this Code" as stated in the saving clause of Section 133. The
saving clause refers to Section 234(a) on the exception to the exemption from real
estate tax of real property owned by the Republic.
The minority, however, theorizes that unless exempted in Section 193 itself, all
juridical persons are subject to tax by local governments. The minority insists that
the juridical persons exempt from local taxation are limited to the three classes of
entities specifically enumerated as exempt in Section 193. Thus, the minority
states:
x x x Under Section 193, the exemption is limited to (a) local water districts; (b)
cooperatives duly registered under Republic Act No. 6938; and (c) non-stock and
non-profit hospitals and educational institutions. It would be belaboring the obvious
why the MIAA does not fall within any of the exempt entities under Section 193.
(Emphasis supplied)
The minority's theory directly contradicts and completely negates Section 133(o)
of the Local Government Code. This theory will result in gross absurdities. It will
make the national government, which itself is a juridical person, subject to tax by
local governments since the national government is not included in the
enumeration of exempt entities in Section 193. Under this theory, local
governments can impose any kind of local tax, and not only real estate tax, on the
national government.
Under the minority's theory, many national government instrumentalities with
juridical personalities will also be subject to any kind of local tax, and not only real
estate tax. Some of the national government instrumentalities vested by law with
juridical personalities are: Bangko Sentral ng Pilipinas,30 Philippine Rice Research
Institute,31 Laguna Lake
Development Authority,32 Fisheries Development Authority,33 Bases Conversion
Development Authority,34 Philippine Ports Authority,35 Cagayan de Oro Port
Authority,36 San Fernando Port Authority,37 Cebu Port Authority,38 and Philippine
National Railways.39
The minority's theory violates Section 133(o) of the Local Government Code which
expressly prohibits local governments from imposing any kind of tax on national
government instrumentalities. Section 133(o) does not distinguish between
national government instrumentalities with or without juridical personalities. Where
the law does not distinguish, courts should not distinguish. Thus, Section 133(o)
applies to all national government instrumentalities, with or without juridical
personalities. The determinative test whether MIAA is exempt from local taxation
is not whether MIAA is a juridical person, but whether it is a national government
instrumentality under Section 133(o) of the Local Government Code. Section
133(o) is the specific provision of law prohibiting local governments from imposing
any kind of tax on the national government, its agencies and instrumentalities.
Section 133 of the Local Government Code starts with the saving clause "[u]nless
otherwise provided in this Code." This means that unless the Local Government
Code grants an express authorization, local governments have no power to tax the
national government, its agencies and instrumentalities. Clearly, the rule is local
governments have no power to tax the national government, its agencies and
instrumentalities. As an exception to this rule, local governments may tax the
national government, its agencies and instrumentalities only if the Local
Government Code expressly so provides.
The saving clause in Section 133 refers to the exception to the exemption in
Section 234(a) of the Code, which makes the national government subject to real
estate tax when it gives the beneficial use of its real properties to a taxable entity.
Section 234(a) of the Local Government Code provides:
SEC. 234. Exemptions from Real Property Tax – The following are exempted from
payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person.
x x x. (Emphasis supplied)
Under Section 234(a), real property owned by the Republic is exempt from real
estate tax. The exception to this exemption is when the government gives the
beneficial use of the real property to a taxable entity.
The exception to the exemption in Section 234(a) is the only instance when the
national government, its agencies and instrumentalities are subject to any kind of
tax by local governments. The exception to the exemption applies only to real
estate tax and not to any other tax. The justification for the exception to the
exemption is that the real property, although owned by the Republic, is not devoted
to public use or public service but devoted to the private gain of a taxable person.
The minority also argues that since Section 133 precedes Section 193 and 234 of
the Local Government Code, the later provisions prevail over Section 133. Thus,
the minority asserts:
x x x Moreover, sequentially Section 133 antecedes Section 193 and 234.
Following an accepted rule of construction, in case of conflict the subsequent
provisions should prevail. Therefore, MIAA, as a juridical person, is subject to real
property taxes, the general exemptions attaching to instrumentalities under
Section 133(o) of the Local Government Code being qualified by Sections 193 and
234 of the same law. (Emphasis supplied)
The minority assumes that there is an irreconcilable conflict between Section 133
on one hand, and Sections 193 and 234 on the other. No one has urged that there
is such a conflict, much less has any one presenteda persuasive argument that
there is such a conflict. The minority's assumption of an irreconcilable conflict in
the statutory provisions is an egregious error for two reasons.
First, there is no conflict whatsoever between Sections 133 and 193 because
Section 193 expressly admits its subordination to other provisions of the Code
when Section 193 states "[u]nless otherwise provided in this Code." By its own
words, Section 193 admits the superiority of other provisions of the Local
Government Code that limit the exercise of the taxing power in Section 193. When
a provision of law grants a power but withholds such power on certain matters,
there is no conflict between the grant of power and the withholding of power. The
grantee of the power simply cannot exercise the power on matters withheld from
its power.
Second, Section 133 is entitled "Common Limitations on the Taxing Powers of
Local Government Units." Section 133 limits the grant to local governments of the
power to tax, and not merely the exercise of a delegated power to tax. Section 133
states that the taxing powers of local governments "shall not extend to the levy" of
any kind of tax on the national government, its agencies and instrumentalities.
There is no clearer limitation on the taxing power than this.
Since Section 133 prescribes the "common limitations" on the taxing powers of
local governments, Section 133 logically prevails over Section 193 which grants
local governments such taxing powers. By their very meaning and purpose, the
"common limitations" on the taxing power prevail over the grant or exercise of the
taxing power. If the taxing power of local governments in Section 193 prevails over
the limitations on such taxing power in Section 133, then local governments can
impose any kind of tax on the national government, its agencies and
instrumentalities — a gross absurdity.
Local governments have no power to tax the national government, its agencies
and instrumentalities, except as otherwise provided in the Local Government Code
pursuant to the saving clause in Section 133 stating "[u]nless otherwise provided
in this Code." This exception — which is an exception to the exemption of the
Republic from real estate tax imposed by local governments — refers to Section
234(a) of the Code. The exception to the exemption in Section 234(a) subjects real
property owned by the Republic, whether titled in the name of the national
government, its agencies or instrumentalities, to real estate tax if the beneficial use
of such property is given to a taxable entity.
The minority also claims that the definition in the Administrative Code of the phrase
"government-owned or controlled corporation" is not controlling. The minority
points out that Section 2 of the Introductory Provisions of the Administrative Code
admits that its definitions are not controlling when it provides:
SEC. 2. General Terms Defined. — Unless the specific words of the text, or the
context as a whole, or a particular statute, shall require a different meaning:
xxxx
The minority then concludes that reliance on the Administrative Code definition is
"flawed."
The minority's argument is a non sequitur. True, Section 2 of the Administrative
Code recognizes that a statute may require a different meaning than that defined
in the Administrative Code. However, this does not automatically mean that the
definition in the Administrative Code does not apply to the Local Government
Code. Section 2 of the Administrative Code clearly states that "unless the specific
words x x x of a particular statute shall require a different meaning," the definition
in Section 2 of the Administrative Code shall apply. Thus, unless there is specific
language in the Local Government Code defining the phrase "government-owned
or controlled corporation" differently from the definition in the Administrative Code,
the definition in the Administrative Code prevails.
The minority does not point to any provision in the Local Government Code
defining the phrase "government-owned or controlled corporation" differently from
the definition in the Administrative Code. Indeed, there is none. The Local
Government Code is silent on the definition of the phrase "government-owned or
controlled corporation." The Administrative Code, however, expressly defines the
phrase "government-owned or controlled corporation." The inescapable
conclusion is that the Administrative Code definition of the phrase "government-
owned or controlled corporation" applies to the Local Government Code.
The third whereas clause of the Administrative Code states that the Code
"incorporates in a unified document the major structural, functional and procedural
principles and rules of governance." Thus, the Administrative Code is the
governing law defining the status and relationship of government departments,
bureaus, offices, agencies and instrumentalities. Unless a statute expressly
provides for a different status and relationship for a specific government unit or
entity, the provisions of the Administrative Code prevail.
The minority also contends that the phrase "government-owned or controlled
corporation" should apply only to corporations organized under the Corporation
Code, the general incorporation law, and not to corporations created by special
charters. The minority sees no reason why government corporations with special
charters should have a capital stock. Thus, the minority declares:
I submit that the definition of "government-owned or controlled corporations" under
the Administrative Code refer to those corporations owned by the government or
its instrumentalities which are created not by legislative enactment, but formed and
organized under the Corporation Code through registration with the Securities and
Exchange Commission. In short, these are GOCCs without original charters.
xxxx
It might as well be worth pointing out that there is no point in requiring a capital
structure for GOCCs whose full ownership is limited by its charter to the State or
Republic. Such GOCCs are not empowered to declare dividends or alienate their
capital shares.
The contention of the minority is seriously flawed. It is not in accord with the
Constitution and existing legislations. It will also result in gross absurdities.
First, the Administrative Code definition of the phrase "government-owned or
controlled corporation" does not distinguish between one incorporated under the
Corporation Code or under a special charter. Where the law does not distinguish,
courts should not distinguish.
Second, Congress has created through special charters several government-
owned corporations organized as stock corporations. Prime examples are the
Land Bank of the Philippines and the Development Bank of the Philippines. The
special charter40 of the Land Bank of the Philippines provides:
SECTION 81. Capital. — The authorized capital stock of the Bank shall be nine
billion pesos, divided into seven hundred and eighty million common shares with a
par value of ten pesos each, which shall be fully subscribed by the Government,
and one hundred and twenty million preferred shares with a par value of ten pesos
each, which shall be issued in accordance with the provisions of Sections seventy-
seven and eighty-three of this Code. (Emphasis supplied)
Likewise, the special charter41 of the Development Bank of the Philippines
provides:
SECTION 7. Authorized Capital Stock – Par value. — The capital stock of the Bank
shall be Five Billion Pesos to be divided into Fifty Million common shares with par
value of P100 per share. These shares are available for subscription by the
National Government. Upon the effectivity of this Charter, the National
Government shall subscribe to Twenty-Five Million common shares of stock worth
Two Billion Five Hundred Million which shall be deemed paid for by the
Government with the net asset values of the Bank remaining after the transfer of
assets and liabilities as provided in Section 30 hereof. (Emphasis supplied)
Other government-owned corporations organized as stock corporations under their
special charters are the Philippine Crop Insurance Corporation,42 Philippine
International Trading Corporation,43 and the Philippine National Bank44 before it
was reorganized as a stock corporation under the Corporation Code. All these
government-owned corporations organized under special charters as stock
corporations are subject to real estate tax on real properties owned by them. To
rule that they are not government-owned or controlled corporations because they
are not registered with the Securities and Exchange Commission would remove
them from the reach of Section 234 of the Local Government Code, thus exempting
them from real estate tax.
Third, the government-owned or controlled corporations created through special
charters are those that meet the two conditions prescribed in Section 16, Article
XII of the Constitution. The first condition is that the government-owned or
controlled corporation must be established for the common good. The second
condition is that the government-owned or controlled corporation must meet the
test of economic viability. Section 16, Article XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or
controlled corporations may be created or established by special charters in the
interest of the common good and subject to the test of economic viability.
(Emphasis and underscoring supplied)
The Constitution expressly authorizes the legislature to create "government-owned
or controlled corporations" through special charters only if these entities are
required to meet the twin conditions of common good and economic viability. In
other words, Congress has no power to create government-owned or controlled
corporations with special charters unless they are made to comply with the two
conditions of common good and economic viability. The test of economic viability
applies only to government-owned or controlled corporations that perform
economic or commercial activities and need to compete in the market place. Being
essentially economic vehicles of the State for the common good — meaning for
economic development purposes — these government-owned or controlled
corporations with special charters are usually organized as stock corporations just
like ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers and
performing governmental or public functions need not meet the test of economic
viability. These instrumentalities perform essential public services for the common
good, services that every modern State must provide its citizens. These
instrumentalities need not be economically viable since the government may even
subsidize their entire operations. These instrumentalities are not the "government-
owned or controlled corporations" referred to in Section 16, Article XII of the 1987
Constitution.
Thus, the Constitution imposes no limitation when the legislature creates
government instrumentalities vested with corporate powers but performing
essential governmental or public functions. Congress has plenary authority to
create government instrumentalities vested with corporate powers provided these
instrumentalities perform essential government functions or public services.
However, when the legislature creates through special charters corporations that
perform economic or commercial activities, such entities — known as
"government-owned or controlled corporations" — must meet the test of economic
viability because they compete in the market place.
This is the situation of the Land Bank of the Philippines and the Development Bank
of the Philippines and similar government-owned or controlled corporations, which
derive their income to meet operating expenses solely from commercial
transactions in competition with the private sector. The intent of the Constitution is
to prevent the creation of government-owned or controlled corporations that cannot
survive on their own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability, explained
to the Constitutional Commission the purpose of this test, as follows:
MR. OPLE: Madam President, the reason for this concern is really that when the
government creates a corporation, there is a sense in which this corporation
becomes exempt from the test of economic performance. We know what
happened in the past. If a government corporation loses, then it makes its claim
upon the taxpayers' money through new equity infusions from the government and
what is always invoked is the common good. That is the reason why this year, out
of a budget of P115 billion for the entire government, about P28 billion of this will
go into equity infusions to support a few government financial institutions. And this
is all taxpayers' money which could have been relocated to agrarian reform, to
social services like health and education, to augment the salaries of grossly
underpaid public employees. And yet this is all going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together with the
"common good," this becomes a restraint on future enthusiasts for state capitalism
to excuse themselves from the responsibility of meeting the market test so that
they become viable. And so, Madam President, I reiterate, for the committee's
consideration and I am glad that I am joined in this proposal by Commissioner Foz,
the insertion of the standard of "ECONOMIC VIABILITY OR THE ECONOMIC
TEST," together with the common good.45
Father Joaquin G. Bernas, a leading member of the Constitutional Commission,
explains in his textbook The 1987 Constitution of the Republic of the Philippines:
A Commentary:
The second sentence was added by the 1986 Constitutional Commission. The
significant addition, however, is the phrase "in the interest of the common good
and subject to the test of economic viability." The addition includes the ideas that
they must show capacity to function efficiently in business and that they should not
go into activities which the private sector can do better. Moreover, economic
viability is more than financial viability but also includes capability to make profit
and generate benefits not quantifiable in financial terms.46 (Emphasis supplied)
Clearly, the test of economic viability does not apply to government entities vested
with corporate powers and performing essential public services. The State is
obligated to render essential public services regardless of the economic viability of
providing such service. The non-economic viability of rendering such essential
public service does not excuse the State from withholding such essential services
from the public.
However, government-owned or controlled corporations with special charters,
organized essentially for economic or commercial objectives, must meet the test
of economic viability. These are the government-owned or controlled corporations
that are usually organized under their special charters as stock corporations, like
the Land Bank of the Philippines and the Development Bank of the Philippines.
These are the government-owned or controlled corporations, along with
government-owned or controlled corporations organized under the Corporation
Code, that fall under the definition of "government-owned or controlled
corporations" in Section 2(10) of the Administrative Code.
The MIAA need not meet the test of economic viability because the legislature did
not create MIAA to compete in the market place. MIAA does not compete in the
market place because there is no competing international airport operated by the
private sector. MIAA performs an essential public service as the primary domestic
and international airport of the Philippines. The operation of an international airport
requires the presence of personnel from the following government agencies:
1. The Bureau of Immigration and Deportation, to document the arrival and
departure of passengers, screening out those without visas or travel documents,
or those with hold departure orders;
2. The Bureau of Customs, to collect import duties or enforce the ban on prohibited
importations;
3. The quarantine office of the Department of Health, to enforce health measures
against the spread of infectious diseases into the country;
4. The Department of Agriculture, to enforce measures against the spread of plant
and animal diseases into the country;
5. The Aviation Security Command of the Philippine National Police, to prevent the
entry of terrorists and the escape of criminals, as well as to secure the airport
premises from terrorist attack or seizure;
6. The Air Traffic Office of the Department of Transportation and Communications,
to authorize aircraft to enter or leave Philippine airspace, as well as to land on, or
take off from, the airport; and
7. The MIAA, to provide the proper premises — such as runway and buildings —
for the government personnel, passengers, and airlines, and to manage the airport
operations.
All these agencies of government perform government functions essential to the
operation of an international airport.
MIAA performs an essential public service that every modern State must provide
its citizens. MIAA derives its revenues principally from the mandatory fees and
charges MIAA imposes on passengers and airlines. The terminal fees that MIAA
charges every passenger are regulatory or administrative fees47 and not income
from commercial transactions.
MIAA falls under the definition of a government instrumentality under Section 2(10)
of the Introductory Provisions of the Administrative Code, which provides:
SEC. 2. General Terms Defined. – x x x x
(10) Instrumentality refers to any agency of the National Government, not
integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually through a charter. x x x
(Emphasis supplied)
The fact alone that MIAA is endowed with corporate powers does not make MIAA
a government-owned or controlled corporation. Without a change in its capital
structure, MIAA remains a government instrumentality under Section 2(10) of the
Introductory Provisions of the Administrative Code. More importantly, as long as
MIAA renders essential public services, it need not comply with the test of
economic viability. Thus, MIAA is outside the scope of the phrase "government-
owned or controlled corporations" under Section 16, Article XII of the 1987
Constitution.
The minority belittles the use in the Local Government Code of the phrase
"government-owned or controlled corporation" as merely "clarificatory or
illustrative." This is fatal. The 1987 Constitution prescribes explicit conditions for
the creation of "government-owned or controlled corporations." The Administrative
Code defines what constitutes a "government-owned or controlled corporation." To
belittle this phrase as "clarificatory or illustrative" is grave error.
To summarize, MIAA is not a government-owned or controlled corporation under
Section 2(13) of the Introductory Provisions of the Administrative Code because it
is not organized as a stock or non-stock corporation. Neither is MIAA a
government-owned or controlled corporation under Section 16, Article XII of the
1987 Constitution because MIAA is not required to meet the test of economic
viability. MIAA is a government instrumentality vested with corporate powers and
performing essential public services pursuant to Section 2(10) of the Introductory
Provisions of the Administrative Code. As a government instrumentality, MIAA is
not subject to any kind of tax by local governments under Section 133(o) of the
Local Government Code. The exception to the exemption in Section 234(a) does
not apply to MIAA because MIAA is not a taxable entity under the Local
Government Code. Such exception applies only if the beneficial use of real
property owned by the Republic is given to a taxable entity.
Finally, the Airport Lands and Buildings of MIAA are properties devoted to public
use and thus are properties of public dominion. Properties of public dominion are
owned by the State or the Republic. Article 420 of the Civil Code provides:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents, ports and
bridges constructed by the State, banks, shores, roadsteads, and others of similar
character;
(2) Those which belong to the State, without being for public use, and are intended
for some public service or for the development of the national wealth. (Emphasis
supplied)
The term "ports x x x constructed by the State" includes airports and seaports. The
Airport Lands and Buildings of MIAA are intended for public use, and at the very
least intended for public service. Whether intended for public use or public service,
the Airport Lands and Buildings are properties of public dominion. As properties of
public dominion, the Airport Lands and Buildings are owned by the Republic and
thus exempt from real estate tax under Section 234(a) of the Local Government
Code.
4. Conclusion
Under Section 2(10) and (13) of the Introductory Provisions of the Administrative
Code, which governs the legal relation and status of government units, agencies
and offices within the entire government machinery, MIAA is a government
instrumentality and not a government-owned or controlled corporation. Under
Section 133(o) of the Local Government Code, MIAA as a government
instrumentality is not a taxable person because it is not subject to "[t]axes, fees or
charges of any kind" by local governments. The only exception is when MIAA
leases its real property to a "taxable person" as provided in Section 234(a) of the
Local Government Code, in which case the specific real property leased becomes
subject to real estate tax. Thus, only portions of the Airport Lands and Buildings
leased to taxable persons like private parties are subject to real estate tax by the
City of Parañaque.
Under Article 420 of the Civil Code, the Airport Lands and Buildings of MIAA, being
devoted to public use, are properties of public dominion and thus owned by the
State or the Republic of the Philippines. Article 420 specifically mentions "ports x
x x constructed by the State," which includes public airports and seaports, as
properties of public dominion and owned by the Republic. As properties of public
dominion owned by the Republic, there is no doubt whatsoever that the Airport
Lands and Buildings are expressly exempt from real estate tax under Section
234(a) of the Local Government Code. This Court has also repeatedly ruled that
properties of public dominion are not subject to execution or foreclosure sale.
WHEREFORE, we GRANT the petition. We SET ASIDE the assailed Resolutions
of the Court of Appeals of 5 October 2001 and 27 September 2002 in CA-G.R. SP
No. 66878. We DECLARE the Airport Lands and Buildings of the Manila
International Airport Authority EXEMPT from the real estate tax imposed by the
City of Parañaque. We declare VOID all the real estate tax assessments, including
the final notices of real estate tax delinquencies, issued by the City of Parañaque
on the Airport Lands and Buildings of the Manila International Airport Authority,
except for the portions that the Manila International Airport Authority has leased to
private parties. We also declare VOID the assailed auction sale, and all its effects,
of the Airport Lands and Buildings of the Manila International Airport Authority.
No costs.
SO ORDERED.
Panganiban, C.J., Puno, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez,
Austria-Martinez, Corona, Carpio Morales, Callejo, Sr., Azcuna, Tinga, Chico-
Nazario, Garcia, Velasco, Jr., J.J., concur.

x-------------------------------------------------------------------------------x
DISSENTING OPINION
TINGA, J. :
The legally correct resolution of this petition would have had the added benefit of
an utterly fair and equitable result – a recognition of the constitutional and
statutory power of the City of Parañaque to impose real property taxes on the
Manila International Airport Authority (MIAA), but at the same time, upholding a
statutory limitation that prevents the City of Parañaque from seizing and
conducting an execution sale over the real properties of MIAA. In the end, all that
the City of Parañaque would hold over the MIAA is a limited lien, unenforceable
as it is through the sale or disposition of MIAA properties. Not only is this the
legal effect of all the relevant constitutional and statutory provisions applied to
this case, it also leaves the room for negotiation for a mutually acceptable
resolution between the City of Parañaque and MIAA.
Instead, with blind but measured rage, the majority today veers wildly off-course,
shattering statutes and judicial precedents left and right in order to protect the
precious Ming vase that is the Manila International Airport Authority (MIAA).
While the MIAA is left unscathed, it is surrounded by the wreckage that once was
the constitutional policy, duly enacted into law, that was local autonomy. Make no
mistake, the majority has virtually declared war on the seventy nine (79)
provinces, one hundred seventeen (117) cities, and one thousand five hundred
(1,500) municipalities of the Philippines.1
The icing on this inedible cake is the strained and purposely vague rationale used
to justify the majority opinion. Decisions of the Supreme Court are expected to
provide clarity to the parties and to students of jurisprudence, as to what the law
of the case is, especially when the doctrines of long standing are modified or
clarified. With all due respect, the decision in this case is plainly so, so wrong on
many levels. More egregious, in the majority's resolve to spare the Manila
International Airport Authority (MIAA) from liability for real estate taxes, no clear-
cut rule emerges on the important question of the power of local government
units (LGUs) to tax government corporations, instrumentalities or agencies.
The majority would overturn sub silencio, among others, at least one dozen
precedents enumerated below:
1) Mactan-Cebu International Airport Authority v. Hon. Marcos,2 the leading case
penned in 1997 by recently retired Chief Justice Davide, which held that the
express withdrawal by the Local Government Code of previously granted
exemptions from realty taxes applied to instrumentalities and government-owned
or controlled corporations (GOCCs) such as the Mactan-Cebu International
Airport Authority (MCIAA). The majority invokes the ruling in Basco v. Pagcor,3 a
precedent discredited in Mactan, and a vanguard of a doctrine so noxious to the
concept of local government rule that the Local Government Code was drafted
precisely to counter such philosophy. The efficacy of several rulings that
expressly rely on Mactan, such as PHILRECA v. DILG Secretary,4 City
Government of San Pablo v. Hon. Reyes5 is now put in question.
2) The rulings in National Power Corporation v. City of Cabanatuan,6 wherein the
Court, through Justice Puno, declared that the National Power Corporation, a
GOCC, is liable for franchise taxes under the Local Government Code, and
succeeding cases that have relied on it such as Batangas Power Corp. v.
Batangas City7 The majority now states that deems instrumentalities as defined
under the Administrative Code of 1987 as purportedly beyond the reach of any
form of taxation by LGUs, stating "[l]ocal governments are devoid of power to tax
the national government, its agencies and instrumentalities."8 Unfortunately,
using the definition employed by the majority, as provided by Section 2(d) of the
Administrative Code, GOCCs are also considered as instrumentalities, thus
leading to the astounding conclusion that GOCCs may not be taxed by LGUs
under the Local Government Code.
3) Lung Center of the Philippines v. Quezon City,9 wherein a unanimous en banc
Court held that the Lung Center of the Philippines may be liable for real property
taxes. Using the majority's reasoning, the Lung Center would be properly
classified as an instrumentality which the majority now holds as exempt from all
forms of local taxation.10
4) City of Davao v. RTC,11 where the Court held that the Government Service
Insurance System (GSIS) was liable for real property taxes for the years 1992 to
1994, its previous exemption having been withdrawn by the enactment of the
Local Government Code.12 This decision, which expressly relied on Mactan,
would be directly though silently overruled by the majority.
5) The common essence of the Court's rulings in the two Philippine Ports
Authority v. City of Iloilo,13 cases penned by Justices Callejo and Azcuna
respectively, which relied in part on Mactan in holding the Philippine Ports
Authority (PPA) liable for realty taxes, notwithstanding the fact that it is a GOCC.
Based on the reasoning of the majority, the PPA cannot be considered a GOCC.
The reliance of these cases on Mactan, and its rationale for holding
governmental entities like the PPA liable for local government taxation is mooted
by the majority.
6) The 1963 precedent of Social Security System Employees Association v.
Soriano,14 which declared the Social Security Commission (SSC) as a GOCC
performing proprietary functions. Based on the rationale employed by the
majority, the Social Security System is not a GOCC. Or perhaps more accurately,
"no longer" a GOCC.
7) The decision penned by Justice (now Chief Justice) Panganiban, Light Rail
Transit Authority v. Central Board of Assessment.15 The characterization therein
of the Light Rail Transit Authority (LRTA) as a "service-oriented commercial
endeavor" whose patrimonial property is subject to local taxation is now rendered
inconsequential, owing to the majority's thinking that an entity such as the LRTA
is itself exempt from local government taxation16, irrespective of the functions it
performs. Moreover, based on the majority's criteria, LRTA is not a GOCC.
8) The cases of Teodoro v. National Airports Corporation17 and Civil Aeronautics
Administration v. Court of Appeals.18 wherein the Court held that the
predecessor agency of the MIAA, which was similarly engaged in the operation,
administration and management of the Manila International Agency, was
engaged in the exercise of proprietary, as opposed to sovereign functions. The
majority would hold otherwise that the property maintained by MIAA is actually
patrimonial, thus implying that MIAA is actually engaged in sovereign functions.
9) My own majority in Phividec Industrial Authority v. Capitol Steel,19 wherein the
Court held that the Phividec Industrial Authority, a GOCC, was required to secure
the services of the Office of the Government Corporate Counsel for legal
representation.20 Based on the reasoning of the majority, Phividec would not be
a GOCC, and the mandate of the Office of the Government Corporate Counsel
extends only to GOCCs.
10) Two decisions promulgated by the Court just last month (June 2006),
National Power Corporation v. Province of Isabela21 and GSIS v. City Assessor
of Iloilo City.22 In the former, the Court pronounced that "[a]lthough as a general
rule, LGUs cannot impose taxes, fees, or charges of any kind on the National
Government, its agencies and instrumentalities, this rule admits of an exception,
i.e., when specific provisions of the LGC authorize the LGUs to impose taxes,
fees or charges on the aforementioned entities." Yet the majority now rules that
the exceptions in the LGC no longer hold, since "local governments are devoid of
power to tax the national government, its agencies and instrumentalities."23 The
ruling in the latter case, which held the GSIS as liable for real property taxes, is
now put in jeopardy by the majority's ruling.
There are certainly many other precedents affected, perhaps all previous
jurisprudence regarding local government taxation vis-a-vis government entities,
as well as any previous definitions of GOCCs, and previous distinctions between
the exercise of governmental and proprietary functions (a distinction laid down by
this Court as far back as 191624). What is the reason offered by the majority for
overturning or modifying all these precedents and doctrines? None is given, for
the majority takes comfort instead in the pretense that these precedents never
existed. Only children should be permitted to subscribe to the theory that
something bad will go away if you pretend hard enough that it does not exist.
I.
Case Should Have Been Decided
Following Mactan Precedent
The core issue in this case, whether the MIAA is liable to the City of Parañaque
for real property taxes under the Local Government Code, has already been
decided by this Court in the Mactan case, and should have been resolved by
simply applying precedent.
Mactan Explained
A brief recall of the Mactan case is in order. The Mactan-Cebu International
Airport Authority (MCIAA) claimed that it was exempt from payment of real
property taxes to the City of Cebu, invoking the specific exemption granted in
Section 14 of its charter, Republic Act No. 6958, and its status as an
instrumentality of the government performing governmental functions.25
Particularly, MCIAA invoked Section 133 of the Local Government Code,
precisely the same provision utilized by the majority as the basis for MIAA's
exemption. Section 133 reads:
Sec. 133. Common Limitations on the Taxing Powers of Local Government
Units.— Unless otherwise provided herein, the exercise of the taxing powers of
provinces, cities, municipalities, and barangays shall not extend to the levy of the
following:
xxx
(o) Taxes, fees or charges of any kind on the National Government, its agencies
and instrumentalities and local government units. (emphasis and underscoring
supplied).
However, the Court in Mactan noted that Section 133 qualified the exemption of
the National Government, its agencies and instrumentalities from local taxation
with the phrase "unless otherwise provided herein." It then considered the other
relevant provisions of the Local Government Code, particularly the following:
SEC. 193. Withdrawal of Tax Exemption Privileges. – Unless otherwise provided
in this Code, tax exemption or incentives granted to, or enjoyed by all persons,
whether natural or juridical, including government-owned and controlled
corporations, except local water districts, cooperatives duly registered under R.A.
No. 6938, non-stock and non-profit hospitals and educational institutions, are
hereby withdrawn upon the effectivity of this Code.26
SECTION 232. Power to Levy Real Property Tax. – A province or city or a
municipality within the Metropolitan Manila area may levy an annual ad valorem
tax on real property such as land, building, machinery, and other improvements
not hereafter specifically exempted.27
SECTION 234. Exemptions from Real Property Tax. -- The following are
exempted from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person:
(b) Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious charitable or
educational purposes;
(c) All machineries and equipment that are actually, directly and exclusively used
by local water districts and government-owned and controlled corporations
engaged in the distribution of water and/or generation and transmission of
electric power;
(d) All real property owned by duly registered cooperatives as provided for under
R.A. No. 6938; and
(e) Machinery and equipment used for pollution control and environmental
protection.
Except as provided herein, any exemption from payment of real property tax
previously granted to, or presently enjoyed by, all persons, whether natural or
juridical, including all government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.28
Clearly, Section 133 was not intended to be so absolute a prohibition on the
power of LGUs to tax the National Government, its agencies and
instrumentalities, as evidenced by these cited provisions which "otherwise
provided." But what was the extent of the limitation under Section 133? This is
how the Court, correctly to my mind, defined the parameters in Mactan:
The foregoing sections of the LGC speak of: (a) the limitations on the taxing
powers of local government units and the exceptions to such limitations; and (b)
the rule on tax exemptions and the exceptions thereto. The use of exceptions or
provisos in these sections, as shown by the following clauses:
(1) "unless otherwise provided herein" in the opening paragraph of Section 133;
(2) "Unless otherwise provided in this Code" in Section 193;
(3) "not hereafter specifically exempted" in Section 232; and
(4) "Except as provided herein" in the last paragraph of Section 234
initially hampers a ready understanding of the sections. Note, too, that the
aforementioned clause in Section 133 seems to be inaccurately worded. Instead
of the clause "unless otherwise provided herein," with the "herein" to mean, of
course, the section, it should have used the clause "unless otherwise provided in
this Code." The former results in absurdity since the section itself enumerates
what are beyond the taxing powers of local government units and, where
exceptions were intended, the exceptions are explicitly indicated in the next. For
instance, in item (a) which excepts income taxes "when levied on banks and
other financial institutions"; item (d) which excepts "wharfage on wharves
constructed and maintained by the local government unit concerned"; and item
(1) which excepts taxes, fees and charges for the registration and issuance of
licenses or permits for the driving of "tricycles." It may also be observed that
within the body itself of the section, there are exceptions which can be found only
in other parts of the LGC, but the section interchangeably uses therein the
clause, "except as otherwise provided herein" as in items (c) and (i), or the
clause "except as provided in this Code" in item (j). These clauses would be
obviously unnecessary or mere surplusages if the opening clause of the section
were "Unless otherwise provided in this Code" instead of "Unless otherwise
provided herein." In any event, even if the latter is used, since under Section 232
local government units have the power to levy real property tax, except those
exempted therefrom under Section 234, then Section 232 must be deemed to
qualify Section 133.
Thus, reading together Sections 133, 232, and 234 of the LGC, we conclude that
as a general rule, as laid down in Section 133, the taxing powers of local
government units cannot extend to the levy of, inter alia, "taxes, fees and
charges of any kind on the National Government, its agencies and
instrumentalities, and local government units"; however, pursuant to Section 232,
provinces, cities, and municipalities in the Metropolitan Manila Area may impose
the real property tax except on, inter alia, "real property owned by the Republic of
the Philippines or any of its political subdivisions except when the beneficial use
thereof has been granted, for consideration or otherwise, to a taxable person," as
provided in item (a) of the first paragraph of Section 234.
As to tax exemptions or incentives granted to or presently enjoyed by natural or
judicial persons, including government-owned and controlled corporations,
Section 193 of the LGC prescribes the general rule, viz., they are withdrawn upon
the effectivity of the LGC, except those granted to local water districts,
cooperatives duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, and unless otherwise provided in the LGC.
The latter proviso could refer to Section 234 which enumerates the properties
exempt from real property tax. But the last paragraph of Section 234 further
qualifies the retention of the exemption insofar as real property taxes are
concerned by limiting the retention only to those enumerated therein; all others
not included in the enumeration lost the privilege upon the effectivity of the LGC.
Moreover, even as to real property owned by the Republic of the Philippines or
any of its political subdivisions covered by item (a) of the first paragraph of
Section 234, the exemption is withdrawn if the beneficial use of such property
has been granted to a taxable person for consideration or otherwise.
Since the last paragraph of Section 234 unequivocally withdrew, upon the
effectivity of the LGC, exemptions from payment of real property taxes granted to
natural or juridical persons, including government-owned or controlled
corporations, except as provided in the said section, and the petitioner is,
undoubtedly, a government-owned corporation, it necessarily follows that its
exemption from such tax granted it in Section 14 of its Charter, R.A. No. 6958,
has been withdrawn. Any claim to the contrary can only be justified if the
petitioner can seek refuge under any of the exceptions provided in Section 234,
but not under Section 133, as it now asserts, since, as shown above, the said
section is qualified by Sections 232 and 234.29
The Court in Mactan acknowledged that under Section 133, instrumentalities
were generally exempt from all forms of local government taxation, unless
otherwise provided in the Code. On the other hand, Section 232 "otherwise
provided" insofar as it allowed LGUs to levy an ad valorem real property tax,
irrespective of who owned the property. At the same time, the imposition of real
property taxes under Section 232 is in turn qualified by the phrase "not
hereinafter specifically exempted." The exemptions from real property taxes are
enumerated in Section 234, which specifically states that only real properties
owned "by the Republic of the Philippines or any of its political subdivisions" are
exempted from the payment of the tax. Clearly, instrumentalities or GOCCs do
not fall within the exceptions under Section 234.30
Mactan Overturned the
Precedents Now Relied
Upon by the Majority
But the petitioners in Mactan also raised the Court's ruling in Basco v.
PAGCOR,31 decided before the enactment of the Local Government Code. The
Court in Basco declared the PAGCOR as exempt from local taxes, justifying the
exemption in this wise:
Local governments have no power to tax instrumentalities of the National
Government. PAGCOR is a government owned or controlled corporation with an
original charter, PD 1869. All of its shares of stocks are owned by the National
Government. In addition to its corporate powers (Sec. 3, Title II, PD 1869) it also
exercises regulatory powers xxx
PAGCOR has a dual role, to operate and to regulate gambling casinos. The latter
role is governmental, which places it in the category of an agency or
instrumentality of the Government. Being an instrumentality of the Government,
PAGCOR should be and actually is exempt from local taxes. Otherwise, its
operation might be burdened, impeded or subjected to control by a mere Local
government.
"The states have no power by taxation or otherwise, to retard impede, burden or
in any manner control the operation of constitutional laws enacted by Congress
to carry into execution the powers vested in the federal government." (McCulloch
v. Marland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government over
local governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the entire
absence of power on the part of the States to touch, in that way (taxation) at
least, the instrumentalities of the United States (Johnson v. Maryland, 254 US
51) and it can be agreed that no state or political subdivision can regulate a
federal instrumentality in such a way as to prevent it from consummating its
federal responsibilities, or even to seriously burden it in the accomplishment of
them." (Antieau, Modern Constitutional Law, Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable activates
or enterprise using the power to tax as "a tool for regulation" (U.S. v. Sanchez,
340 US 42).
The power to tax which was called by Justice Marshall as the "power to destroy"
(McCulloch v. Maryland, supra) cannot be allowed to defeat an instrumentality or
creation of the very entity which has the inherent power to wield it.32
Basco is as strident a reiteration of the old guard view that frowned on the
principle of local autonomy, especially as it interfered with the prerogatives and
privileges of the national government. Also consider the following citation from
Maceda v. Macaraig,33 decided the same year as Basco. Discussing the rule of
construction of tax exemptions on government instrumentalities, the sentiments
are of a similar vein.
Moreover, it is a recognized principle that the rule on strict interpretation does not
apply in the case of exemptions in favor of a government political subdivision or
instrumentality.
The basis for applying the rule of strict construction to statutory provisions
granting tax exemptions or deductions, even more obvious than with reference to
the affirmative or levying provisions of tax statutes, is to minimize differential
treatment and foster impartiality, fairness, and equality of treatment among tax
payers.
The reason for the rule does not apply in the case of exemptions running to the
benefit of the government itself or its agencies. In such case the practical effect
of an exemption is merely to reduce the amount of money that has to be handled
by government in the course of its operations. For these reasons, provisions
granting exemptions to government agencies may be construed liberally, in favor
of non tax-liability of such agencies.
In the case of property owned by the state or a city or other public corporations,
the express exemption should not be construed with the same degree of
strictness that applies to exemptions contrary to the policy of the state, since as
to such property "exemption is the rule and taxation the exception."34
Strikingly, the majority cites these two very cases and the stodgy rationale
provided therein. This evinces the perspective from which the majority is coming
from. It is admittedly a viewpoint once shared by this Court, and en vogue prior to
the enactment of the Local Government Code of 1991.
However, the Local Government Code of 1991 ushered in a new ethos on how
the art of governance should be practiced in the Philippines, conceding greater
powers once held in the private reserve of the national government to LGUs. The
majority might have private qualms about the wisdom of the policy of local
autonomy, but the members of the Court are not expected to substitute their
personal biases for the legislative will, especially when the 1987 Constitution
itself promotes the principle of local autonomy.
Article II. Declaration of Principles and State Policies
xxx
Sec. 25. The State shall ensure the autonomy of local governments.
Article X. Local Government
xxx
Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.
Section 3. The Congress shall enact a local government code which shall provide
for a more responsive and accountable local government structure instituted
through a system of decentralization with effective mechanisms of recall,
initiative, and referendum, allocate among the different local government units
their powers, responsibilities, and resources, and provide for the qualifications,
election, appointment and removal, term, salaries, powers and functions and
duties of local officials, and all other matters relating to the organization and
operation of the local units.
xxx
Section 5. Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively
to the local governments.
xxx
The Court in Mactan recognized that a new day had dawned with the enactment
of the 1987 Constitution and the Local Government Code of 1991. Thus, it
expressly rejected the contention of the MCIAA that Basco was applicable to
them. In doing so, the language of the Court was dramatic, if only to emphasize
how monumental the shift in philosophy was with the enactment of the Local
Government Code:
Accordingly, the position taken by the [MCIAA] is untenable. Reliance on Basco
v. Philippine Amusement and Gaming Corporation is unavailing since it was
decided before the effectivity of the [Local Government Code]. Besides, nothing
can prevent Congress from decreeing that even instrumentalities or agencies of
the Government performing governmental functions may be subject to tax.
Where it is done precisely to fulfill a constitutional mandate and national policy,
no one can doubt its wisdom.35 (emphasis supplied)
The Court Has Repeatedly
Reaffirmed Mactan Over the
Precedents Now Relied Upon
By the Majority
Since then and until today, the Court has been emphatic in declaring the Basco
doctrine as dead. The notion that instrumentalities may be subjected to local
taxation by LGUs was again affirmed in National Power Corporation v. City of
Cabanatuan,36 which was penned by Justice Puno. NPC or Napocor, invoking
its continued exemption from payment of franchise taxes to the City of
Cabanatuan, alleged that it was an instrumentality of the National Government
which could not be taxed by a city government. To that end, Basco was cited by
NPC. The Court had this to say about Basco.
xxx[T]he doctrine in Basco vs. Philippine Amusement and Gaming Corporation
relied upon by the petitioner to support its claim no longer applies. To emphasize,
the Basco case was decided prior to the effectivity of the LGC, when no law
empowering the local government units to tax instrumentalities of the National
Government was in effect. However, as this Court ruled in the case of Mactan
Cebu International Airport Authority (MCIAA) vs. Marcos, nothing prevents
Congress from decreeing that even instrumentalities or agencies of the
government performing governmental functions may be subject to tax. In
enacting the LGC, Congress exercised its prerogative to tax instrumentalities and
agencies of government as it sees fit. Thus, after reviewing the specific
provisions of the LGC, this Court held that MCIAA, although an instrumentality of
the national government, was subject to real property tax.37
In the 2003 case of Philippine Ports Authority v. City of Iloilo,38 the Court, in the
able ponencia of Justice Azcuna, affirmed the levy of realty taxes on the PPA.
Although the taxes were assessed under the old Real Property Tax Code and not
the Local Government Code, the Court again cited Mactan to refute PPA's
invocation of Basco as the basis of its exemption.
[Basco] did not absolutely prohibit local governments from taxing government
instrumentalities. In fact we stated therein:
The power of local government to "impose taxes and fees" is always subject to
"limitations" which Congress may provide by law. Since P.D. 1869 remains an
"operative" law until "amended, repealed or revoked". . . its "exemption clause"
remains an exemption to the exercise of the power of local governments to
impose taxes and fees.
Furthermore, in the more recent case of Mactan Cebu International Airport
Authority v. Marcos, where the Basco case was similarly invoked for tax
exemption, we stated: "[N]othing can prevent Congress from decreeing that even
instrumentalities or agencies of the Government performing governmental
functions may be subject to tax. Where it is done precisely to fulfill a
constitutional mandate and national policy, no one can doubt its wisdom." The
fact that tax exemptions of government-owned or controlled corporations have
been expressly withdrawn by the present Local Government Code clearly attests
against petitioner's claim of absolute exemption of government instrumentalities
from local taxation.39
Just last month, the Court in National Power Corporation v. Province of Isabela40
again rejected Basco in emphatic terms. Held the Court, through Justice Callejo,
Sr.:
Thus, the doctrine laid down in the Basco case is no longer true. In the
Cabanatuan case, the Court noted primarily that the Basco case was decided
prior to the effectivity of the LGC, when no law empowering the local government
units to tax instrumentalities of the National Government was in effect. It further
explained that in enacting the LGC, Congress empowered the LGUs to impose
certain taxes even on instrumentalities of the National Government.41
The taxability of the PPA recently came to fore in Philippine Ports Authority v.
City of Iloilo42 case, a decision also penned by Justice Callejo, Sr., wherein the
Court affirmed the sale of PPA's properties at public auction for failure to pay
realty taxes. The Court again reiterated that "it was the intention of Congress to
withdraw the tax exemptions granted to or presently enjoyed by all persons,
including government-owned or controlled corporations, upon the effectivity" of
the Code.43 The Court in the second Public Ports Authority case likewise cited
Mactan as providing the "raison d'etre for the withdrawal of the exemption,"
namely, "the State policy to ensure autonomy to local governments and the
objective of the [Local Government Code] that they enjoy genuine and
meaningful local autonomy to enable them to attain their fullest development as
self-reliant communities. . . . "44
Last year, the Court, in City of Davao v. RTC,45 affirmed that the legislated
exemption from real property taxes of the Government Service Insurance System
(GSIS) was removed under the Local Government Code. Again, Mactan was
relied upon as the governing precedent. The removal of the tax exemption stood
even though the then GSIS law46 prohibited the removal of GSIS' tax
exemptions unless the exemption was specifically repealed, "and a provision is
enacted to substitute the declared policy of exemption from any and all taxes as
an essential factor for the solvency of the fund."47 The Court, citing established
doctrines in statutory construction and Duarte v. Dade48 ruled that such
proscription on future legislation was itself prohibited, as "the legislature cannot
bind a future legislature to a particular mode of repeal."49
And most recently, just less than one month ago, the Court, through Justice
Corona in Government Service Insurance System v. City Assessor of Iloilo50
again affirmed that the Local Government Code removed the previous exemption
from real property taxes of the GSIS. Again Mactan was cited as having
"expressly withdrawn the [tax] exemption of the [GOCC].51
Clearly then, Mactan is not a stray or unique precedent, but the basis of a
jurisprudential rule employed by the Court since its adoption, the doctrine therein
consistent with the Local Government Code. Corollarily, Basco, the polar
opposite of Mactan has been emphatically rejected and declared inconsistent
with the Local Government Code.
II.
Majority, in Effectively Overturning Mactan,
Refuses to Say Why Mactan Is Wrong
The majority cites Basco in support. It does not cite Mactan, other than an
incidental reference that it is relied upon by the respondents.52 However, the
ineluctable conclusion is that the majority rejects the rationale and ruling in
Mactan. The majority provides for a wildly different interpretation of Section 133,
193 and 234 of the Local Government Code than that employed by the Court in
Mactan. Moreover, the parties in Mactan and in this case are similarly situated,
as can be obviously deducted from the fact that both petitioners are airport
authorities operating under similarly worded charters. And the fact that the
majority cites doctrines contrapuntal to the Local Government Code as in Basco
and Maceda evinces an intent to go against the Court's jurisprudential trend
adopting the philosophy of expanded local government rule under the Local
Government Code.
Before I dwell upon the numerous flaws of the majority, a brief comment is
necessitated on the majority's studied murkiness vis-à-vis the Mactan precedent.
The majority is obviously inconsistent with Mactan and there is no way these two
rulings can stand together. Following basic principles in statutory construction,
Mactan will be deemed as giving way to this new ruling.
However, the majority does not bother to explain why Mactan is wrong. The
interpretation in Mactan of the relevant provisions of the Local Government Code
is elegant and rational, yet the majority refuses to explain why this reasoning of
the Court in Mactan is erroneous. In fact, the majority does not even engage
Mactan in any meaningful way. If the majority believes that Mactan may still
stand despite this ruling, it remains silent as to the viable distinctions between
these two cases.
The majority's silence on Mactan is baffling, considering how different this new
ruling is with the ostensible precedent. Perhaps the majority does not simply
know how to dispense with the ruling in Mactan. If Mactan truly deserves to be
discarded as precedent, it deserves a more honorable end than death by
amnesia or ignonominous disregard. The majority could have devoted its
discussion in explaining why it thinks Mactan is wrong, instead of pretending that
Mactan never existed at all. Such an approach might not have won the votes of
the minority, but at least it would provide some degree of intellectual clarity for
the parties, LGUs and the national government, students of jurisprudence and
practitioners. A more meaningful debate on the matter would have been possible,
enriching the study of law and the intellectual dynamic of this Court.
There is no way the majority can be justified unless Mactan is overturned. The
MCIAA and the MIAA are similarly situated. They are both, as will be
demonstrated, GOCCs, commonly engaged in the business of operating an
airport. They are the owners of airport properties they respectively maintain and
hold title over these properties in their name.53 These entities are both owned by
the State, and denied by their respective charters the absolute right to dispose of
their properties without prior approval elsewhere.54 Both of them are
not empowered to obtain loans or encumber their properties without prior
approval the prior approval of the President.55
III.
Instrumentalities, Agencies
And GOCCs Generally
Liable for Real Property Tax
I shall now proceed to demonstrate the errors in reasoning of the majority. A
bulwark of my position lies with Mactan, which will further demonstrate why the
majority has found it inconvenient to even grapple with the precedent that is
Mactan in the first place.
Mactan held that the prohibition on taxing the national government, its agencies
and instrumentalities under Section 133 is qualified by Section 232 and Section
234, and accordingly, the only relevant exemption now applicable to these bodies
is as provided under Section 234(o), or on "real property owned by the Republic
of the Philippines or any of its political subdivisions except when the beneficial
use thereof has been granted, for consideration or otherwise, to a taxable
person."
It should be noted that the express withdrawal of previously granted exemptions
by the Local Government Code do not even make any distinction as to whether
the exempt person is a governmental entity or not. As Sections 193 and 234 both
state, the withdrawal applies to "all persons, including [GOCCs]", thus
encompassing the two classes of persons recognized under our laws, natural
persons56 and juridical persons.57
The fact that the Local Government Code mandates the withdrawal of previously
granted exemptions evinces certain key points. If an entity was previously
granted an express exemption from real property taxes in the first place, the
obvious conclusion would be that such entity would ordinarily be liable for such
taxes without the exemption. If such entities were already deemed exempt due to
some overarching principle of law, then it would be a redundancy or surplusage
to grant an exemption to an already exempt entity. This fact militates against the
claim that MIAA is preternaturally exempt from realty taxes, since it required the
enactment of an express exemption from such taxes in its charter.
Amazingly, the majority all but ignores the disquisition in Mactan and asserts that
government instrumentalities are not taxable persons unless they lease their
properties to a taxable person. The general rule laid down in Section 232 is given
short shrift. In arriving at this conclusion, several leaps in reasoning are
committed.
Majority's Flawed Definition
of GOCCs.
The majority takes pains to assert that the MIAA is not a GOCC, but rather an
instrumentality. However, and quite grievously, the supposed foundation of this
assertion is an adulteration.
The majority gives the impression that a government instrumentality is a distinct
concept from a government corporation.58 Most tellingly, the majority selectively
cites a portion of Section 2(10) of the Administrative Code of 1987, as follows:
Instrumentality refers to any agency of the National Government not integrated
within the department framework, vested with special functions or jurisdiction by
law, endowed with some if not all corporate powers, administering special funds,
and enjoying operational autonomy, usually through a charter. xxx59 (emphasis
omitted)
However, Section 2(10) of the Administrative Code, when read in full, makes an
important clarification which the majority does not show. The portions omitted by
the majority are highlighted below:
(10)Instrumentality refers to any agency of the National Government not
integrated within the department framework, vested with special functions or
jurisdiction by law, endowed with some if not all corporate powers, administering
special funds, and enjoying operational autonomy, usually through a charter. This
term includes regulatory agencies, chartered institutions and government—
owned or controlled corporations.60
Since Section 2(10) makes reference to "agency of the National Government,"
Section 2(4) is also worth citing in full:
(4) Agency of the Government refers to any of the various units of the
Government, including a department, bureau, office, instrumentality, or
government-owned or controlled corporation, or a local government or a distinct
unit therein. (emphasis supplied)61
Clearly then, based on the Administrative Code, a GOCC may be an
instrumentality or an agency of the National Government. Thus, there actually is
no point in the majority's assertion that MIAA is not a GOCC, since based on the
majority's premise of Section 133 as the key provision, the material question is
whether MIAA is either an instrumentality, an agency, or the National
Government itself. The very provisions of the Administrative Code provide that a
GOCC can be either an instrumentality or an agency, so why even bother to
extensively discuss whether or not MIAA is a GOCC?
Indeed as far back as the 1927 case of Government of the Philippine Islands v.
Springer,62 the Supreme Court already noted that a corporation of which the
government is the majority stockholder "remains an agency or instrumentality of
government."63
Ordinarily, the inconsequential verbiage stewing in judicial opinions deserve little
rebuttal. However, the entire discussion of the majority on the definition of a
GOCC, obiter as it may ultimately be, deserves emphatic refutation. The views of
the majority on this matter are very dangerous, and would lead to absurdities,
perhaps unforeseen by the majority. For in fact, the majority effectively
declassifies many entities created and recognized as GOCCs and would give
primacy to the Administrative Code of 1987 rather than their respective charters
as to the definition of these entities.
Majority Ignores the Power
Of Congress to Legislate and
Define Chartered Corporations
First, the majority declares that, citing Section 2(13) of the Administrative Code, a
GOCC must be "organized as a stock or non-stock corporation," as defined
under the Corporation Code. To insist on this as an absolute rule fails on bare
theory. Congress has the undeniable power to create a corporation by legislative
charter, and has been doing so throughout legislative history. There is no
constitutional prohibition on Congress as to what structure these chartered
corporations should take on. Clearly, Congress has the prerogative to create a
corporation in whatever form it chooses, and it is not bound by any traditional
format. Even if there is a definition of what a corporation is under the Corporation
Code or the Administrative Code, these laws are by no means sacrosanct. It
should be remembered that these two statutes fall within the same level of
hierarchy as a congressional charter, since they all are legislative enactments.
Certainly, Congress can choose to disregard either the Corporation Code or the
Administrative Code in defining the corporate structure of a GOCC, utilizing the
same extent of legislative powers similarly vesting it the putative ability to amend
or abolish the Corporation Code or the Administrative Code.
These principles are actually recognized by both the Administrative Code and the
Corporation Code. The definition of GOCCs, agencies and instrumentalities
under the Administrative Code are laid down in the section entitled "General
Terms Defined," which qualifies:
Sec. 2. General Terms Defined. – Unless the specific words of the text, or the
context as a whole, or a particular statute, shall require a different meaning:
(emphasis supplied)
xxx
Similar in vein is Section 6 of the Corporation Code which provides:
SEC. 4. Corporations created by special laws or charters.— Corporations created
by special laws or charters shall be governed primarily by the provisions of the
special law or charter creating them or applicable to them, supplemented by the
provisions of this Code, insofar as they are applicable. (emphasis supplied)
Thus, the clear doctrine emerges – the law that governs the definition of a
corporation or entity created by Congress is its legislative charter. If the
legislative enactment defines an entity as a corporation, then it is a corporation,
no matter if the Corporation Code or the Administrative Code seemingly provides
otherwise. In case of conflict between the legislative charter of a government
corporation, on one hand, and the Corporate Code and the Administrative Code,
on the other, the former always prevails.
Majority, in Ignoring the
Legislative Charters, Effectively
Classifies Duly Established GOCCs,
With Disastrous and Far Reaching
Legal Consequences
Second, the majority claims that MIAA does not qualify either as a stock or non-
stock corporation, as defined under the Corporation Code. It explains that the
MIAA is not a stock corporation because it does not have any capital stock
divided into shares. Neither can it be considered as a non-stock corporation
because it has no members, and under Section 87, a non-stock corporation is
one where no part of its income is distributable as dividends to its members,
trustees or officers.
This formulation of course ignores Section 4 of the Corporation Code, which
again provides that corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or charter, and not the
Corporation Code.
That the MIAA cannot be considered a stock corporation if only because it does
not have a stock structure is hardly a plausible proposition. Indeed, there is no
point in requiring a capital stock structure for GOCCs whose full ownership is
limited by its charter to the State or Republic. Such GOCCs are not empowered
to declare dividends or alienate their capital shares.
Admittedly, there are GOCCs established in such a manner, such as the National
Power Corporation (NPC), which is provided with authorized capital stock wholly
subscribed and paid for by the Government of the Philippines, divided into shares
but at the same time, is prohibited from transferring, negotiating, pledging,
mortgaging or otherwise giving these shares as security for payment of any
obligation.64 However, based on the Corporation Code definition relied upon by
the majority, even the NPC cannot be considered as a stock corporation. Under
Section 3 of the Corporation Code, stock corporations are defined as being
"authorized to distribute to the holders of its shares dividends or allotments of the
surplus profits on the basis of the shares held."65 On the other hand, Section 13
of the NPC's charter states that "the Corporation shall be non-profit and shall
devote all its returns from its capital investment, as well as excess revenues from
its operation, for expansion."66 Can the holder of the shares of NPC, the
National Government, receive its surplus profits on the basis of its shares held? It
cannot, according to the NPC charter, and hence, following Section 3 of the
Corporation Code, the NPC is not a stock corporation, if the majority is to be
believed.
The majority likewise claims that corporations without members cannot be
deemed non-stock corporations. This would seemingly exclude entities such as
the NPC, which like MIAA, has no ostensible members. Moreover, non-stock
corporations cannot distribute any part of its income as dividends to its members,
trustees or officers. The majority faults MIAA for remitting 20% of its gross
operating income to the national government. How about the Philippine Health
Insurance Corporation, created with the "status of a tax-exempt government
corporation attached to the Department of Health" under Rep. Act No. 7875.67 It
too cannot be considered as a stock corporation because it has no capital stock
structure. But using the criteria of the majority, it is doubtful if it would pass
muster as a non-stock corporation, since the PHIC or Philhealth, as it is
commonly known, is expressly empowered "to collect, deposit, invest, administer
and disburse" the National Health Insurance Fund.68 Or how about the Social
Security System, which under its revised charter, Republic Act No. 8282, is
denominated as a "corporate body."69 The SSS has no capital stock structure,
but has capital comprised of contributions by its members, which are eventually
remitted back to its members. Does this disqualify the SSS from classification as
a GOCC, notwithstanding this Court's previous pronouncement in Social Security
System Employees Association v. Soriano?70
In fact, Republic Act No. 7656, enacted in 1993, requires that all GOCCs,
whether stock or non-stock,71 declare and remit at least fifty percent (50%) of
their annual net earnings as cash, stock or property dividends to the National
Government.72 But according to the majority, non-stock corporations are
prohibited from declaring any part of its income as dividends. But if Republic Act
No. 7656 requires even non-stock corporations to declare dividends from income,
should it not follow that the prohibition against declaration of dividends by non-
stock corporations under the Corporation Code does not apply to government-
owned or controlled corporations? For if not, and the majority's illogic is pursued,
Republic Act No. 7656, passed in 1993, would be fatally flawed, as it would
contravene the Administrative Code of 1987 and the Corporation Code.
In fact, the ruinous effects of the majority's hypothesis on the nature of GOCCs
can be illustrated by Republic Act No. 7656. Following the majority's definition of
a GOCC and in accordance with Republic Act No. 7656, here are but a few
entities which are not obliged to remit fifty (50%) of its annual net earnings to the
National Government as they are excluded from the scope of Republic Act No.
7656:
1) Philippine Ports Authority73 – has no capital stock74, no members, and
obliged to apply the balance of its income or revenue at the end of each year in a
general reserve.75
2) Bases Conversion Development Authority76 - has no capital stock,77 no
members.
3) Philippine Economic Zone Authority78 - no capital stock,79 no members.
4) Light Rail Transit Authority80 - no capital stock,81 no members.
5) Bangko Sentral ng Pilipinas82 - no capital stock,83 no members, required to
remit fifty percent (50%) of its net profits to the National Treasury.84
6) National Power Corporation85 - has capital stock but is prohibited from
"distributing to the holders of its shares dividends or allotments of the surplus
profits on the basis of the shares held;"86 no members.
7) Manila International Airport Authority – no capital stock87, no members88,
mandated to remit twenty percent (20%) of its annual gross operating income to
the National Treasury.89
Thus, for the majority, the MIAA, among many others, cannot be considered as
within the coverage of Republic Act No. 7656. Apparently, President Fidel V.
Ramos disagreed. How else then could Executive Order No. 483, signed in 1998
by President Ramos, be explained? The issuance provides:
WHEREAS, Section 1 of Republic Act No. 7656 provides that:
"Section 1. Declaration of Policy. - It is hereby declared the policy of the State
that in order for the National Government to realize additional revenues,
government-owned and/or controlled corporations, without impairing their viability
and the purposes for which they have been established, shall share a substantial
amount of their net earnings to the National Government."
WHEREAS, to support the viability and mandate of government-owned and/or
controlled corporations [GOCCs], the liquidity, retained earnings position and
medium-term plans and programs of these GOCCs were considered in the
determination of the reasonable dividend rates of such corporations on their 1997
net earnings.
WHEREAS, pursuant to Section 5 of RA 7656, the Secretary of Finance
recommended the adjustment on the percentage of annual net earnings that shall
be declared by the Manila International Airport Authority [MIAA] and Phividec
Industrial Authority [PIA] in the interest of national economy and general welfare.
NOW, THEREFORE, I, FIDEL V. RAMOS, President of the Philippines, by virtue
of the powers vested in me by law, do hereby order:
SECTION 1. The percentage of net earnings to be declared and remitted by the
MIAA and PIA as dividends to the National Government as provided for under
Section 3 of Republic Act No. 7656 is adjusted from at least fifty percent [50%] to
the rates specified hereunder:
1. Manila International Airport Authority - 35% [cash]
2. Phividec Industrial Authority - 25% [cash]
SECTION 2. The adjusted dividend rates provided for under Section 1 are only
applicable on 1997 net earnings of the concerned government-owned and/or
controlled corporations.
Obviously, it was the opinion of President Ramos and the Secretary of Finance
that MIAA is a GOCC, for how else could it have come under the coverage of
Republic Act No. 7656, a law applicable only to GOCCs? But, the majority
apparently disagrees, and resultantly holds that MIAA is not obliged to remit even
the reduced rate of thirty five percent (35%) of its net earnings to the national
government, since it cannot be covered by Republic Act No. 7656.
All this mischief because the majority would declare the Administrative Code of
1987 and the Corporation Code as the sole sources of law defining what a
government corporation is. As I stated earlier, I find it illogical that chartered
corporations are compelled to comply with the templates of the Corporation
Code, especially when the Corporation Code itself states that these corporations
are to be governed by their own charters. This is especially true considering that
the very provision cited by the majority, Section 87 of the Corporation Code,
expressly says that the definition provided therein is laid down "for the purposes
of this [Corporation] Code." Read in conjunction with Section 4 of the Corporation
Code which mandates that corporations created by charter be governed by the
law creating them, it is clear that contrary to the majority, MIAA is not disqualified
from classification as a non-stock corporation by reason of Section 87, the
provision not being applicable to corporations created by special laws or charters.
In fact, I see no real impediment why the MIAA and similarly situated
corporations such as the PHIC, the SSS, the Philippine Deposit Insurance
Commission, or maybe even the NPC could at the very least, be deemed as no
stock corporations (as differentiated from non-stock corporations).
The point, stripped to bare simplicity, is that entity created by legislative
enactment is a corporation if the legislature says so. After all, it is the legislature
that dictates what a corporation is in the first place. This is better illustrated by
another set of entities created before martial law. These include the Mindanao
Development Authority,90 the Northern Samar Development Authority,91 the
Ilocos Sur Development Authority,92 the Southeastern Samar Development
Authority93 and the Mountain Province Development Authority.94 An
examination of the first section of the statutes creating these entities reveal that
they were established "to foster accelerated and balanced growth" of their
respective regions, and towards such end, the charters commonly provide that "it
is recognized that a government corporation should be created for the purpose,"
and accordingly, these charters "hereby created a body corporate."95 However,
these corporations do not have capital stock nor members, and are obliged to
return the unexpended balances of their appropriations and earnings to a
revolving fund in the National Treasury. The majority effectively declassifies
these entities as GOCCs, never mind the fact that their very charters declare
them to be GOCCs.
I mention these entities not to bring an element of obscurantism into the fray. I
cite them as examples to emphasize my fundamental point—that it is the
legislative charters of these entities, and not the Administrative Code, which
define the class of personality of these entities created by Congress. To adopt
the view of the majority would be, in effect, to sanction an implied repeal of
numerous congressional charters for the purpose of declassifying GOCCs.
Certainly, this could not have been the intent of the crafters of the Administrative
Code when they drafted the "Definition of Terms" incorporated therein.
MIAA Is Without
Doubt, A GOCC
Following the charters of government corporations, there are two kinds of
GOCCs, namely: GOCCs which are stock corporations and GOCCs which are no
stock corporations (as distinguished from non-stock corporation). Stock GOCCs
are simply those which have capital stock while no stock GOCCs are those which
have no capital stock. Obviously these definitions are different from the
definitions of the terms in the Corporation Code. Verily, GOCCs which are not
incorporated with the Securities and Exchange Commission are not governed by
the Corporation Code but by their respective charters.
For the MIAA's part, its charter is replete with provisions that indubitably classify
it as a GOCC. Observe the following provisions from MIAA's charter:
SECTION 3. Creation of the Manila International Airport Authority.—There is
hereby established a body corporate to be known as the Manila International
Airport Authority which shall be attached to the Ministry of Transportation and
Communications. The principal office of the Authority shall be located at the New
Manila International Airport. The Authority may establish such offices, branches,
agencies or subsidiaries as it may deem proper and necessary; Provided, That
any subsidiary that may be organized shall have the prior approval of the
President.
The land where the Airport is presently located as well as the surrounding land
area of approximately six hundred hectares, are hereby transferred, conveyed
and assigned to the ownership and administration of the Authority, subject to
existing rights, if any. The Bureau of Lands and other appropriate government
agencies shall undertake an actual survey of the area transferred within one year
from the promulgation of this Executive Order and the corresponding title to be
issued in the name of the Authority. Any portion thereof shall not be disposed
through sale or through any other mode unless specifically approved by the
President of the Philippines.
xxx
SECTION 5. Functions, Powers, and Duties. — The Authority shall have the
following functions, powers and duties:
xxx
(d) To sue and be sued in its corporate name;
(e) To adopt and use a corporate seal;
(f) To succeed by its corporate name;
(g) To adopt its by-laws, and to amend or repeal the same from time to time;
(h) To execute or enter into contracts of any kind or nature;
(i) To acquire, purchase, own, administer, lease, mortgage, sell or otherwise
dispose of any land, building, airport facility, or property of whatever kind and
nature, whether movable or immovable, or any interest therein;
(j) To exercise the power of eminent domain in the pursuit of its purposes and
objectives;
xxx
(o) To exercise all the powers of a corporation under the Corporation Law, insofar
as these powers are not inconsistent with the provisions of this Executive Order.
xxx
SECTION 16. Borrowing Power. — The Authority may, after consultation with the
Minister of Finance and with the approval of the President of the Philippines, as
recommended by the Minister of Transportation and Communications, raise
funds, either from local or international sources, by way of loans, credits or
securities, and other borrowing instruments, with the power to create pledges,
mortgages and other voluntary liens or encumbrances on any of its assets or
properties.
All loans contracted by the Authority under this Section, together with all interests
and other sums payable in respect thereof, shall constitute a charge upon all the
revenues and assets of the Authority and shall rank equally with one another, but
shall have priority over any other claim or charge on the revenue and assets of
the Authority: Provided, That this provision shall not be construed as a prohibition
or restriction on the power of the Authority to create pledges, mortgages, and
other voluntary liens or encumbrances on any assets or property of the Authority.
Except as expressly authorized by the President of the Philippines the total
outstanding indebtedness of the Authority in the principal amount, in local and
foreign currency, shall not at any time exceed the net worth of the Authority at
any given time.
xxx
The President or his duly authorized representative after consultation with the
Minister of Finance may guarantee, in the name and on behalf of the Republic of
the Philippines, the payment of the loans or other indebtedness of the Authority
up to the amount herein authorized.
These cited provisions establish the fitness of MIAA to be the subject of legal
relations.96 MIAA under its charter may acquire and possess property, incur
obligations, and bring civil or criminal actions. It has the power to contract in its
own name, and to acquire title to real or personal property. It likewise may
exercise a panoply of corporate powers and possesses all the trappings of
corporate personality, such as a corporate name, a corporate seal and by-laws.
All these are contained in MIAA's charter which, as conceded by the Corporation
Code and even the Administrative Code, is the primary law that governs the
definition and organization of the MIAA.
In fact, MIAA itself believes that it is a GOCC represents itself as such. It said so
itself in the very first paragraph of the present petition before this Court.97 So
does, apparently, the Department of Budget and Management, which classifies
MIAA as a "government owned & controlled corporation" on its internet
website.98 There is also the matter of Executive Order No. 483, which evinces
the belief of the then-president of the Philippines that MIAA is a GOCC. And the
Court before had similarly characterized MIAA as a government-owned and
controlled corporation in the earlier MIAA case, Manila International Airport
Authority v. Commission on Audit.99
Why then the hesitance to declare MIAA a GOCC? As the majority repeatedly
asserts, it is because MIAA is actually an instrumentality. But the very definition
relied upon by the majority of an instrumentality under the Administrative Code
clearly states that a GOCC is likewise an instrumentality or an agency. The
question of whether MIAA is a GOCC might not even be determinative of this
Petition, but the effect of the majority's disquisition on that matter may even be
more destructive than the ruling that MIAA is exempt from realty taxes. Is the
majority ready to live up to the momentous consequences of its flawed
reasoning?
Novel Proviso in 1987 Constitution
Prescribing Standards in the
Creation of GOCCs Necessarily
Applies only to GOCCs Created
After 1987.
One last point on this matter on whether MIAA is a GOCC. The majority
triumphantly points to Section 16, Article XII of the 1987 Constitution, which
mandates that the creation of GOCCs through special charters be "in the interest
of the common good and subject to the test of economic viability." For the
majority, the test of economic viability does not apply to government entities
vested with corporate powers and performing essential public services. But this
test of "economic viability" is new to the constitutional framework. No such test
was imposed in previous Constitutions, including the 1973 Constitution which
was the fundamental law in force when the MIAA was created. How then could
the MIAA, or any GOCC created before 1987 be expected to meet this new
precondition to the creation of a GOCC? Does the dissent seriously suggest that
GOCCs created before 1987 may be declassified on account of their failure to
meet this "economic viability test"?
Instrumentalities and Agencies
Also Generally Liable For
Real Property Taxes
Next, the majority, having bludgeoned its way into asserting that MIAA is not a
GOCC, then argues that MIAA is an instrumentality. It cites incompletely, as
earlier stated, the provision of Section 2(10) of the Administrative Code. A more
convincing view offered during deliberations, but which was not adopted by the
ponencia, argued that MIAA is not an instrumentality but an agency, considering
the fact that under the Administrative Code, the MIAA is attached within the
department framework of the Department of Transportation and
Communications.100 Interestingly, Executive Order No. 341, enacted by
President Arroyo in 2004, similarly calls MIAA an agency. Since instrumentalities
are expressly defined as "an agency not integrated within the department
framework," that view concluded that MIAA cannot be deemed an instrumentality.
Still, that distinction is ultimately irrelevant. Of course, as stated earlier, the
Administrative Code considers GOCCs as agencies,101 so the fact that MIAA is
an agency does not exclude it from classification as a GOCC. On the other hand,
the majority justifies MIAA's purported exemption on Section 133 of the Local
Government Code, which similarly situates "agencies and instrumentalities" as
generally exempt from the taxation powers of LGUs. And on this point, the
majority again evades Mactan and somehow concludes that Section 133 is the
general rule, notwithstanding Sections 232 and 234(a) of the Local Government
Code. And the majority's ultimate conclusion? "By express mandate of the Local
Government Code, local governments cannot impose any kind of tax on national
government instrumentalities like the MIAA. Local governments are devoid of
power to tax the national government, its agencies and instrumentalities."102
The Court's interpretation of the Local Government Code in Mactan renders the
law integrally harmonious and gives due accord to the respective prerogatives of
the national government and LGUs. Sections 133 and 234(a) ensure that the
Republic of the Philippines or its political subdivisions shall not be subjected to
any form of local government taxation, except realty taxes if the beneficial use of
the property owned has been granted for consideration to a taxable entity or
person. On the other hand, Section 133 likewise assures that government
instrumentalities such as GOCCs may not be arbitrarily taxed by LGUs, since
they could be subjected to local taxation if there is a specific proviso thereon in
the Code. One such proviso is Section 137, which as the Court found in National
Power Corporation,103 permits the imposition of a franchise tax on businesses
enjoying a franchise, even if it be a GOCC such as NPC. And, as the Court
acknowledged in Mactan, Section 232 provides another exception on the
taxability of instrumentalities.
The majority abjectly refuses to engage Section 232 of the Local Government
Code although it provides the indubitable general rule that LGUs "may levy an
annual ad valorem tax on real property such as land, building, machinery, and
other improvements not hereafter specifically exempted." The specific
exemptions are provided by Section 234. Section 232 comes sequentially after
Section 133(o),104 and even if the sequencing is irrelevant, Section 232 would
fall under the qualifying phrase of Section 133, "Unless otherwise provided
herein." It is sad, but not surprising that the majority is not willing to consider or
even discuss the general rule, but only the exemptions under Section 133 and
Section 234. After all, if the majority is dead set in ruling for MIAA no matter what
the law says, why bother citing what the law does say.
Constitution, Laws and
Jurisprudence Have Long
Explained the Rationale
Behind the Local Taxation
Of GOCCs.
This blithe disregard of precedents, almost all of them unanimously decided, is
nowhere more evident than in the succeeding discussion of the majority, which
asserts that the power of local governments to tax national government
instrumentalities be construed strictly against local governments. The Maceda
case, decided before the Local Government Code, is cited, as is Basco. This
section of the majority employs deliberate pretense that the Code never existed,
or that the fundamentals of local autonomy are of limited effect in our country.
Why is it that the Local Government Code is barely mentioned in this section of
the majority? Because Section 5 of the Code, purposely omitted by the majority
provides for a different rule of interpretation than that asserted:
Section 5. Rules of Interpretation. – In the interpretation of the provisions of this
Code, the following rules shall apply:
(a) Any provision on a power of a local government unit shall be liberally
interpreted in its favor, and in case of doubt, any question thereon shall be
resolved in favor of devolution of powers and of the lower local government unit.
Any fair and reasonable doubt as to the existence of the power shall be
interpreted in favor of the local government unit concerned;
(b) In case of doubt, any tax ordinance or revenue measure shall be construed
strictly against the local government unit enacting it, and liberally in favor of the
taxpayer. Any tax exemption, incentive or relief granted by any local government
unit pursuant to the provisions of this Code shall be construed strictly against the
person claiming it; xxx
Yet the majority insists that "there is no point in national and local governments
taxing each other, unless a sound and compelling policy requires such transfer of
public funds from one government pocket to another."105 I wonder whether the
Constitution satisfies the majority's desire for "a sound and compelling policy." To
repeat:
Article II. Declaration of Principles and State Policies
xxx
Sec. 25. The State shall ensure the autonomy of local governments.
Article X. Local Government
xxx
Sec. 2. The territorial and political subdivisions shall enjoy local autonomy.
xxx
Section 5. Each local government unit shall have the power to create its own
sources of revenues and to levy taxes, fees, and charges subject to such
guidelines and limitations as the Congress may provide, consistent with the basic
policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively
to the local governments.
Or how about the Local Government Code, presumably an expression of sound
and compelling policy considering that it was enacted by the legislature, that
veritable source of all statutes:
SEC. 129. Power to Create Sources of Revenue. - Each local government unit
shall exercise its power to create its own sources of revenue and to levy taxes,
fees, and charges subject to the provisions herein, consistent with the basic
policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively
to the local government units.
Justice Puno, in National Power Corporation v. City of Cabanatuan,106 provides
a more "sound and compelling policy considerations" that would warrant
sustaining the taxability of government-owned entities by local government units
under the Local Government Code.
Doubtless, the power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities of the local government units
for the delivery of basic services essential to the promotion of the general welfare
and the enhancement of peace, progress, and prosperity of the people. As this
Court observed in the Mactan case, "the original reasons for the withdrawal of tax
exemption privileges granted to government-owned or controlled corporations
and all other units of government were that such privilege resulted in serious tax
base erosion and distortions in the tax treatment of similarly situated enterprises."
With the added burden of devolution, it is even more imperative for government
entities to share in the requirements of development, fiscal or otherwise, by
paying taxes or other charges due from them.107
I dare not improve on Justice Puno's exhaustive disquisition on the statutory and
jurisprudential shift brought about the acceptance of the principles of local
autonomy:
In recent years, the increasing social challenges of the times expanded the scope
of state activity, and taxation has become a tool to realize social justice and the
equitable distribution of wealth, economic progress and the protection of local
industries as well as public welfare and similar objectives. Taxation assumes
even greater significance with the ratification of the 1987 Constitution.
Thenceforth, the power to tax is no longer vested exclusively on Congress; local
legislative bodies are now given direct authority to levy taxes, fees and other
charges pursuant to Article X, section 5 of the 1987 Constitution, viz:
"Section 5. Each Local Government unit shall have the power to create its own
sources of revenue, to levy taxes, fees and charges subject to such guidelines
and limitations as the Congress may provide, consistent with the basic policy of
local autonomy. Such taxes, fees and charges shall accrue exclusively to the
Local Governments."
This paradigm shift results from the realization that genuine development can be
achieved only by strengthening local autonomy and promoting decentralization of
governance. For a long time, the country's highly centralized government
structure has bred a culture of dependence among local government leaders
upon the national leadership. It has also "dampened the spirit of initiative,
innovation and imaginative resilience in matters of local development on the part
of local government leaders." 35 The only way to shatter this culture of
dependence is to give the LGUs a wider role in the delivery of basic services, and
confer them sufficient powers to generate their own sources for the purpose. To
achieve this goal, section 3 of Article X of the 1987 Constitution mandates
Congress to enact a local government code that will, consistent with the basic
policy of local autonomy, set the guidelines and limitations to this grant of taxing
powers, viz:
"Section 3. The Congress shall enact a local government code which shall
provide for a more responsive and accountable local government structure
instituted through a system of decentralization with effective mechanisms of
recall, initiative, and referendum, allocate among the different local government
units their powers, responsibilities, and resources, and provide for the
qualifications, election, appointment and removal, term, salaries, powers and
functions and duties of local officials, and all other matters relating to the
organization and operation of the local units."
To recall, prior to the enactment of the Rep. Act No. 7160, also known as the
Local Government Code of 1991 (LGC), various measures have been enacted to
promote local autonomy. These include the Barrio Charter of 1959, the Local
Autonomy Act of 1959, the Decentralization Act of 1967 and the Local
Government Code of 1983. Despite these initiatives, however, the shackles of
dependence on the national government remained. Local government units were
faced with the same problems that hamper their capabilities to participate
effectively in the national development efforts, among which are: (a) inadequate
tax base, (b) lack of fiscal control over external sources of income, (c) limited
authority to prioritize and approve development projects, (d) heavy dependence
on external sources of income, and (e) limited supervisory control over personnel
of national line agencies.
Considered as the most revolutionary piece of legislation on local autonomy, the
LGC effectively deals with the fiscal constraints faced by LGUs. It widens the tax
base of LGUs to include taxes which were prohibited by previous laws such as
the imposition of taxes on forest products, forest concessionaires, mineral
products, mining operations, and the like. The LGC likewise provides enough
flexibility to impose tax rates in accordance with their needs and capabilities. It
does not prescribe graduated fixed rates but merely specifies the minimum and
maximum tax rates and leaves the determination of the actual rates to the
respective sanggunian.108
And the Court's ruling through Justice Azcuna in Philippine Ports Authority v. City
of Iloilo109, provides especially clear and emphatic rationale:
In closing, we reiterate that in taxing government-owned or controlled
corporations, the State ultimately suffers no loss. In National Power Corp. v.
Presiding Judge, RTC, Br. XXV, 38 we elucidated:
Actually, the State has no reason to decry the taxation of NPC's properties, as
and by way of real property taxes. Real property taxes, after all, form part and
parcel of the financing apparatus of the Government in development and nation-
building, particularly in the local government level.
xxxxxxxxx
To all intents and purposes, real property taxes are funds taken by the State with
one hand and given to the other. In no measure can the government be said to
have lost anything.
Finally, we find it appropriate to restate that the primary reason for the withdrawal
of tax exemption privileges granted to government-owned and controlled
corporations and all other units of government was that such privilege resulted in
serious tax base erosion and distortions in the tax treatment of similarly situated
enterprises, hence resulting in the need for these entities to share in the
requirements of development, fiscal or otherwise, by paying the taxes and other
charges due from them.110
How does the majority counter these seemingly valid rationales which establish
the soundness of a policy consideration subjecting national instrumentalities to
local taxation? Again, by simply ignoring that these doctrines exist. It is
unfortunate if the majority deems these cases or the principles of devolution and
local autonomy as simply too inconvenient, and relies instead on discredited
precedents. Of course, if the majority faces the issues squarely, and expressly
discusses why Basco was right and Mactan was wrong, then this entire endeavor
of the Court would be more intellectually satisfying. But, this is not a game the
majority wants to play.
Mischaracterization of My
Views on the Tax Exemption
Enjoyed by the National Government
Instead, the majority engages in an extended attack pertaining to Section 193,
mischaracterizing my views on that provision as if I had been interpreting the
provision as making "the national government, which itself is a juridical person,
subject to tax by local governments since the national government is not included
in the enumeration of exempt entities in Section 193."111
Nothing is farther from the truth. I have never advanced any theory of the sort
imputed in the majority. My main thesis on the matter merely echoes the explicit
provision of Section 193 that unless otherwise provided in the Local Government
Code (LGC) all tax exemptions enjoyed by all persons, whether natural or
juridical, including GOCCs, were withdrawn upon the effectivity of the Code.
Since the provision speaks of withdrawal of tax exemptions of persons, it follows
that the exemptions theretofore enjoyed by MIAA which is definitely a person are
deemed withdrawn upon the advent of the Code.
On the other hand, the provision does not address the question of who are
beyond the reach of the taxing power of LGUs. In fine, the grant of tax exemption
or the withdrawal thereof assumes that the person or entity involved is subject to
tax. Thus, Section 193 does not apply to entities which were never given any tax
exemption. This would include the national government and its political
subdivisions which, as a general rule, are not subjected to tax in the first
place.112 Corollarily, the national government and its political subdivisions do not
need tax exemptions. And Section 193 which ordains the withdrawal of tax
exemptions is obviously irrelevant to them.
Section 193 is in point for the disposition of this case as it forecloses dependence
for the grant of tax exemption to MIAA on Section 21 of its charter. Even the
majority should concede that the charter section is now ineffectual, as Section
193 withdraws the tax exemptions previously enjoyed by all juridical persons.
With Section 193 mandating the withdrawal of tax exemptions granted to all
persons upon the effectivity of the LGC, for MIAA to continue enjoying exemption
from realty tax, it will have to rely on a basis other than Section 21 of its charter.
Lung Center of the Philippines v. Quezon City113 provides another illustrative
example of the jurisprudential havoc wrought about by the majority. Pursuant to
its charter, the Lung Center was organized as a trust administered by an
eponymous GOCC organized with the SEC.114 There is no doubt it is a GOCC,
even by the majority's reckoning. Applying the Administrative Code, it is also
considered as an agency, the term encompassing even GOCCs. Yet since the
Administrative Code definition of "instrumentalities" encompasses agencies,
especially those not attached to a line department such as the Lung Center, it
also follows that the Lung Center is an instrumentality, which for the majority is
exempt from all local government taxes, especially real estate taxes. Yet just in
2004, the Court unanimously held that the Lung Center was not exempt from real
property taxes. Can the majority and Lung Center be reconciled? I do not see
how, and no attempt is made to demonstrate otherwise.
Another key point. The last paragraph of Section 234 specifically asserts that any
previous exemptions from realty taxes granted to or enjoyed by all persons,
including all GOCCs, are thereby withdrawn. The majority's interpretation of
Sections 133 and 234(a) however necessarily implies that all instrumentalities,
including GOCCs, can never be subjected to real property taxation under the
Code. If that is so, what then is the sense of the last paragraph specifically
withdrawing previous tax exemptions to all persons, including GOCCs when
juridical persons such as MIAA are anyway, to his view, already exempt from
such taxes under Section 133? The majority's interpretation would effectively
render the express and emphatic withdrawal of previous exemptions to GOCCs
inutile. Ut magis valeat quam pereat. Hence, where a statute is susceptible of
more than one interpretation, the court should adopt such reasonable and
beneficial construction which will render the provision thereof operative and
effective, as well as harmonious with each other.115
But, the majority seems content rendering as absurd the Local Government
Code, since it does not have much use anyway for the Code's general
philosophy of fiscal autonomy, as evidently seen by the continued reliance on
Basco or Maceda. Local government rule has never been a grant of
emancipation from the national government. This is the favorite bugaboo of the
opponents of local autonomy—the fallacy that autonomy equates to
independence.
Thus, the conclusion of the majority is that under Section 133(o), MIAA as a
government instrumentality is beyond the reach of local taxation because it is not
subject to taxes, fees or charges of any kind. Moreover, the taxation of national
instrumentalities and agencies by LGUs should be strictly construed against the
LGUs, citing Maceda and Basco. No mention is made of the subsequent rejection
of these cases in jurisprudence following the Local Government Code, including
Mactan. The majority is similarly silent on the general rule under Section 232 on
real property taxation or Section 5 on the rules of construction of the Local
Government Code.
V.
MIAA, and not the National Government
Is the Owner of the Subject Taxable Properties
Section 232 of the Local Government Code explicitly provides that there are
exceptions to the general rule on rule property taxation, as "hereafter specifically
exempted." Section 234, certainly "hereafter," provides indubitable basis for
exempting entities from real property taxation. It provides the most viable legal
support for any claim that an governmental entity such as the MIAA is exempt
from real property taxes. To repeat:
SECTION 234. Exemptions from Real Property Tax. -- The following are
exempted from payment of the real property tax:
xxx
(f) Real property owned by the Republic of the Philippines or any of its political
subdivisions except when the beneficial use thereof has been granted, for
consideration or otherwise, to a taxable person:
The majority asserts that the properties owned by MIAA are owned by the
Republic of the Philippines, thus placing them under the exemption under Section
234. To arrive at this conclusion, the majority employs four main arguments.
MIAA Property Is Patrimonial
And Not Part of Public Dominion
The majority claims that the Airport Lands and Buildings are property of public
dominion as defined by the Civil Code, and therefore owned by the State or the
Republic of the Philippines. But as pointed out by Justice Azcuna in the first PPA
case, if indeed a property is considered part of the public dominion, such property
is "owned by the general public and cannot be declared to be owned by a public
corporation, such as [the PPA]."
Relevant on this point are the following provisions of the MIAA charter:
Section 3. Creation of the Manila International Airport Authority. – xxx
The land where the Airport is presently located as well as the surrounding land
area of approximately six hundred hectares, are hereby transferred, conveyed
and assigned to the ownership and administration of the Authority, subject to
existing rights, if any. xxx Any portion thereof shall not be disposed through sale
or through any other mode unless specifically approved by the President of the
Philippines.
Section 22. Transfer of Existing Facilities and Intangible Assets. – All existing
public airport facilities, runways, lands, buildings and other property, movable or
immovable, belonging to the Airport, and all assets, powers rights, interests and
privileges belonging to the Bureau of Air Transportation relating to airport works
or air operations, including all equipment which are necessary for the operation of
crash fire and rescue facilities, are hereby transferred to the Authority.
Clearly, it is the MIAA, and not either the State, the Republic of the Philippines or
the national government that asserts legal title over the Airport Lands and
Buildings. There was an express transfer of ownership between the MIAA and
the national government. If the distinction is to be blurred, as the majority does,
between the State/Republic/Government and a body corporate such as the
MIAA, then the MIAA charter showcases the remarkable absurdity of an entity
transferring property to itself.
Nothing in the Civil Code or the Constitution prohibits the State from transferring
ownership over property of public dominion to an entity that it similarly owns. It is
just like a family transferring ownership over the properties its members own into
a family corporation. The family exercises effective control over the
administration and disposition of these properties. Yet for several purposes under
the law, such as taxation, it is the corporation that is deemed to own those
properties. A similar situation obtains with MIAA, the State, and the Airport Lands
and Buildings.
The second Public Ports Authority case, penned by Justice Callejo, likewise lays
down useful doctrines in this regard. The Court refuted the claim that the
properties of the PPA were owned by the Republic of the Philippines, noting that
PPA's charter expressly transferred ownership over these properties to the PPA,
a situation which similarly obtains with MIAA. The Court even went as far as
saying that the fact that the PPA "had not been issued any torrens title over the
port and port facilities and appurtenances is of no legal consequence. A torrens
title does not, by itself, vest ownership; it is merely an evidence of title over
properties. xxx It has never been recognized as a mode of acquiring ownership
over real properties."116
The Court further added:
xxx The bare fact that the port and its facilities and appurtenances are accessible
to the general public does not exempt it from the payment of real property taxes.
It must be stressed that the said port facilities and appurtenances are the
petitioner's corporate patrimonial properties, not for public use, and that the
operation of the port and its facilities and the administration of its buildings are in
the nature of ordinary business. The petitioner is clothed, under P.D. No. 857,
with corporate status and corporate powers in the furtherance of its proprietary
interests xxx The petitioner is even empowered to invest its funds in such
government securities approved by the Board of Directors, and derives its
income from rates, charges or fees for the use by vessels of the port premises,
appliances or equipment. xxx Clearly then, the petitioner is a profit-earning
corporation; hence, its patrimonial properties are subject to tax.117
There is no doubt that the properties of the MIAA, as with the PPA, are in a
sense, for public use. A similar argument was propounded by the Light Rail
Transit Authority in Light Rail Transit Authority v. Central Board of
Assessment,118 which was cited in Philippine Ports Authority and deserves
renewed emphasis. The Light Rail Transit Authority (LRTA), a body corporate,
"provides valuable transportation facilities to the paying public."119 It claimed
that its carriage-ways and terminal stations are immovably attached to
government-owned national roads, and to impose real property taxes thereupon
would be to impose taxes on public roads. This view did not persuade the Court,
whose decision was penned by Justice (now Chief Justice) Panganiban. It was
noted:
Though the creation of the LRTA was impelled by public service — to provide
mass transportation to alleviate the traffic and transportation situation in Metro
Manila — its operation undeniably partakes of ordinary business. Petitioner is
clothed with corporate status and corporate powers in the furtherance of its
proprietary objectives. Indeed, it operates much like any private corporation
engaged in the mass transport industry. Given that it is engaged in a service-
oriented commercial endeavor, its carriageways and terminal stations are
patrimonial property subject to tax, notwithstanding its claim of being a
government-owned or controlled corporation.
xxx
Petitioner argues that it merely operates and maintains the LRT system, and that
the actual users of the carriageways and terminal stations are the commuting
public. It adds that the public use character of the LRT is not negated by the fact
that revenue is obtained from the latter's operations.
We do not agree. Unlike public roads which are open for use by everyone, the
LRT is accessible only to those who pay the required fare. It is thus apparent that
petitioner does not exist solely for public service, and that the LRT carriageways
and terminal stations are not exclusively for public use. Although petitioner is a
public utility, it is nonetheless profit-earning. It actually uses those carriageways
and terminal stations in its public utility business and earns money therefrom.120
xxx
Even granting that the national government indeed owns the carriageways and
terminal stations, the exemption would not apply because their beneficial use has
been granted to petitioner, a taxable entity.121
There is no substantial distinction between the properties held by the PPA, the
LRTA, and the MIAA. These three entities are in the business of operating
facilities that promote public transportation.
The majority further asserts that MIAA's properties, being part of the public
dominion, are outside the commerce of man. But if this is so, then why does
Section 3 of MIAA's charter authorize the President of the Philippines to approve
the sale of any of these properties? In fact, why does MIAA's charter in the first
place authorize the transfer of these airport properties, assuming that indeed
these are beyond the commerce of man?
No Trust Has Been Created
Over MIAA Properties For
The Benefit of the Republic
The majority posits that while MIAA might be holding title over the Airport Lands
and Buildings, it is holding it in trust for the Republic. A provision of the
Administrative Code is cited, but said provision does not expressly provide that
the property is held in trust. Trusts are either express or implied, and only those
situations enumerated under the Civil Code would constitute an implied trust.
MIAA does not fall within this enumeration, and neither is there a provision in
MIAA's charter expressly stating that these properties are being held in trust. In
fact, under its charter, MIAA is obligated to retain up to eighty percent (80%) of its
gross operating income, not an inconsequential sum assuming that the beneficial
owner of MIAA's properties is actually the Republic, and not the MIAA.
Also, the claim that beneficial ownership over the MIAA remains with the
government and not MIAA is ultimately irrelevant. Section 234(a) of the Local
Government Code provides among those exempted from paying real property
taxes are "[r]eal property owned by the [Republic]… except when the beneficial
use thereof has been granted, for consideration or otherwise, to a taxable
person." In the context of Section 234(a), the identity of the beneficial owner over
the properties is not determinative as to whether the exemption avails. It is the
identity of the beneficial user of the property owned by the Republic or its political
subdivisions that is crucial, for if said beneficial user is a taxable person, then the
exemption does not lie.
I fear the majority confuses the notion of what might be construed as "beneficial
ownership" of the Republic over the properties of MIAA as nothing more than
what arises as a consequence of the fact that the capital of MIAA is contributed
by the National Government.122 If so, then there is no difference between the
State's ownership rights over MIAA properties than those of a majority
stockholder over the properties of a corporation. Even if such shareholder
effectively owns the corporation and controls the disposition of its assets, the
personality of the stockholder remains separately distinct from that of the
corporation. A brief recall of the entrenched rule in corporate law is in order:
The first consequence of the doctrine of legal entity regarding the separate
identity of the corporation and its stockholders insofar as their obligations and
liabilities are concerned, is spelled out in this general rule deeply entrenched in
American jurisprudence:
Unless the liability is expressly imposed by constitutional or statutory provisions,
or by the charter, or by special agreement of the stockholders, stockholders are
not personally liable for debts of the corporation either at law or equity. The
reason is that the corporation is a legal entity or artificial person, distinct from the
members who compose it, in their individual capacity; and when it contracts a
debt, it is the debt of the legal entity or artificial person – the corporation – and
not the debt of the individual members. (13A Fletcher Cyc. Corp. Sec. 6213)
The entirely separate identity of the rights and remedies of a corporation itself
and its individual stockholders have been given definite recognition for a long
time. Applying said principle, the Supreme Court declared that a corporation may
not be made to answer for acts or liabilities of its stockholders or those of legal
entities to which it may be connected, or vice versa. (Palay Inc. v. Clave et. al.
124 SCRA 638) It was likewise declared in a similar case that a bonafide
corporation should alone be liable for corporate acts duly authorized by its
officers and directors. (Caram Jr. v. Court of Appeals et.al. 151 SCRA, p.
372)123
It bears repeating that MIAA under its charter, is expressly conferred the right to
exercise all the powers of a corporation under the Corporation Law, including the
right to corporate succession, and the right to sue and be sued in its corporate
name.124 The national government made a particular choice to divest ownership
and operation of the Manila International Airport and transfer the same to such an
empowered entity due to perceived advantages. Yet such transfer cannot be
deemed consequence free merely because it was the State which contributed the
operating capital of this body corporate.
The majority claims that the transfer the assets of MIAA was meant merely to
effect a reorganization. The imputed rationale for such transfer does not serve to
militate against the legal consequences of such assignment. Certainly, if it was
intended that the transfer should be free of consequence, then why was it
effected to a body corporate, with a distinct legal personality from that of the
State or Republic? The stated aims of the MIAA could have very well been
accomplished by creating an agency without independent juridical personality.
VI.
MIAA Performs Proprietary Functions
Nonetheless, Section 234(f) exempts properties owned by the Republic of the
Philippines or its political subdivisions from realty taxation. The obvious question
is what comprises "the Republic of the Philippines." I think the key to
understanding the scope of "the Republic" is the phrase "political subdivisions."
Under the Constitution, political subdivisions are defined as "the provinces, cities,
municipalities and barangays."125 In correlation, the Administrative Code of
1987 defines "local government" as referring to "the political subdivisions
established by or in accordance with the Constitution."
Clearly then, these political subdivisions are engaged in the exercise of sovereign
functions and are accordingly exempt. The same could be said generally of the
national government, which would be similarly exempt. After all, even with the
principle of local autonomy, it is inherently noxious and self-defeatist for local
taxation to interfere with the sovereign exercise of functions. However, the
exercise of proprietary functions is a different matter altogether.
Sovereign and Proprietary
Functions Distinguished
Sovereign or constituent functions are those which constitute the very bonds of
society and are compulsory in nature, while ministrant or proprietary functions are
those undertaken by way of advancing the general interests of society and are
merely optional.126 An exhaustive discussion on the matter was provided by the
Court in Bacani v. NACOCO:127
xxx This institution, when referring to the national government, has reference to
what our Constitution has established composed of three great departments, the
legislative, executive, and the judicial, through which the powers and functions of
government are exercised. These functions are twofold: constituent and
ministrant. The former are those which constitute the very bonds of society and
are compulsory in nature; the latter are those that are undertaken only by way of
advancing the general interests of society, and are merely optional. President
Wilson enumerates the constituent functions as follows:
"'(1) The keeping of order and providing for the protection of persons and
property from violence and robbery.
'(2) The fixing of the legal relations between man and wife and between parents
and children.
'(3) The regulation of the holding, transmission, and interchange of property, and
the determination of its liabilities for debt or for crime.
'(4) The determination of contract rights between individuals.
'(5) The definition and punishment of crime.
'(6) The administration of justice in civil cases.
'(7) The determination of the political duties, privileges, and relations of citizens.
'(8) Dealings of the state with foreign powers: the preservation of the state from
external danger or encroachment and the advancement of its international
interests.'" (Malcolm, The Government of the Philippine Islands, p. 19.)
The most important of the ministrant functions are: public works, public
education, public charity, health and safety regulations, and regulations of trade
and industry. The principles determining whether or not a government shall
exercise certain of these optional functions are: (1) that a government should do
for the public welfare those things which private capital would not naturally
undertake and (2) that a government should do these things which by its very
nature it is better equipped to administer for the public welfare than is any private
individual or group of individuals. (Malcolm, The Government of the Philippine
Islands, pp. 19-20.)
From the above we may infer that, strictly speaking, there are functions which our
government is required to exercise to promote its objectives as expressed in our
Constitution and which are exercised by it as an attribute of sovereignty, and
those which it may exercise to promote merely the welfare, progress and
prosperity of the people. To this latter class belongs the organization of those
corporations owned or controlled by the government to promote certain aspects
of the economic life of our people such as the National Coconut Corporation.
These are what we call government-owned or controlled corporations which may
take on the form of a private enterprise or one organized with powers and formal
characteristics of a private corporations under the Corporation Law.128
The Court in Bacani rejected the proposition that the National Coconut
Corporation exercised sovereign functions:
Does the fact that these corporations perform certain functions of government
make them a part of the Government of the Philippines?
The answer is simple: they do not acquire that status for the simple reason that
they do not come under the classification of municipal or public corporation. Take
for instance the National Coconut Corporation. While it was organized with the
purpose of "adjusting the coconut industry to a position independent of trade
preferences in the United States" and of providing "Facilities for the better curing
of copra products and the proper utilization of coconut by-products," a function
which our government has chosen to exercise to promote the coconut industry,
however, it was given a corporate power separate and distinct from our
government, for it was made subject to the provisions of our Corporation Law in
so far as its corporate existence and the powers that it may exercise are
concerned (sections 2 and 4, Commonwealth Act No. 518). It may sue and be
sued in the same manner as any other private corporations, and in this sense it is
an entity different from our government. As this Court has aptly said, "The mere
fact that the Government happens to be a majority stockholder does not make it
a public corporation" (National Coal Co. vs. Collector of Internal Revenue, 46
Phil., 586-587). "By becoming a stockholder in the National Coal Company, the
Government divested itself of its sovereign character so far as respects the
transactions of the corporation. . . . Unlike the Government, the corporation may
be sued without its consent, and is subject to taxation. Yet the National Coal
Company remains an agency or instrumentality of government." (Government of
the Philippine Islands vs. Springer, 50 Phil., 288.)
The following restatement of the entrenched rule by former SEC Chairperson
Rosario Lopez bears noting:
The fact that government corporations are instrumentalities of the State does not
divest them with immunity from suit. (Malong v. PNR, 138 SCRA p. 63) It is
settled that when the government engages in a particular business through the
instrumentality of a corporation, it divests itself pro hoc vice of its sovereign
character so as to subject itself to the rules governing private corporations, (PNB
v. Pabolan 82 SCRA 595) and is to be treated like any other corporation. (PNR v.
Union de Maquinistas Fogonero y Motormen, 84 SCRA 223)
In the same vein, when the government becomes a stockholder in a corporation,
it does not exercise sovereignty as such. It acts merely as a corporator and
exercises no other power in the management of the affairs of the corporation
than are expressly given by the incorporating act. Nor does the fact that the
government may own all or a majority of the capital stock take from the
corporation its character as such, or make the government the real party in
interest. (Amtorg Trading Corp. v. US 71 F2d 524, 528)129
MIAA Performs Proprietary
Functions No Matter How
Vital to the Public Interest
The simple truth is that, based on these accepted doctrinal tests, MIAA performs
proprietary functions. The operation of an airport facility by the State may be
imbued with public interest, but it is by no means indispensable or obligatory on
the national government. In fact, as demonstrated in other countries, it makes a
lot of economic sense to leave the operation of airports to the private sector.
The majority tries to becloud this issue by pointing out that the MIAA does not
compete in the marketplace as there is no competing international airport
operated by the private sector; and that MIAA performs an essential public
service as the primary domestic and international airport of the Philippines. This
premise is false, for one. On a local scale, MIAA competes with other
international airports situated in the Philippines, such as Davao International
Airport and MCIAA. More pertinently, MIAA also competes with other
international airports in Asia, at least. International airlines take into account the
quality and conditions of various international airports in determining the number
of flights it would assign to a particular airport, or even in choosing a hub through
which destinations necessitating connecting flights would pass through.
Even if it could be conceded that MIAA does not compete in the market place,
the example of the Philippine National Railways should be taken into account.
The PNR does not compete in the marketplace, and performs an essential public
service as the operator of the railway system in the Philippines. Is the PNR
engaged in sovereign functions? The Court, in Malong v. Philippine National
Railways,130 held that it was not.131
Even more relevant to this particular case is Teodoro v. National Airports
Corporation,132 concerning the proper appreciation of the functions performed
by the Civil Aeronautics Administration (CAA), which had succeeded the
defunction National Airports Corporation. The CAA claimed that as an
unincorporated agency of the Republic of the Philippines, it was incapable of
suing and being sued. The Court noted:
Among the general powers of the Civil Aeronautics Administration are, under
Section 3, to execute contracts of any kind, to purchase property, and to grant
concession rights, and under Section 4, to charge landing fees, royalties on sales
to aircraft of aviation gasoline, accessories and supplies, and rentals for the use
of any property under its management.
These provisions confer upon the Civil Aeronautics Administration, in our opinion,
the power to sue and be sued. The power to sue and be sued is implied from the
power to transact private business. And if it has the power to sue and be sued on
its behalf, the Civil Aeronautics Administration with greater reason should have
the power to prosecute and defend suits for and against the National Airports
Corporation, having acquired all the properties, funds and choses in action and
assumed all the liabilities of the latter. To deny the National Airports
Corporation's creditors access to the courts of justice against the Civil
Aeronautics Administration is to say that the government could impair the
obligation of its corporations by the simple expedient of converting them into
unincorporated agencies. 133
xxx
Eventually, the charter of the CAA was revised, and it among its expanded
functions was "[t]o administer, operate, manage, control, maintain and develop
the Manila International Airport."134 Notwithstanding this expansion, in the 1988
case of CAA v. Court of Appeals135 the Court reaffirmed the ruling that the CAA
was engaged in "private or non-governmental functions."136 Thus, the Court had
already ruled that the predecessor agency of MIAA, the CAA was engaged in
private or non-governmental functions. These are more precedents ignored by
the majority. The following observation from the Teodoro case very well applies
to MIAA.
The Civil Aeronautics Administration comes under the category of a private
entity. Although not a body corporate it was created, like the National Airports
Corporation, not to maintain a necessary function of government, but to run what
is essentially a business, even if revenues be not its prime objective but rather
the promotion of travel and the convenience of the traveling public. It is engaged
in an enterprise which, far from being the exclusive prerogative of state, may,
more than the construction of public roads, be undertaken by private
concerns.137
If the determinative point in distinguishing between sovereign functions and
proprietary functions is the vitality of the public service being performed, then it
should be noted that there is no more important public service performed than
that engaged in by public utilities. But notably, the Constitution itself authorizes
private persons to exercise these functions as it allows them to operate public
utilities in this country138 If indeed such functions are actually sovereign and
belonging properly to the government, shouldn't it follow that the exercise of
these tasks remain within the exclusive preserve of the State?
There really is no prohibition against the government taxing itself,139 and nothing
obscene with allowing government entities exercising proprietary functions to be
taxed for the purpose of raising the coffers of LGUs. On the other hand, it would
be an even more noxious proposition that the government or the instrumentalities
that it owns are above the law and may refuse to pay a validly imposed tax.
MIAA, or any similar entity engaged in the exercise of proprietary, and not
sovereign functions, cannot avoid the adverse-effects of tax evasion simply on
the claim that it is imbued with some of the attributes of government.
VII.
MIAA Property Not Subject to
Execution Sale Without Consent
Of the President.
Despite the fact that the City of Parañaque ineluctably has the power to impose
real property taxes over the MIAA, there is an equally relevant statutory limitation
on this power that must be fully upheld. Section 3 of the MIAA charter states that
"[a]ny portion [of the [lands transferred, conveyed and assigned to the ownership
and administration of the MIAA] shall not be disposed through sale or through
any other mode unless specifically approved by the President of the
Philippines."140
Nothing in the Local Government Code, even with its wide grant of powers to
LGUs, can be deemed as repealing this prohibition under Section 3, even if it
effectively forecloses one possible remedy of the LGU in the collection of
delinquent real property taxes. While the Local Government Code withdrew all
previous local tax exemptions of the MIAA and other natural and juridical
persons, it did not similarly withdraw any previously enacted prohibitions on
properties owned by GOCCs, agencies or instrumentalities. Moreover, the
resulting legal effect, subjecting on one hand the MIAA to local taxes but on the
other hand shielding its properties from any form of sale or disposition, is not
contradictory or paradoxical, onerous as its effect may be on the LGU. It simply
means that the LGU has to find another way to collect the taxes due from MIAA,
thus paving the way for a mutually acceptable negotiated solution.141
There are several other reasons this statutory limitation should be upheld and
applied to this case. It is at this juncture that the importance of the Manila Airport
to our national life and commerce may be accorded proper consideration. The
closure of the airport, even by reason of MIAA's legal omission to pay its taxes,
will have an injurious effect to our national economy, which is ever reliant on air
travel and traffic. The same effect would obtain if ownership and administration of
the airport were to be transferred to an LGU or some other entity which were not
specifically chartered or tasked to perform such vital function. It is for this reason
that the MIAA charter specifically forbids the sale or disposition of MIAA
properties without the consent of the President. The prohibition prevents the
peremptory closure of the MIAA or the hampering of its operations on account of
the demands of its creditors. The airport is important enough to be sheltered by
legislation from ordinary legal processes.
Section 3 of the MIAA charter may also be appreciated as within the proper
exercise of executive control by the President over the MIAA, a GOCC which
despite its separate legal personality, is still subsumed within the executive
branch of government. The power of executive control by the President should be
upheld so long as such exercise does not contravene the Constitution or the law,
the President having the corollary duty to faithfully execute the Constitution and
the laws of the land.142 In this case, the exercise of executive control is precisely
recognized and authorized by the legislature, and it should be upheld even if it
comes at the expense of limiting the power of local government units to collect
real property taxes.
Had this petition been denied instead with Mactan as basis, but with the caveat
that the MIAA properties could not be subject of execution sale without the
consent of the President, I suspect that the parties would feel little distress.
Through such action, both the Local Government Code and the MIAA charter
would have been upheld. The prerogatives of LGUs in real property taxation, as
guaranteed by the Local Government Code, would have been preserved, yet the
concerns about the ruinous effects of having to close the Manila International
Airport would have been averted. The parties would then be compelled to try
harder at working out a compromise, a task, if I might add, they are all too willing
to engage in.143 Unfortunately, the majority will cause precisely the opposite
result of unremitting hostility, not only to the City of Parañaque, but to the
thousands of LGUs in the country.
VIII.
Summary of Points
My points may be summarized as follows:
1) Mactan and a long line of succeeding cases have already settled the rule that
under the Local Government Code, enacted pursuant to the constitutional
mandate of local autonomy, all natural and juridical persons, even those GOCCs,
instrumentalities and agencies, are no longer exempt from local taxes even if
previously granted an exemption. The only exemptions from local taxes are those
specifically provided under the Local Government Code itself, or those enacted
through subsequent legislation.
2) Under the Local Government Code, particularly Section 232, instrumentalities,
agencies and GOCCs are generally liable for real property taxes. The only
exemptions therefrom under the same Code are provided in Section 234, which
include real property owned by the Republic of the Philippines or any of its
political subdivisions.
3) The subject properties are owned by MIAA, a GOCC, holding title in its own
name. MIAA, a separate legal entity from the Republic of the Philippines, is the
legal owner of the properties, and is thus liable for real property taxes, as it does
not fall within the exemptions under Section 234 of the Local Government Code.
4) The MIAA charter expressly bars the sale or disposition of MIAA properties. As
a result, the City of Parañaque is prohibited from seizing or selling these
properties by public auction in order to satisfy MIAA's tax liability. In the end,
MIAA is encumbered only by a limited lien possessed by the City of Parañaque.
On the other hand, the majority's flaws are summarized as follows:
1) The majority deliberately ignores all precedents which run counter to its
hypothesis, including Mactan. Instead, it relies and directly cites those doctrines
and precedents which were overturned by Mactan. By imposing a different result
than that warranted by the precedents without explaining why Mactan or the
other precedents are wrong, the majority attempts to overturn all these ruling sub
silencio and without legal justification, in a manner that is not sanctioned by the
practices and traditions of this Court.
2) The majority deliberately ignores the policy and philosophy of local fiscal
autonomy, as mandated by the Constitution, enacted under the Local
Government Code, and affirmed by precedents. Instead, the majority asserts that
there is no sound rationale for local governments to tax national government
instrumentalities, despite the blunt existence of such rationales in the
Constitution, the Local Government Code, and precedents.
3) The majority, in a needless effort to justify itself, adopts an extremely strained
exaltation of the Administrative Code above and beyond the Corporation Code
and the various legislative charters, in order to impose a wholly absurd definition
of GOCCs that effectively declassifies innumerable existing GOCCs, to
catastrophic legal consequences.
4) The majority asserts that by virtue of Section 133(o) of the Local Government
Code, all national government agencies and instrumentalities are exempt from
any form of local taxation, in contravention of several precedents to the contrary
and the proviso under Section 133, "unless otherwise provided herein [the Local
Government Code]."
5) The majority erroneously argues that MIAA holds its properties in trust for the
Republic of the Philippines, and that such properties are patrimonial in character.
No express or implied trust has been created to benefit the national government.
The legal distinction between sovereign and proprietary functions, as affirmed by
jurisprudence, likewise preclude the classification of MIAA properties as
patrimonial.
IX.
Epilogue
If my previous discussion still fails to convince on how wrong the majority is, then
the following points are well-worth considering. The majority cites the Bangko
Sentral ng Pilipinas (Bangko Sentral) as a government instrumentality that
exercises corporate powers but not organized as a stock or non-stock
corporation. Correspondingly for the majority, the Bangko ng Sentral is exempt
from all forms of local taxation by LGUs by virtue of the Local Government Code.
Section 125 of Rep. Act No. 7653, The New Central Bank Act, states:
SECTION 125. Tax Exemptions. — The Bangko Sentral shall be exempt for a
period of five (5) years from the approval of this Act from all national, provincial,
municipal and city taxes, fees, charges and assessments.
The New Central Bank Act was promulgated after the Local Government Code if
the BSP is already preternaturally exempt from local taxation owing to its
personality as an "government instrumentality," why then the need to make a
new grant of exemption, which if the majority is to be believed, is actually a
redundancy. But even more tellingly, does not this provision evince a clear intent
that after the lapse of five (5) years, that the Bangko Sentral will be liable for
provincial, municipal and city taxes? This is the clear congressional intent, and it
is Congress, not this Court which dictates which entities are subject to taxation
and which are exempt.
Perhaps this notion will offend the majority, because the Bangko Sentral is not
even a government owned corporation, but a government instrumentality, or
perhaps "loosely", a "government corporate entity." How could such an entity like
the Bangko Sentral , which is not even a government owned corporation, be
subjected to local taxation like any mere mortal? But then, see Section 1 of the
New Central Bank Act:
SECTION 1. Declaration of Policy. — The State shall maintain a central
monetary authority that shall function and operate as an independent and
accountable body corporate in the discharge of its mandated responsibilities
concerning money, banking and credit. In line with this policy, and considering its
unique functions and responsibilities, the central monetary authority established
under this Act, while being a government-owned corporation, shall enjoy fiscal
and administrative autonomy.
Apparently, the clear legislative intent was to create a government corporation
known as the Bangko Sentral ng Pilipinas. But this legislative intent, the sort that
is evident from the text of the provision and not the one that needs to be
unearthed from the bowels of the archival offices of the House and the Senate, is
for naught to the majority, as it contravenes the Administrative Code of 1987,
which after all, is "the governing law defining the status and relationship of
government agencies and instrumentalities" and thus superior to the legislative
charter in determining the personality of a chartered entity. Its like saying that the
architect who designed a school building is better equipped to teach than the
professor because at least the architect is familiar with the geometry of the
classroom.
Consider further the example of the Philippine Institute of Traditional and
Alternative Health Care (PITAHC), created by Republic Act No. 8243 in 1997. It
has similar characteristics as MIAA in that it is established as a body
corporate,144 and empowered with the attributes of a corporation,145 including
the power to purchase or acquire real properties.146 However the PITAHC has
no capital stock and no members, thus following the majority, it is not a GOCC.
The state policy that guides PITAHC is the development of traditional and
alternative health care,147 and its objectives include the promotion and advocacy
of alternative, preventive and curative health care modalities that have been
proven safe, effective and cost effective.148 "Alternative health care modalities"
include "other forms of non-allophatic, occasionally non-indigenous or imported
healing methods" which include, among others "reflexology, acupuncture,
massage, acupressure" and chiropractics.149
Given these premises, there is no impediment for the PITAHC to purchase land
and construct thereupon a massage parlor that would provide a cheaper
alternative to the opulent spas that have proliferated around the metropolis. Such
activity is in line with the purpose of the PITAHC and with state policy. Is such
massage parlor exempt from realty taxes? For the majority, it is, for PITAHC is an
instrumentality or agency exempt from local government taxation, which does not
fall under the exceptions under Section 234 of the Local Government Code.
Hence, this massage parlor would not just be a shelter for frazzled nerves, but for
taxes as well.
Ridiculous? One might say, certainly a decision of the Supreme Court cannot be
construed to promote an absurdity. But precisely the majority, and the faulty
reasoning it utilizes, opens itself up to all sorts of mischief, and certainly, a tax-
exempt massage parlor is one of the lesser evils that could arise from the
majority ruling. This is indeed a very strange and very wrong decision.
I dissent.
DANTE O. TINGA
Associate Justice

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 58168 December 19, 1989
CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAY-
CABRERA, LUISA MAGSAYSAY-CORPUZ, assisted be her husband, Dr.
Jose Corpuz, FELICIDAD P. MAGSAYSAY, and MERCEDES MAGSAYSAY-
DIAZ, petitioners,
vs.
THE COURT OF APPEALS and ADELAIDA RODRIGUEZ-MAGSAYSAY,
Special Administratrix of the Estate of the late Genaro F. Magsaysay
respondents.

FERNAN, C.J.:
In this petition for review on certiorari, petitioners seek to reverse and set aside
[1] the decision of the Court of Appeals dated July l3, 1981, 1 affirming that of the
Court of First Instance of Zambales and Olongapo City which denied petitioners'
motion to intervene in an annulment suit filed by herein private respondent, and
[2] its resolution dated September 7, 1981, denying their motion for
reconsideration.
Petitioners are raising a purely legal question; whether or not respondent Court of
Appeals correctly denied their motion for intervention.
The facts are not controverted.
On February 9, 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. In her complaint, she
alleged that in 1958, she and her husband acquired, thru conjugal funds, a parcel
of land with improvements, known as "Pequena Island", covered by TCT No.
3258; that after the death of her husband, she discovered [a] an annotation at the
back of TCT No. 3258 that "the land was acquired by her husband from his
separate capital;" [b] the registration of a Deed of Assignment dated June 25,
1976 purportedly executed by the late Senator in favor of SUBIC, as a result of
which TCT No. 3258 was cancelled and TCT No. 22431 issued in the name of
SUBIC; and [c] the registration of Deed of Mortgage dated April 28, 1977 in the
amount of P 2,700,000.00 executed by SUBIC in favor of FILMANBANK; that the
foregoing acts were void and done in an attempt to defraud the conjugal
partnership considering that the land is conjugal, her marital consent to the
annotation on TCT No. 3258 was not obtained, the change made by the Register
of Deeds of the titleholders was effected without the approval of the
Commissioner of Land Registration and that the late Senator did not execute the
purported Deed of Assignment or his consent thereto, if obtained, was secured
by mistake, violence and intimidation. She further alleged that the assignment in
favor of SUBIC was without consideration and consequently null and void. She
prayed that the Deed of Assignment and the Deed of Mortgage be annulled and
that the Register of Deeds be ordered to cancel TCT No. 22431 and to issue a
new title in her favor.
On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for
intervention on the ground that on June 20, 1978, their brother conveyed to them
one-half (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 July 26, 1979, the 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, respondent 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 petitioners have against the late Senator or against SUBIC
for that matter can be ventilated in a separate proceeding, such that with the
denial of the motion for intervention, they are not left without any remedy or
judicial relief under existing law.
Petitioners' motion for reconsideration was denied. Hence, the instant recourse.
Petitioners anchor their right to intervene on the purported assignment made by
the late Senator of a certain portion of his shareholdings to them as evidenced by
a Deed of Sale dated June 20, 1978. 2 Such transfer, petitioners posit, clothes
them with an interest, protected by law, in the matter of litigation.
Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil Co., 49 Phil.
857,862 & 853 (1927), 3 petitioners strongly argue that their ownership of
41.66% of the entire outstanding capital stock of SUBIC entitles them to a
significant vote in the corporate affairs; that they are affected by the action of the
widow of their late brother for it concerns the only tangible asset of the
corporation and that it appears that they are more vitally interested in the
outcome of the case than SUBIC.
Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court
affirms the respondent court's holding that petitioners herein have no legal
interest in the subject matter in litigation so as to entitle them to intervene in the
proceedings below. In the case of Batama Farmers' Cooperative Marketing
Association, Inc. v. Rosal, 4 we held: "As clearly stated in Section 2 of Rule 12 of
the Rules of Court, 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 ."
To allow intervention, [a] it must be shown that the movant has legal interest in
the matter in litigation, or otherwise qualified; and [b] consideration must be given
as to whether the adjudication of the rights of the original parties may be delayed
or prejudiced, or whether the intervenor's rights may be protected in a separate
proceeding or not. Both requirements must concur as the first is not more
important than the second. 5
The interest which entitles a person to intervene in a suit between other parties
must be in the matter in litigation and of such direct and immediate character that
the intervenor will either gain or lose by the direct legal operation and effect of the
judgment. Otherwise, if persons not parties of the action could be allowed to
intervene, proceedings will become unnecessarily complicated, expensive and
interminable. And this is not the policy of the law. 6
The words "an interest in the subject" mean a direct interest in the cause of
action as pleaded, and which would put the intervenor in a legal position to
litigate a fact alleged in the complaint, without the establishment of which plaintiff
could not recover. 7
Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent,
remote, conjectural, consequential and collateral. At the very least, their interest
is purely inchoate, or in sheer expectancy of a right in the management of the
corporation and to share in the profits thereof and in the properties and assets
thereof on dissolution, after payment of the corporate debts and obligations.
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. 8
Petitioners further contend that the availability of other remedies, as declared by
the Court of appeals, is totally immaterial to the availability of the remedy of
intervention.
We cannot give credit to such averment. As earlier stated, that the movant's
interest may be protected in a separate proceeding is a factor to be considered in
allowing or disallowing a motion for intervention. It is significant to note at this
juncture that as per records, there are four pending cases involving the parties
herein, enumerated as follows: [1] Special Proceedings No. 122122 before the
CFI of Manila, Branch XXII, entitled "Concepcion Magsaysay-Labrador, et al. v.
Subic Land Corp., et al.", involving the validity of the transfer by the late Genaro
Magsaysay of one-half of his shareholdings in Subic Land Corporation; [2] Civil
Case No. 2577-0 before the CFI of Zambales, Branch III, "Adelaida Rodriguez-
Magsaysay v. Panganiban, etc.; Concepcion Labrador, et al. Intervenors",
seeking to annul the purported Deed of Assignment in favor of SUBIC and its
annotation at the back of TCT No. 3258 in the name of respondent's deceased
husband; [3] SEC Case No. 001770, filed by respondent praying, among other
things that she be declared in her capacity as the surviving spouse and
administratrix of the estate of Genaro Magsaysay as the sole subscriber and
stockholder of SUBIC. There, petitioners, by motion, sought to intervene. Their
motion to reconsider the denial of their motion to intervene was granted; [4] SP
No. Q-26739 before the CFI of Rizal, Branch IV, petitioners herein filing a
contingent claim pursuant to Section 5, Rule 86, Revised Rules of Court. 9
Petitioners' interests are no doubt amply protected in these cases.
Neither do we lend credence to petitioners' argument that they are more
interested in the outcome of the case than the corporation-assignee, owing to the
fact that the latter is willing to compromise with widow-respondent and since a
compromise involves the giving of reciprocal concessions, the only conceivable
concession the corporation may give is a total or partial relinquishment of the
corporate assets. 10
Such claim all the more bolsters the contingent nature of petitioners' interest in
the subject of litigation.
The factual findings of the trial court are clear on this point. The petitioners
cannot claim the right to intervene on the strength of the transfer of shares
allegedly executed by the late Senator. The corporation did not keep books and
records. 11 Perforce, no transfer was ever recorded, much less effected as to
prejudice third parties. The transfer must be registered in the books of the
corporation to affect third persons. The law on corporations is explicit. Section 63
of the Corporation Code provides, thus: "No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the date of the
transfer, the number of the certificate or certificates and the number of shares
transferred."
And even assuming arguendo that there was a valid transfer, petitioners are
nonetheless barred from intervening inasmuch as their rights can be ventilated
and amply protected in another proceeding.
WHEREFORE, the instant petition is hereby DENIED. Costs against petitioners.
SO ORDERED.
Gutierrez, Jr., Bidin and Corte's, JJ., concur.
Feliciano, J., is on leave.

Footnotes
1 Penned by Associate Justice Porfirio V. Sison and concurred in by Associate
Justices Elias B. Asuncion and Juan A. Sison.
2 Rollo, p. 14.
3 In this case, the appellee challenged the right of Phil. C. Whitaker as intervenor
to ask that the mortgage contract executed by the Vegetable Oil Company be
declared null and void. The court held: Appellee is right as to the premises. The
Veg. Oil Co. is the defendant. The corporation has not appealed. At the same
time, it is evident that Phil. C. Whitaker was one of the largest individual
stockholders of the Veg. Oil Co., and was until the inauguration of the
receivership, exercising control over and dictating the policy of the company. Out
of twenty-eight thousand shares of the Veg. Oil Co., Mr. Whitaker was the owner
of 5,893 fully paid shares of the par value of P100 each. It was he who asked for
the appointment of the receiver. It was he who was the leading figure in the
negotiations between the Veg. Oil Co., the Philippine National Bank, and the
other creditors. It was he who pledged his own property to the extent of over P
4,000,000 in an endeavor to assist in the rehabilitation of the Veg. Oil Co. He is
injuriously affected by the mortgage. In truth, Mr. Whitaker is more vitally
interested in the outcome of this case than is the Veg. Oil Company. Conceivably
if the mortgage had been the free act of the Veg. Oil Co., it could not be heard to
allege its own fraud, and only a creditor could take advantage of the fraud to
intervene to avoid the conveyance.
4 42 SCRA 408.
5 Gibson v. Hon. Revilla, G.R. No. L-41432, 30 July 1979,92 SCRA 219.
6 Garcia v. David, 67 Phil. 279; Hacienda Sapang Tayal Tenant's League v.
Yatco, G.R. No. L-14651, Feb. 29, 1960.
7 Bulova v. E.L. Barrett, Inc., 194 App. Div. 418,185 NYS 424.
8 Ballantine, 288-289, Pascual v. Del Sanz Orozco, 19 Phil. 82, 86.
9 Rollo, pp. 112-120.
10 Rollo, pp. 119-120.
11 Rollo, p. 39.

o Law Foundation

SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-31061 August 17, 1976
SULO NG BAYAN INC., plaintiff-appellant,
vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL
WATERWORKS & SEWERAGE AUTHORITY, HACIENDA CARETAS, INC,
and REGISTER OF DEEDS OF BULACAN, defendants-appellees.
Hill & Associates Law Offices for appellant.
Araneta, Mendoza & Papa for appellee Gregorio Araneta, Inc.
Carlos, Madarang, Carballo & Valdez for Paradise Farms, Inc.
Leopoldo M. Abellera, Arsenio J. Magpale & Raul G. Bernardo, Office of the
Government Corporate Counsel for appellee National Waterworks & Sewerage
Authority.
Candido G. del Rosario for appellee Hacienda Caretas, Inc.

ANTONIO, J.:
The issue posed in this appeal is whether or not plaintiff 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; for the nullification of the transfer
certificates of title issued in favor of defendants appellees covering the aforesaid
parcels of land; for a declaration of "plaintiff's members as absolute owners of the
property" and the issuance of the corresponding certificate of title; and for
damages.
On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed an accion de
revindicacion with the Court of First Instance of Bulacan, Fifth Judicial District,
Valenzuela, Bulacan, against defendants-appellees 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 square meters, more or less, registered under the Torrens
System in the name of defendants-appellees' predecessors-in-interest. 1 The
complaint, as amended on June 13, 1966, specifically alleged that plaintiff is a
corporation organized and existing under the laws of the Philippines, with its
principal office and place of business at San Jose del Monte, Bulacan; that its
membership is composed of natural persons residing at San Jose del Monte,
Bulacan; that the members of the plaintiff corporation, through themselves and
their predecessors-in-interest, had pioneered in the clearing of the fore-mentioned
tract of land, cultivated the same since the Spanish regime and continuously
possessed the said property openly and public under concept of ownership
adverse against the whole world; that defendant-appellee Gregorio Araneta, Inc.,
sometime in the year 1958, through force and intimidation, ejected the members
of the plaintiff corporation fro their possession of the aforementioned vast tract of
land; that upon investigation conducted by the members and officers of plaintiff
corporation, they found out for the first time in the year 1961 that the land in
question "had been either fraudelently or erroneously included, by direct or
constructive fraud, in Original Certificate of Title No. 466 of the Land of Records of
the province of Bulacan", issued on May 11, 1916, which title is fictitious, non-
existent and devoid of legal efficacy due to the fact that "no original survey nor plan
whatsoever" appears to have been submitted as a basis thereof and that the Court
of First Instance of Bulacan which issued the decree of registration did not acquire
jurisdiction over the land registration case because no notice of such proceeding
was given to the members of the plaintiff corporation who were then in actual
possession of said properties; that as a consequence of the nullity of the original
title, all subsequent titles derived therefrom, such as Transfer Certificate of Title
No. 4903 issued in favor of Gregorio Araneta and Carmen Zaragoza, which was
subsequently cancelled by Transfer Certificate of Title No. 7573 in the name of
Gregorio Araneta, Inc., Transfer Certificate of Title No. 4988 issued in the name
of, the National Waterworks & Sewerage Authority (NWSA), Transfer Certificate of
Title No. 4986 issued in the name of Hacienda Caretas, Inc., and another transfer
certificate of title in the name of Paradise Farms, Inc., are therefore void. Plaintiff-
appellant consequently prayed (1) that Original Certificate of Title No. 466, as well
as all transfer certificates of title issued and derived therefrom, be nullified; (2) that
"plaintiff's members" be declared as absolute owners in common of said property
and that the corresponding certificate of title be issued to plaintiff; and (3) that
defendant-appellee Gregorio Araneta, Inc. be ordered to pay to plaintiff the
damages therein specified.
On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. 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. Appellee National Waterworks & Sewerage Authority
did not file any motion to dismiss. However, it pleaded in its answer as special and
affirmative defenses lack of cause of action by the plaintiff-appellant and the
barring of such action by prescription and laches.
During the pendency of the motion to dismiss, plaintiff-appellant filed a motion,
dated October 7, 1966, praying that the case be transferred to another branch of
the Court of First Instance sitting at Malolos, Bulacan, According to defendants-
appellees, they were not furnished a copy of said motion, hence, on October 14,
1966, the lower court issued an Order requiring plaintiff-appellant to furnish the
appellees copy of said motion, hence, on October 14, 1966, defendant-appellant's
motion dated October 7, 1966 and, consequently, prayed that the said motion be
denied for lack of notice and for failure of the plaintiff-appellant to comply with the
Order of October 14, 1966. Similarly, defendant-appellee paradise Farms, Inc.
filed, on December 2, 1966, a manifestation information the court that it also did
not receive a copy of the afore-mentioned of appellant. On January 24, 1967, the
trial court issued an Order dismissing the amended complaint.
On February 14, 1967, appellant filed a motion to reconsider the Order of dismissal
on the grounds that the court had no jurisdiction to issue the Order of dismissal,
because its request for the transfer of the case from the Valenzuela Branch of the
Court of First Instance to the Malolos Branch of the said court has been approved
by the Department of Justice; 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; and that the action is not barred by the statute of
limitations because (a) an action for the reconveyance of property registered
through fraud does not prescribe, and (b) an action to impugn a void judgment may
be brought any time. This motion was denied by the trial court in its Order dated
February 22, 1967. From the afore-mentioned Order of dismissal and the Order
denying its motion for reconsideration, plaintiff-appellant appealed to the Court of
Appeals.
On September 3, 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 this
case to this Court for resolution of the legal issues involved in the controversy.
I
Appellant contends, as a first assignment of error, that the trial court acted without
authority and jurisdiction in dismissing the amended complaint when the Secretary
of Justice had already approved the transfer of the case to any one of the two
branches of the Court of First Instance of Malolos, Bulacan.
Appellant confuses the jurisdiction of a court and the venue of cases with the
assignment of cases in the different branches of the same Court of First Instance.
Jurisdiction implies the power of the court to decide a case, while venue the place
of action. There is no question that respondent court has jurisdiction over the case.
The venue of actions in the Court of First Instance is prescribed in Section 2, Rule
4 of the Revised Rules of Court. The laying of venue is not left to the caprice of
plaintiff, but must be in accordance with the aforesaid provision of the rules. 2 The
mere fact that a request for the transfer of a case to another branch of the same
court has been approved by the Secretary of Justice does not divest the court
originally taking cognizance thereof of its jurisdiction, much less does it change the
venue of the action. As correctly observed by the trial court, the indorsement of the
Undersecretary of Justice did not order the transfer of the case to the Malolos
Branch of the Bulacan Court of First Instance, but only "authorized" it for the reason
given by plaintiff's counsel that the transfer would be convenient for the parties.
The trial court is not without power to either grant or deny the motion, especially in
the light of a strong opposition thereto filed by the defendant. We hold that the
court a quo acted within its authority in denying the motion for the transfer the case
to Malolos notwithstanding the authorization" of the same by the Secretary of
Justice.
II
Let us now consider the substantive aspect of the Order of dismissal.
In dismissing the amended complaint, the court a quo said:
The issue of lack of cause of action raised in the motions to dismiss refer to the
lack of personality of plaintiff to file the instant action. Essentially, the term 'cause
of action' is composed of two elements: (1) the right of the plaintiff and (2) the
violation of such right by the defendant. (Moran, Vol. 1, p. 111). For these reasons,
the rules require that every action must be prosecuted and defended in the name
of the real party in interest and that all persons having an interest in the subject of
the action and in obtaining the relief demanded shall be joined as plaintiffs (Sec.
2, Rule 3). In the amended complaint, the people whose rights were alleged to
have been violated by being deprived and dispossessed of their land are the
members of the corporation and not the corporation itself. The corporation has a
separate. and distinct personality from its members, and this is not a mere
technicality but a matter of substantive law. There is no allegation that the
members have assigned their rights to the corporation or any showing that the
corporation has in any way or manner succeeded to such rights. The corporation
evidently did not have any rights violated by the defendants for which it could seek
redress. Even if the Court should find against the defendants, therefore, the plaintiff
corporation would not be entitled to the reliefs prayed for, which are recoveries of
ownership and possession of the land, issuance of the corresponding title in its
name, and payment of damages. Neither can such reliefs be awarded to the
members allegedly deprived of their land, since they are not parties to the suit. It
appearing clearly that the action has not been filed in the names of the real parties
in interest, the complaint must be dismissed on the ground of lack of cause of
action. 3
Viewed in the light of existing law and jurisprudence, We find that the trial court
correctly dismissed the amended complaint.
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. 4 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. 5
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. 6 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. 7 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. 8
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. 9 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. 10
Thus, when "the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, ... the law will regard the corporation as an
association of persons, or in the case of two corporations, merge them into one,
the one being merely regarded as part or instrumentality of the other. 11 The same
is true where a corporation is a dummy and serves no business purpose and is
intended only as a blind, or an alter ego or business conduit for the sole benefit of
the stockholders. 12 This doctrine of disregarding the distinct personality of the
corporation has been applied by the courts in those cases when the corporate
entity is used for the evasion of taxes 13 or when the veil of corporate fiction is
used to confuse legitimate issue of employer-employee relationship, 14 or when
necessary for the protection of creditors, in which case the veil of corporate fiction
may be pierced and the funds of the corporation may be garnished to satisfy the
debts of a principal stockholder. 15 The aforecited principle is resorted to by the
courts as a measure protection for third parties to prevent fraud, illegality or
injustice. 16
It has not been claimed that the members have assigned or transferred whatever
rights they may have on the land in question to the plaintiff corporation. Absent any
showing of interest, therefore, a corporation, like plaintiff-appellant herein, 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.
It is fundamental that there cannot be a cause of action 'without an antecedent
primary legal right conferred' by law upon a person. 17 Evidently, there can be no
wrong without a corresponding right, and no breach of duty by one person without
a corresponding right belonging to some other person. 18 Thus, the essential
elements of a cause of action are legal right of the plaintiff, correlative obligation of
the defendant, an act or omission of the defendant in violation of the aforesaid legal
right. 19 Clearly, no right of action exists in favor of plaintiff corporation, for as
shown heretofore it does not have any interest in the subject matter of the case
which is material and, direct so as to entitle it to file the suit as a real party in
interest.
III
Appellant maintains, however, that the amended complaint may be treated as a
class suit, pursuant to Section 12 of Rule 3 of the Revised Rules of Court.
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. 20
Under the first requisite, the person who sues must have an interest in the
controversy, common with those for whom he sues, and there must be that unity
of interest between him and all such other persons which would entitle them to
maintain the action if suit was brought by them jointly. 21
As to what constitutes common interest in the subject matter of the controversy, it
has been explained in Scott v. Donald 22 thus:
The interest that will allow parties to join in a bill of complaint, or that will enable
the court to dispense with the presence of all the parties, when numerous, except
a determinate number, is not only an interest in the question, but one in common
in the subject Matter of the suit; ... a community of interest growing out of the nature
and condition of the right in dispute; for, although there may not be any privity
between the numerous parties, there is a common title out of which the question
arises, and which lies at the foundation of the proceedings ... [here] the only matter
in common among the plaintiffs, or between them and the defendants, is an interest
in the Question involved which alone cannot lay a foundation for the joinder of
parties. There is scarcely a suit at law, or in equity which settles a Principle or
applies a principle to a given state of facts, or in which a general statute is
interpreted, that does not involved a Question in which other parties are interested.
... (Emphasis supplied )
Here, there is only one party plaintiff, and the plaintiff 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, as correctly stated by the
appellees, 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. 23
Having shown that no cause of action in favor of the plaintiff exists and that the
action in the lower court cannot be considered as a class suit, it would be
unnecessary and an Idle exercise for this Court to resolve the remaining issue of
whether or not the plaintiffs action for reconveyance of real property based upon
constructive or implied trust had already prescribed.
ACCORDINGLY, the instant appeal is hereby DISMISSED with costs against the
plaintiff-appellant.
Fernando, C.J., Barredo, Aquino and Concepcion, Jr., JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. 75885 May 27, 1987
BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO), petitioner,
vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT, CHAIRMAN
JOVITO SALONGA, COMMISSIONER MARY CONCEPCION BAUTISTA,
COMMISSIONER RAMON DIAZ, COMMISSIONER RAUL R. DAZA,
COMMISSIONER QUINTIN S. DOROMAL, CAPT. JORGE B. SIACUNCO, et
al., respondents.
Apostol, Bernas, Gumaru, Ona and Associates for petitioner.
Vicente G. Sison for intervenor A.T. Abesamis.

NARVASA, J.:
Challenged in this special civil action of certiorari and prohibition by a private
corporation known as the Bataan Shipyard and Engineering Co., Inc. are: (1)
Executive Orders Numbered 1 and 2, promulgated by President Corazon C.
Aquino on February 28, 1986 and March 12, 1986, respectively, and (2) the
sequestration, takeover, and other orders issued, and acts done, in accordance
with said executive orders by the Presidential Commission on Good Government
and/or its Commissioners and agents, affecting said corporation.
1. The Sequestration, Takeover, and Other Orders Complained of
a. The Basic Sequestration Order
The sequestration order which, in the view of the petitioner corporation, initiated all
its misery was issued on April 14, 1986 by Commissioner Mary Concepcion
Bautista. It was addressed to three of the agents of the Commission, hereafter
simply referred to as PCGG. It reads as follows:
RE: SEQUESTRATION ORDER
By virtue of the powers vested in the Presidential Commission on Good
Government, by authority of the President of the Philippines, you are hereby
directed to sequester the following companies.
1. Bataan Shipyard and Engineering Co., Inc. (Engineering Island Shipyard and
Mariveles Shipyard)
2. Baseco Quarry
3. Philippine Jai-Alai Corporation
4. Fidelity Management Co., Inc.
5. Romson Realty, Inc.
6. Trident Management Co.
7. New Trident Management
8. Bay Transport
9. And all affiliate companies of Alfredo "Bejo" Romualdez
You are hereby ordered:
1. To implement this sequestration order with a minimum disruption of these
companies' business activities.
2. To ensure the continuity of these companies as going concerns, the care and
maintenance of these assets until such time that the Office of the President through
the Commission on Good Government should decide otherwise.
3. To report to the Commission on Good Government periodically.
Further, you are authorized to request for Military/Security Support from the
Military/Police authorities, and such other acts essential to the achievement of this
sequestration order. 1
b. Order for Production of Documents
On the strength of the above sequestration order, Mr. Jose M. Balde, acting for the
PCGG, addressed a letter dated April 18, 1986 to the President and other officers
of petitioner firm, reiterating an earlier request for the production of certain
documents, to wit:
1. Stock Transfer Book
2. Legal documents, such as:
2.1. Articles of Incorporation
2.2. By-Laws
2.3. Minutes of the Annual Stockholders Meeting from 1973 to 1986
2.4. Minutes of the Regular and Special Meetings of the Board of Directors from
1973 to 1986
2.5. Minutes of the Executive Committee Meetings from 1973 to 1986
2.6. Existing contracts with suppliers/contractors/others.
3. Yearly list of stockholders with their corresponding share/stockholdings from
1973 to 1986 duly certified by the Corporate Secretary.
4. Audited Financial Statements such as Balance Sheet, Profit & Loss and others
from 1973 to December 31, 1985.
5. Monthly Financial Statements for the current year up to March 31, 1986.
6. Consolidated Cash Position Reports from January to April 15, 1986.
7. Inventory listings of assets up dated up to March 31, 1986.
8. Updated schedule of Accounts Receivable and Accounts Payable.
9. Complete list of depository banks for all funds with the authorized signatories for
withdrawals thereof.
10. Schedule of company investments and placements. 2
The letter closed with the warning that if the documents were not submitted within
five days, the officers would be cited for "contempt in pursuance with Presidential
Executive Order Nos. 1 and 2."
c. Orders Re Engineer Island
(1) Termination of Contract for Security Services
A third order assailed by petitioner corporation, hereafter referred to simply as
BASECO, is that issued on April 21, 1986 by a Capt. Flordelino B. Zabala, a
member of the task force assigned to carry out the basic sequestration order. He
sent a letter to BASECO's Vice-President for Finance, 3 terminating the contract
for security services within the Engineer Island compound between BASECO and
"Anchor and FAIRWAYS" and "other civilian security agencies," CAPCOM military
personnel having already been assigned to the area,
(2) Change of Mode of Payment of Entry Charges
On July 15, 1986, the same Capt. Zabala issued a Memorandum addressed to
"Truck Owners and Contractors," particularly a "Mr. Buddy Ondivilla National
Marine Corporation," advising of the amendment in part of their contracts with
BASECO in the sense that the stipulated charges for use of the BASECO road
network were made payable "upon entry and not anymore subject to monthly billing
as was originally agreed upon." 4
d. Aborted Contract for Improvement of Wharf at Engineer Island
On July 9, 1986, a PCGG fiscal agent, S. Berenguer, entered into a contract in
behalf of BASECO with Deltamarine Integrated Port Services, Inc., in virtue of
which the latter undertook to introduce improvements costing approximately
P210,000.00 on the BASECO wharf at Engineer Island, allegedly then in poor
condition, avowedly to "optimize its utilization and in return maximize the revenue
which would flow into the government coffers," in consideration of Deltamarine's
being granted "priority in using the improved portion of the wharf ahead of
anybody" and exemption "from the payment of any charges for the use of wharf
including the area where it may install its bagging equipments" "until the
improvement remains in a condition suitable for port operations." 5 It seems
however that this contract was never consummated. Capt. Jorge B. Siacunco,
"Head- (PCGG) BASECO Management Team," advised Deltamarine by letter
dated July 30, 1986 that "the new management is not in a position to honor the
said contract" and thus "whatever improvements * * (may be introduced) shall be
deemed unauthorized * * and shall be at * * (Deltamarine's) own risk." 6
e. Order for Operation of Sesiman Rock Quarry, Mariveles, Bataan
By Order dated June 20, 1986, Commissioner Mary Bautista first directed a PCGG
agent, Mayor Melba O. Buenaventura, "to plan and implement progress towards
maximizing the continuous operation of the BASECO Sesiman Rock Quarry * * by
conventional methods;" but afterwards, Commissioner Bautista, in representation
of the PCGG, authorized another party, A.T. Abesamis, to operate the quarry,
located at Mariveles, Bataan, an agreement to this effect having been executed by
them on September 17, 1986. 7
f. Order to Dispose of Scrap, etc.
By another Order of Commissioner Bautista, this time dated June 26, 1986, Mayor
Buenaventura was also "authorized to clean and beautify the Company's
compound," and in this connection, to dispose of or sell "metal scraps" and other
materials, equipment and machineries no longer usable, subject to specified
guidelines and safeguards including audit and verification. 8
g. The TAKEOVER Order
By letter dated July 14, 1986, Commissioner Ramon A. Diaz decreed the
provisional takeover by the PCGG of BASECO, "the Philippine Dockyard
Corporation and all their affiliated companies." 9 Diaz invoked the provisions of
Section 3 (c) of Executive Order No. 1, empowering the Commission —
* * To provisionally takeover in the public interest or to prevent its disposal or
dissipation, business enterprises and properties taken over by the government of
the Marcos Administration or by entities or persons close to former President
Marcos, until the transactions leading to such acquisition by the latter can be
disposed of by the appropriate authorities.
A management team was designated to implement the order, headed by Capt.
Siacunco, and was given the following powers:
1. Conducts all aspects of operation of the subject companies;
2. Installs key officers, hires and terminates personnel as necessary;
3. Enters into contracts related to management and operation of the companies;
4. Ensures that the assets of the companies are not dissipated and used effectively
and efficiently; revenues are duly accounted for; and disburses funds only as may
be necessary;
5. Does actions including among others, seeking of military support as may be
necessary, that will ensure compliance to this order;
6. Holds itself fully accountable to the Presidential Commission on Good
Government on all aspects related to this take-over order.
h. Termination of Services of BASECO Officers
Thereafter, Capt. Siacunco, sent letters to Hilario M. Ruiz, Manuel S. Mendoza,
Moises M. Valdez, Gilberto Pasimanero, and Benito R. Cuesta I, advising of the
termination of their services by the PCGG. 10
2. Petitioner's Plea and Postulates
It is the foregoing specific orders and acts of the PCGG and its members and
agents which, to repeat, petitioner BASECO would have this Court nullify. More
particularly, BASECO prays that this Court-
1) declare unconstitutional and void Executive Orders Numbered 1 and 2;
2) annul the sequestration order dated April- 14, 1986, and all other orders
subsequently issued and acts done on the basis thereof, inclusive of the takeover
order of July 14, 1986 and the termination of the services of the BASECO
executives. 11
a. Re Executive Orders No. 1 and 2, and the Sequestration and Takeover Orders
While BASECO concedes that "sequestration without resorting to judicial action,
might be made within the context of Executive Orders Nos. 1 and 2 before March
25, 1986 when the Freedom Constitution was promulgated, under the principle that
the law promulgated by the ruler under a revolutionary regime is the law of the
land, it ceased to be acceptable when the same ruler opted to promulgate the
Freedom Constitution on March 25, 1986 wherein under Section I of the same,
Article IV (Bill of Rights) of the 1973 Constitution was adopted providing, among
others, that "No person shall be deprived of life, liberty and property without due
process of law." (Const., Art. I V, Sec. 1)." 12
It declares that its objection to the constitutionality of the Executive Orders "as well
as the Sequestration Order * * and Takeover Order * * issued purportedly under
the authority of said Executive Orders, rests on four fundamental considerations:
First, no notice and hearing was accorded * * (it) before its properties and business
were taken over; Second, the PCGG is not a court, but a purely investigative
agency and therefore not competent to act as prosecutor and judge in the same
cause; Third, there is nothing in the issuances which envisions any proceeding,
process or remedy by which petitioner may expeditiously challenge the validity of
the takeover after the same has been effected; and Fourthly, being directed against
specified persons, and in disregard of the constitutional presumption of innocence
and general rules and procedures, they constitute a Bill of Attainder." 13
b. Re Order to Produce Documents
It argues that the order to produce corporate records from 1973 to 1986, which it
has apparently already complied with, was issued without court authority and
infringed its constitutional right against self-incrimination, and unreasonable search
and seizure. 14
c. Re PCGG's Exercise of Right of Ownership and Management
BASECO further contends that the PCGG had unduly interfered with its right of
dominion and management of its business affairs by —
1) terminating its contract for security services with Fairways & Anchor, without the
consent and against the will of the contracting parties; and amending the mode of
payment of entry fees stipulated in its Lease Contract with National Stevedoring &
Lighterage Corporation, these acts being in violation of the non-impairment clause
of the constitution; 15
2) allowing PCGG Agent Silverio Berenguer to enter into an "anomalous contract"
with Deltamarine Integrated Port Services, Inc., giving the latter free use of
BASECO premises; 16
3) authorizing PCGG Agent, Mayor Melba Buenaventura, to manage and operate
its rock quarry at Sesiman, Mariveles; 17
4) authorizing the same mayor to sell or dispose of its metal scrap, equipment,
machinery and other materials; 18
5) authorizing the takeover of BASECO, Philippine Dockyard Corporation, and all
their affiliated companies;
6) terminating the services of BASECO executives: President Hilario M. Ruiz; EVP
Manuel S. Mendoza; GM Moises M. Valdez; Finance Mgr. Gilberto Pasimanero;
Legal Dept. Mgr. Benito R. Cuesta I; 19
7) planning to elect its own Board of Directors; 20
8) allowing willingly or unwillingly its personnel to take, steal, carry away from
petitioner's premises at Mariveles * * rolls of cable wires, worth P600,000.00 on
May 11, 1986; 21
9) allowing "indiscriminate diggings" at Engineer Island to retrieve gold bars
supposed to have been buried therein. 22
3. Doubts, Misconceptions regarding Sequestration, Freeze and Takeover Orders
Many misconceptions and much doubt about the matter of sequestration, takeover
and freeze orders have been engendered by misapprehension, or incomplete
comprehension if not indeed downright ignorance of the law governing these
remedies. It is needful that these misconceptions and doubts be dispelled so that
uninformed and useless debates about them may be avoided, and arguments
tainted b sophistry or intellectual dishonesty be quickly exposed and discarded.
Towards this end, this opinion will essay an exposition of the law on the matter. In
the process many of the objections raised by BASECO will be dealt with.
4. The Governing Law
a. Proclamation No. 3
The impugned executive orders are avowedly meant to carry out the explicit
command of the Provisional Constitution, ordained by Proclamation No. 3, 23 that
the President-in the exercise of legislative power which she was authorized to
continue to wield "(until a legislature is elected and convened under a new
Constitution" — "shall give priority to measures to achieve the mandate of the
people," among others to (r)ecover ill-gotten properties amassed by the leaders
and supporters of the previous regime and protect the interest of the people
through orders of sequestration or freezing of assets or accounts." 24
b. Executive Order No. 1
Executive Order No. 1 stresses the "urgent need to recover all ill-gotten wealth,"
and postulates that "vast resources of the government have been amassed by
former President Ferdinand E. Marcos, his immediate family, relatives, and close
associates both here and abroad." 25 Upon these premises, the Presidential
Commission on Good Government was created, 26 "charged with the task of
assisting the President in regard to (certain specified) matters," among which was
precisely-
* * The recovery of all in-gotten wealth accumulated by former President Ferdinand
E. Marcos, his immediate family, relatives, subordinates and close associates,
whether located in the Philippines or abroad, including the takeover or
sequestration of all business enterprises and entities owned or controlled by them,
during his administration, directly or through nominees, by taking undue advantage
of their public office and/or using their powers, authority, influence, connections or
relationship. 27
In relation to the takeover or sequestration that it was authorized to undertake in
the fulfillment of its mission, the PCGG was granted "power and authority" to do
the following particular acts, to wit:
1. To sequester or place or cause to be placed under its control or possession any
building or office wherein any ill-gotten wealth or properties may be found, and any
records pertaining thereto, in order to prevent their destruction, concealment or
disappearance which would frustrate or hamper the investigation or otherwise
prevent the Commission from accomplishing its task.
2. To provisionally take over in the public interest or to prevent the disposal or
dissipation, business enterprises and properties taken over by the government of
the Marcos Administration or by entities or persons close to former President
Marcos, until the transactions leading to such acquisition by the latter can be
disposed of by the appropriate authorities.
3. To enjoin or restrain any actual or threatened commission of acts by any person
or entity that may render moot and academic, or frustrate or otherwise make
ineffectual the efforts of the Commission to carry out its task under this order. 28
So that it might ascertain the facts germane to its objectives, it was granted power
to conduct investigations; require submission of evidence by subpoenae ad
testificandum and duces tecum; administer oaths; punish for contempt. 29 It was
given power also to promulgate such rules and regulations as may be necessary
to carry out the purposes of * * (its creation). 30
c. Executive Order No. 2
Executive Order No. 2 gives additional and more specific data and directions
respecting "the recovery of ill-gotten properties amassed by the leaders and
supporters of the previous regime." It declares that:
1) * * the Government of the Philippines is in possession of evidence showing that
there are assets and properties purportedly pertaining to former Ferdinand E.
Marcos, and/or his wife Mrs. Imelda Romualdez Marcos, their close relatives,
subordinates, business associates, dummies, agents or nominees which had been
or were acquired by them directly or indirectly, through or as a result of the
improper or illegal use of funds or properties owned by the government of the
Philippines or any of its branches, instrumentalities, enterprises, banks or financial
institutions, or by taking undue advantage of their office, authority, influence,
connections or relationship, resulting in their unjust enrichment and causing grave
damage and prejudice to the Filipino people and the Republic of the Philippines:"
and
2) * * said assets and properties are in the form of bank accounts, deposits, trust
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal properties in the
Philippines and in various countries of the world." 31
Upon these premises, the President-
1) froze "all assets and properties in the Philippines in which former President
Marcos and/or his wife, Mrs. Imelda Romualdez Marcos, their close relatives,
subordinates, business associates, dummies, agents, or nominees have any
interest or participation;
2) prohibited former President Ferdinand Marcos and/or his wife * *, their close
relatives, subordinates, business associates, duties, agents, or nominees from
transferring, conveying, encumbering, concealing or dissipating said assets or
properties in the Philippines and abroad, pending the outcome of appropriate
proceedings in the Philippines to determine whether any such assets or properties
were acquired by them through or as a result of improper or illegal use of or the
conversion of funds belonging to the Government of the Philippines or any of its
branches, instrumentalities, enterprises, banks or financial institutions, or by taking
undue advantage of their official position, authority, relationship, connection or
influence to unjustly enrich themselves at the expense and to the grave damage
and prejudice of the Filipino people and the Republic of the Philippines;
3) prohibited "any person from transferring, conveying, encumbering or otherwise
depleting or concealing such assets and properties or from assisting or taking part
in their transfer, encumbrance, concealment or dissipation under pain of such
penalties as are prescribed by law;" and
4) required "all persons in the Philippines holding such assets or properties,
whether located in the Philippines or abroad, in their names as nominees, agents
or trustees, to make full disclosure of the same to the Commission on Good
Government within thirty (30) days from publication of * (the) Executive Order, * *.
32
d. Executive Order No. 14
A third executive order is relevant: Executive Order No. 14, 33 by which the PCGG
is empowered, "with the assistance of the Office of the Solicitor General and other
government agencies, * * to file and prosecute all cases investigated by it * * as
may be warranted by its findings." 34 All such cases, whether civil or criminal, are
to be filed "with the Sandiganbayan which shall have exclusive and original
jurisdiction thereof." 35 Executive Order No. 14 also pertinently provides that civil
suits for restitution, reparation of damages, or indemnification for consequential
damages, forfeiture proceedings provided for under Republic Act No. 1379, or any
other civil actions under the Civil Code or other existing laws, in connection with *
* (said Executive Orders Numbered 1 and 2) may be filed separately from and
proceed independently of any criminal proceedings and may be proved by a
preponderance of evidence;" and that, moreover, the "technical rules of procedure
and evidence shall not be strictly applied to* * (said)civil cases." 36
5. Contemplated Situations
The situations envisaged and sought to be governed are self-evident, these being:
1) that "(i)ll-gotten properties (were) amassed by the leaders and supporters of the
previous regime"; 37
a) more particularly, that ill-gotten wealth (was) accumulated by former President
Ferdinand E. Marcos, his immediate family, relatives, subordinates and close
associates, * * located in the Philippines or abroad, * * (and) business enterprises
and entities (came to be) owned or controlled by them, during * * (the Marcos)
administration, directly or through nominees, by taking undue advantage of their
public office and/or using their powers, authority, influence, Connections or
relationship; 38
b) otherwise stated, that "there are assets and properties purportedly pertaining to
former President Ferdinand E. Marcos, and/or his wife Mrs. Imelda Romualdez
Marcos, their close relatives, subordinates, business associates, dummies, agents
or nominees which had been or were acquired by them directly or indirectly,
through or as a result of the improper or illegal use of funds or properties owned
by the Government of the Philippines or any of its branches, instrumentalities,
enterprises, banks or financial institutions, or by taking undue advantage of their
office, authority, influence, connections or relationship, resulting in their unjust
enrichment and causing grave damage and prejudice to the Filipino people and
the Republic of the Philippines"; 39
c) that "said assets and properties are in the form of bank accounts. deposits, trust.
accounts, shares of stocks, buildings, shopping centers, condominiums, mansions,
residences, estates, and other kinds of real and personal properties in the
Philippines and in various countries of the world;" 40 and
2) that certain "business enterprises and properties (were) taken over by the
government of the Marcos Administration or by entities or persons close to former
President Marcos. 41
6. Government's Right and Duty to Recover All Ill-gotten Wealth
There can be no debate about the validity and eminent propriety of the
Government's plan "to recover all ill-gotten wealth."
Neither can there be any debate about the proposition that assuming the above
described factual premises of the Executive Orders and Proclamation No. 3 to be
true, to be demonstrable by competent evidence, the recovery from Marcos, his
family and his dominions of the assets and properties involved, is not only a right
but a duty on the part of Government.
But however plain and valid that right and duty may be, still a balance must be
sought with the equally compelling necessity that a proper respect be accorded
and adequate protection assured, the fundamental rights of private property and
free enterprise which are deemed pillars of a free society such as ours, and to
which all members of that society may without exception lay claim.
* * Democracy, as a way of life enshrined in the Constitution, embraces as its
necessary components freedom of conscience, freedom of expression, and
freedom in the pursuit of happiness. Along with these freedoms are included
economic freedom and freedom of enterprise within reasonable bounds and under
proper control. * * Evincing much concern for the protection of property, the
Constitution distinctly recognizes the preferred position which real estate has
occupied in law for ages. Property is bound up with every aspect of social life in a
democracy as democracy is conceived in the Constitution. The Constitution
realizes the indispensable role which property, owned in reasonable quantities and
used legitimately, plays in the stimulation to economic effort and the formation and
growth of a solid social middle class that is said to be the bulwark of democracy
and the backbone of every progressive and happy country. 42
a. Need of Evidentiary Substantiation in Proper Suit
Consequently, the factual premises of the Executive Orders cannot simply be
assumed. They will have to be duly established by adequate proof in each case,
in a proper judicial proceeding, so that the recovery of the ill-gotten wealth may be
validly and properly adjudged and consummated; although there are some who
maintain that the fact-that an immense fortune, and "vast resources of the
government have been amassed by former President Ferdinand E. Marcos, his
immediate family, relatives, and close associates both here and abroad," and they
have resorted to all sorts of clever schemes and manipulations to disguise and
hide their illicit acquisitions-is within the realm of judicial notice, being of so
extensive notoriety as to dispense with proof thereof, Be this as it may, the
requirement of evidentiary substantiation has been expressly acknowledged, and
the procedure to be followed explicitly laid down, in Executive Order No. 14.
b. Need of Provisional Measures to Collect and Conserve Assets Pending Suits
Nor may it be gainsaid that pending the institution of the suits for the recovery of
such "ill-gotten wealth" as the evidence at hand may reveal, there is an obvious
and imperative need for preliminary, provisional measures to prevent the
concealment, disappearance, destruction, dissipation, or loss of the assets and
properties subject of the suits, or to restrain or foil acts that may render moot and
academic, or effectively hamper, delay, or negate efforts to recover the same.
7. Provisional Remedies Prescribed by Law
To answer this need, the law has prescribed three (3) provisional remedies. These
are: (1) sequestration; (2) freeze orders; and (3) provisional takeover.
Sequestration and freezing are remedies applicable generally to unearthed
instances of "ill-gotten wealth." The remedy of "provisional takeover" is peculiar to
cases where "business enterprises and properties (were) taken over by the
government of the Marcos Administration or by entities or persons close to former
President Marcos." 43
a. Sequestration
By the clear terms of the law, the power of the PCGG to sequester property claimed
to be "ill-gotten" means to place or cause to be placed under its possession or
control said property, or any building or office wherein any such property and any
records pertaining thereto may be found, including "business enterprises and
entities,"-for the purpose of preventing the destruction, concealment or dissipation
of, and otherwise conserving and preserving, the same-until it can be determined,
through appropriate judicial proceedings, whether the property was in truth will-
gotten," i.e., acquired through or as a result of improper or illegal use of or the
conversion of funds belonging to the Government or any of its branches,
instrumentalities, enterprises, banks or financial institutions, or by taking undue
advantage of official position, authority relationship, connection or influence,
resulting in unjust enrichment of the ostensible owner and grave damage and
prejudice to the State. 44 And this, too, is the sense in which the term is commonly
understood in other jurisdictions. 45
b. "Freeze Order"
A "freeze order" prohibits the person having possession or control of property
alleged to constitute "ill-gotten wealth" "from transferring, conveying, encumbering
or otherwise depleting or concealing such property, or from assisting or taking part
in its transfer, encumbrance, concealment, or dissipation." 46 In other words, it
commands the possessor to hold the property and conserve it subject to the orders
and disposition of the authority decreeing such freezing. In this sense, it is akin to
a garnishment by which the possessor or ostensible owner of property is enjoined
not to deliver, transfer, or otherwise dispose of any effects or credits in his
possession or control, and thus becomes in a sense an involuntary depositary
thereof. 47
c. Provisional Takeover
In providing for the remedy of "provisional takeover," the law acknowledges the
apparent distinction between "ill gotten" "business enterprises and entities" (going
concerns, businesses in actual operation), generally, as to which the remedy of
sequestration applies, it being necessarily inferred that the remedy entails no
interference, or the least possible interference with the actual management and
operations thereof; and "business enterprises which were taken over by the
government government of the Marcos Administration or by entities or persons
close to him," in particular, as to which a "provisional takeover" is authorized, "in
the public interest or to prevent disposal or dissipation of the enterprises." 48 Such
a "provisional takeover" imports something more than sequestration or freezing,
more than the placing of the business under physical possession and control, albeit
without or with the least possible interference with the management and carrying
on of the business itself. In a "provisional takeover," what is taken into custody is
not only the physical assets of the business enterprise or entity, but the business
operation as well. It is in fine the assumption of control not only over things, but
over operations or on- going activities. But, to repeat, such a "provisional takeover"
is allowed only as regards "business enterprises * * taken over by the government
of the Marcos Administration or by entities or persons close to former President
Marcos."
d. No Divestment of Title Over Property Seized
It may perhaps be well at this point to stress once again the provisional, contingent
character of the remedies just described. Indeed the law plainly qualifies the
remedy of take-over by the adjective, "provisional." These remedies may be
resorted to only for a particular exigency: to prevent in the public interest the
disappearance or dissipation of property or business, and conserve it pending
adjudgment in appropriate proceedings of the primary issue of whether or not the
acquisition of title or other right thereto by the apparent owner was attended by
some vitiating anomaly. None of the remedies is meant to deprive the owner or
possessor of his title or any right to the property sequestered, frozen or taken over
and vest it in the sequestering agency, the Government or other person. This can
be done only for the causes and by the processes laid down by law.
That this is the sense in which the power to sequester, freeze or provisionally take
over is to be understood and exercised, the language of the executive orders in
question leaves no doubt. Executive Order No. 1 declares that the sequestration
of property the acquisition of which is suspect shall last "until the transactions
leading to such acquisition * * can be disposed of by the appropriate authorities."
49 Executive Order No. 2 declares that the assets or properties therein mentioned
shall remain frozen "pending the outcome of appropriate proceedings in the
Philippines to determine whether any such assets or properties were acquired" by
illegal means. Executive Order No. 14 makes clear that judicial proceedings are
essential for the resolution of the basic issue of whether or not particular assets
are "ill-gotten," and resultant recovery thereof by the Government is warranted.
e. State of Seizure Not To Be Indefinitely Maintained; The Constitutional Command
There is thus no cause for the apprehension voiced by BASECO 50 that
sequestration, freezing or provisional takeover is designed to be an end in itself,
that it is the device through which persons may be deprived of their property
branded as "ill-gotten," that it is intended to bring about a permanent, rather than
a passing, transitional state of affairs. That this is not so is quite explicitly declared
by the governing rules.
Be this as it may, the 1987 Constitution should allay any lingering fears about the
duration of these provisional remedies. Section 26 of its Transitory Provisions, 51
lays down the relevant rule in plain terms, apart from extending ratification or
confirmation (although not really necessary) to the institution by presidential fiat of
the remedy of sequestration and freeze orders:
SEC. 26. The authority to issue sequestration or freeze orders under Proclamation
No. 3 dated March 25, 1986 in relation to the recovery of ill-gotten wealth shag
remain operative for not more than eighteen months after the ratification of this
Constitution. However, in the national interest, as certified by the President, the
Congress may extend said period.
A sequestration or freeze order shall be issued only upon showing of a prima facie
case. The order and the list of the sequestered or frozen properties shall forthwith
be registered with the proper court. For orders issued before the ratification of this
Constitution, the corresponding judicial action or proceeding shall be filed within
six months from its ratification. For those issued after such ratification, the judicial
action or proceeding shall be commenced within six months from the issuance
thereof.
The sequestration or freeze order is deemed automatically lifted if no judicial action
or proceeding is commenced as herein provided. 52
f. Kinship to Attachment Receivership
As thus described, sequestration, freezing and provisional takeover are akin to the
provisional remedy of preliminary attachment, or receivership. 53 By attachment,
a sheriff seizes property of a defendant in a civil suit so that it may stand as security
for the satisfaction of any judgment that may be obtained, and not disposed of, or
dissipated, or lost intentionally or otherwise, pending the action. 54 By
receivership, property, real or personal, which is subject of litigation, is placed in
the possession and control of a receiver appointed by the Court, who shall
conserve it pending final determination of the title or right of possession over it. 55
All these remedies — sequestration, freezing, provisional, takeover, attachment
and receivership — are provisional, temporary, designed for-particular exigencies,
attended by no character of permanency or finality, and always subject to the
control of the issuing court or agency.
g. Remedies, Non-Judicial
Parenthetically, that writs of sequestration or freeze or takeover orders are not
issued by a court is of no moment. The Solicitor General draws attention to the writ
of distraint and levy which since 1936 the Commissioner of Internal Revenue has
been by law authorized to issue against property of a delinquent taxpayer. 56
BASECO itself declares that it has not manifested "a rigid insistence on
sequestration as a purely judicial remedy * * (as it feels) that the law should not be
ossified to a point that makes it insensitive to change." What it insists on, what it
pronounces to be its "unyielding position, is that any change in procedure, or the
institution of a new one, should conform to due process and the other prescriptions
of the Bill of Rights of the Constitution." 57 It is, to be sure, a proposition on which
there can be no disagreement.
h. Orders May Issue Ex Parte
Like the remedy of preliminary attachment and receivership, as well as delivery of
personal property in replevin suits, sequestration and provisional takeover writs
may issue ex parte. 58 And as in preliminary attachment, receivership, and delivery
of personality, no objection of any significance may be raised to the ex parte
issuance of an order of sequestration, freezing or takeover, given its fundamental
character of temporariness or conditionality; and taking account specially of the
constitutionally expressed "mandate of the people to recover ill-gotten properties
amassed by the leaders and supporters of the previous regime and protect the
interest of the people;" 59 as well as the obvious need to avoid alerting suspected
possessors of "ill-gotten wealth" and thereby cause that disappearance or loss of
property precisely sought to be prevented, and the fact, just as self-evident, that
"any transfer, disposition, concealment or disappearance of said assets and
properties would frustrate, obstruct or hamper the efforts of the Government" at
the just recovery thereof. 60
8. Requisites for Validity
What is indispensable is that, again as in the case of attachment and receivership,
there exist a prima facie factual foundation, at least, for the sequestration, freeze
or takeover order, and adequate and fair opportunity to contest it and endeavor to
cause its negation or nullification. 61
Both are assured under the executive orders in question and the rules and
regulations promulgated by the PCGG.
a. Prima Facie Evidence as Basis for Orders
Executive Order No. 14 enjoins that there be "due regard to the requirements of
fairness and due process." 62 Executive Order No. 2 declares that with respect to
claims on allegedly "ill-gotten" assets and properties, "it is the position of the new
democratic government that President Marcos * * (and other parties affected) be
afforded fair opportunity to contest these claims before appropriate Philippine
authorities." 63 Section 7 of the Commission's Rules and Regulations provides that
sequestration or freeze (and takeover) orders issue upon the authority of at least
two commissioners, based on the affirmation or complaint of an interested party,
or motu proprio when the Commission has reasonable grounds to believe that the
issuance thereof is warranted. 64 A similar requirement is now found in Section
26, Art. XVIII of the 1987 Constitution, which requires that a "sequestration or
freeze order shall be issued only upon showing of a prima facie case." 65
b. Opportunity to Contest
And Sections 5 and 6 of the same Rules and Regulations lay down the procedure
by which a party may seek to set aside a writ of sequestration or freeze order, viz:
SECTION 5. Who may contend.-The person against whom a writ of sequestration
or freeze or hold order is directed may request the lifting thereof in writing, either
personally or through counsel within five (5) days from receipt of the writ or order,
or in the case of a hold order, from date of knowledge thereof.
SECTION 6. Procedure for review of writ or order.-After due hearing or motu
proprio for good cause shown, the Commission may lift the writ or order
unconditionally or subject to such conditions as it may deem necessary, taking into
consideration the evidence and the circumstance of the case. The resolution of the
commission may be appealed by the party concerned to the Office of the President
of the Philippines within fifteen (15) days from receipt thereof.
Parenthetically, even if the requirement for a prima facie showing of "ill- gotten
wealth" were not expressly imposed by some rule or regulation as a condition to
warrant the sequestration or freezing of property contemplated in the executive
orders in question, it would nevertheless be exigible in this jurisdiction in which the
Rule of Law prevails and official acts which are devoid of rational basis in fact or
law, or are whimsical and capricious, are condemned and struck down. 66
9. Constitutional Sanction of Remedies
If any doubt should still persist in the face of the foregoing considerations as to the
validity and propriety of sequestration, freeze and takeover orders, it should be
dispelled by the fact that these particular remedies and the authority of the PCGG
to issue them have received constitutional approbation and sanction. As already
mentioned, the Provisional or "Freedom" Constitution recognizes the power and
duty of the President to enact "measures to achieve the mandate of the people to
* * * (recover ill- gotten properties amassed by the leaders and supporters of the
previous regime and protect the interest of the people through orders of
sequestration or freezing of assets or accounts." And as also already adverted to,
Section 26, Article XVIII of the 1987 Constitution 67 treats of, and ratifies the
"authority to issue sequestration or freeze orders under Proclamation No. 3 dated
March 25, 1986."
The institution of these provisional remedies is also premised upon the State's
inherent police power, regarded, as t lie power of promoting the public welfare by
restraining and regulating the use of liberty and property," 68 and as "the most
essential, insistent and illimitable of powers * * in the promotion of general welfare
and the public interest," 69 and said to be co-extensive with self-protection and * *
not inaptly termed (also) the'law of overruling necessity." " 70
10. PCGG not a "Judge"; General Functions
It should also by now be reasonably evident from what has thus far been said that
the PCGG is not, and was never intended to act as, a judge. Its general function is
to conduct investigations in order to collect evidence establishing instances of "ill-
gotten wealth;" issue sequestration, and such orders as may be warranted by the
evidence thus collected and as may be necessary to preserve and conserve the
assets of which it takes custody and control and prevent their disappearance, loss
or dissipation; and eventually file and prosecute in the proper court of competent
jurisdiction all cases investigated by it as may be warranted by its findings. It does
not try and decide, or hear and determine, or adjudicate with any character of
finality or compulsion, cases involving the essential issue of whether or not
property should be forfeited and transferred to the State because "ill-gotten" within
the meaning of the Constitution and the executive orders. This function is reserved
to the designated court, in this case, the Sandiganbayan. 71 There can therefore
be no serious regard accorded to the accusation, leveled by BASECO, 72 that the
PCGG plays the perfidious role of prosecutor and judge at the same time.
11. Facts Preclude Grant of Relief to Petitioner
Upon these premises and reasoned conclusions, and upon the facts disclosed by
the record, hereafter to be discussed, the petition cannot succeed. The writs of
certiorari and prohibition prayed for will not be issued.
The facts show that the corporation known as BASECO was owned or controlled
by President Marcos "during his administration, through nominees, by taking
undue advantage of his public office and/or using his powers, authority, or
influence, " and that it was by and through the same means, that BASECO had
taken over the business and/or assets of the National Shipyard and Engineering
Co., Inc., and other government-owned or controlled entities.
12. Organization and Stock Distribution of BASECO
BASECO describes itself in its petition as "a shiprepair and shipbuilding company
* * incorporated as a domestic private corporation * * (on Aug. 30, 1972) by a
consortium of Filipino shipowners and shipping executives. Its main office is at
Engineer Island, Port Area, Manila, where its Engineer Island Shipyard is housed,
and its main shipyard is located at Mariveles Bataan." 73 Its Articles of
Incorporation disclose that its authorized capital stock is P60,000,000.00 divided
into 60,000 shares, of which 12,000 shares with a value of P12,000,000.00 have
been subscribed, and on said subscription, the aggregate sum of P3,035,000.00
has been paid by the incorporators. 74 The same articles Identify the incorporators,
numbering fifteen (15), as follows: (1) Jose A. Rojas, (2) Anthony P. Lee, (3)
Eduardo T. Marcelo, (4) Jose P. Fernandez, (5) Generoso Tanseco, (6) Emilio T.
Yap, (7) Antonio M. Ezpeleta, (8) Zacarias Amante, (9) Severino de la Cruz, (10)
Jose Francisco, (11) Dioscoro Papa, (12) Octavio Posadas, (13) Manuel S.
Mendoza, (14) Magiliw Torres, and (15) Rodolfo Torres.
By 1986, however, of these fifteen (15) incorporators, six (6) had ceased to be
stockholders, namely: (1) Generoso Tanseco, (2) Antonio Ezpeleta, (3) Zacarias
Amante, (4) Octavio Posadas, (5) Magiliw Torres, and (6) Rodolfo Torres. As of
this year, 1986, there were twenty (20) stockholders listed in BASECO's Stock and
Transfer Book. 75 Their names and the number of shares respectively held by
them are as follows:

1. Jose A. Rojas 1,248 shares

2. Severino G. de la Cruz 1,248 shares
3. Emilio T. Yap 2,508 shares
4. Jose Fernandez 1,248 shares
5. Jose Francisco 128 shares
6. Manuel S. Mendoza 96 shares
7. Anthony P. Lee 1,248 shares
8. Hilario M. Ruiz 32 shares
9. Constante L. Fariñas 8 shares
10. Fidelity Management, Inc. 65,882 shares
11. Trident Management 7,412 shares
12. United Phil. Lines 1,240 shares
13. Renato M. Tanseco 8 shares
14. Fidel Ventura 8 shares
15. Metro Bay Drydock 136,370 shares
16. Manuel Jacela 1 share
17. Jonathan G. Lu 1 share
18. Jose J. Tanchanco 1 share
19. Dioscoro Papa 128 shares
20. Edward T. Marcelo 4 shares
TOTAL 218,819 shares.

13 Acquisition of NASSCO by BASECO

Barely six months after its incorporation, BASECO acquired from National
Shipyard & Steel Corporation, or NASSCO, a government-owned or controlled
corporation, the latter's shipyard at Mariveles, Bataan, known as the Bataan
National Shipyard (BNS), and — except for NASSCO's Engineer Island Shops
and certain equipment of the BNS, consigned for future negotiation — all its
structures, buildings, shops, quarters, houses, plants, equipment and facilities, in
stock or in transit. This it did in virtue of a "Contract of Purchase and Sale with
Chattel Mortgage" executed on February 13, 1973. The price was
P52,000,000.00. As partial payment thereof, BASECO delivered to NASSCO a
cash bond of P11,400,000.00, convertible into cash within twenty-four (24) hours
from completion of the inventory undertaken pursuant to the contract. The
balance of P41,600,000.00, with interest at seven percent (7%) per annum,
compounded semi-annually, was stipulated to be paid in equal semi-annual
installments over a term of nine (9) years, payment to commence after a grace
period of two (2) years from date of turnover of the shipyard to BASECO. 76
14. Subsequent Reduction of Price; Intervention of Marcos
Unaccountably, the price of P52,000,000.00 was reduced by more than one-half,
to P24,311,550.00, about eight (8) months later. A document to this effect was
executed on October 9, 1973, entitled "Memorandum Agreement," and was
signed for NASSCO by Arturo Pacificador, as Presiding Officer of the Board of
Directors, and David R. Ines, as General Manager. 77 This agreement bore, at
the top right corner of the first page, the word "APPROVED" in the handwriting of
President Marcos, followed by his usual full signature. The document recited that
a down payment of P5,862,310.00 had been made by BASECO, and the balance
of P19,449,240.00 was payable in equal semi-annual installments over nine (9)
years after a grace period of two (2) years, with interest at 7% per annum.
15. Acquisition of 300 Hectares from Export Processing Zone Authority
On October 1, 1974, BASECO acquired three hundred (300) hectares of land in
Mariveles from the Export Processing Zone Authority for the price of
P10,047,940.00 of which, as set out in the document of sale, P2,000.000.00 was
paid upon its execution, and the balance stipulated to be payable in installments.
78
16. Acquisition of Other Assets of NASSCO; Intervention of Marcos
Some nine months afterwards, or on July 15, 1975, to be precise, BASECO,
again with the intervention of President Marcos, acquired ownership of the rest of
the assets of NASSCO which had not been included in the first two (2) purchase
documents. This was accomplished by a deed entitled "Contract of Purchase and
Sale," 79 which, like the Memorandum of Agreement dated October 9, 1973
supra also bore at the upper right-hand corner of its first page, the handwritten
notation of President Marcos reading, "APPROVED, July 29, 1973," and
underneath it, his usual full signature. Transferred to BASECO were NASSCO's
"ownership and all its titles, rights and interests over all equipment and facilities
including structures, buildings, shops, quarters, houses, plants and expendable
or semi-expendable assets, located at the Engineer Island, known as the
Engineer Island Shops, including all the equipment of the Bataan National
Shipyards (BNS) which were excluded from the sale of NBS to BASECO but
retained by BASECO and all other selected equipment and machineries of
NASSCO at J. Panganiban Smelting Plant." In the same deed, NASSCO
committed itself to cooperate with BASECO for the acquisition from the National
Government or other appropriate Government entity of Engineer Island.
Consideration for the sale was set at P5,000,000.00; a down payment of
P1,000,000.00 appears to have been made, and the balance was stipulated to be
paid at 7% interest per annum in equal semi annual installments over a term of
nine (9) years, to commence after a grace period of two (2) years. Mr. Arturo
Pacificador again signed for NASSCO, together with the general manager, Mr.
David R. Ines.
17. Loans Obtained
It further appears that on May 27, 1975 BASECO obtained a loan from the NDC,
taken from "the last available Japanese war damage fund of $19,000,000.00," to
pay for "Japanese made heavy equipment (brand new)." 80 On September 3,
1975, it got another loan also from the NDC in the amount of P30,000,000.00
(id.). And on January 28, 1976, it got still another loan, this time from the GSIS, in
the sum of P12,400,000.00. 81 The claim has been made that not a single
centavo has been paid on these loans. 82
18. Reports to President Marcos
In September, 1977, two (2) reports were submitted to President Marcos
regarding BASECO. The first was contained in a letter dated September 5, 1977
of Hilario M. Ruiz, BASECO president. 83 The second was embodied in a
confidential memorandum dated September 16, 1977 of Capt. A.T. Romualdez.
84 They further disclose the fine hand of Marcos in the affairs of BASECO, and
that of a Romualdez, a relative by affinity.
a. BASECO President's Report
In his letter of September 5, 1977, BASECO President Ruiz reported to Marcos
that there had been "no orders or demands for ship construction" for some time
and expressed the fear that if that state of affairs persisted, BASECO would not
be able to pay its debts to the Government, which at the time stood at the not
inconsiderable amount of P165,854,000.00. 85 He suggested that, to "save the
situation," there be a "spin-off (of their) shipbuilding activities which shall be
handled exclusively by an entirely new corporation to be created;" and towards
this end, he informed Marcos that BASECO was —
* * inviting NDC and LUSTEVECO to participate by converting the NDC
shipbuilding loan to BASECO amounting to P341.165M and assuming and
converting a portion of BASECO's shipbuilding loans from REPACOM amounting
to P52.2M or a total of P83.365M as NDC's equity contribution in the new
corporation. LUSTEVECO will participate by absorbing and converting a portion
of the REPACOM loan of Bay Shipyard and Drydock, Inc., amounting to
P32.538M. 86
b. Romualdez' Report
Capt. A.T. Romualdez' report to the President was submitted eleven (11) days
later. It opened with the following caption:
MEMORANDUM:
FOR : The President
SUBJECT: An Evaluation and Re-assessment of a Performance of a Mission
FROM: Capt. A.T. Romualdez.
Like Ruiz, Romualdez wrote that BASECO faced great difficulties in meeting its
loan obligations due chiefly to the fact that "orders to build ships as expected * *
did not materialize."
He advised that five stockholders had "waived and/or assigned their holdings
inblank," these being: (1) Jose A. Rojas, (2) Severino de la Cruz, (3) Rodolfo
Torres, (4) Magiliw Torres, and (5) Anthony P. Lee. Pointing out that "Mr. Magiliw
Torres * * is already dead and Mr. Jose A. Rojas had a major heart attack," he
made the following quite revealing, and it may be added, quite cynical and
indurate recommendation, to wit:
* * (that) their replacements (be effected) so we can register their names in the
stock book prior to the implementation of your instructions to pass a board
resolution to legalize the transfers under SEC regulations;
2. By getting their replacements, the families cannot question us later on; and
3. We will owe no further favors from them. 87
He also transmitted to Marcos, together with the report, the following documents:
88
1. Stock certificates indorsed and assigned in blank with assignments and
waivers; 89
2. The articles of incorporation, the amended articles, and the by-laws of BASECO;
3. Deed of Sales, wherein NASSCO sold to BASECO four (4) parcels of land in
"Engineer Island", Port Area, Manila;
4. Transfer Certificate of Title No. 124822 in the name of BASECO, covering
"Engineer Island";
5. Contract dated October 9, 1973, between NASSCO and BASECO re-structure
and equipment at Mariveles, Bataan;
6. Contract dated July 16, 1975, between NASSCO and BASECO re-structure and
equipment at Engineer Island, Port Area Manila;
7. Contract dated October 1, 1974, between EPZA and BASECO re 300 hectares
of land at Mariveles, Bataan;
8. List of BASECO's fixed assets;
9. Loan Agreement dated September 3, 1975, BASECO's loan from NDC of
P30,000,000.00;
10. BASECO-REPACOM Agreement dated May 27, 1975;
11. GSIS loan to BASECO dated January 28, 1976 of P12,400,000.00 for the
housing facilities for BASECO's rank-and-file employees. 90
Capt. Romualdez also recommended that BASECO's loans be restructured "until
such period when BASECO will have enough orders for ships in order for the
company to meet loan obligations," and that —
An LOI may be issued to government agencies using floating equipment, that a
linkage scheme be applied to a certain percent of BASECO's net profit as part of
BASECO's amortization payments to make it justifiable for you, Sir. 91
It is noteworthy that Capt. A.T. Romualdez does not appear to be a stockholder or
officer of BASECO, yet he has presented a report on BASECO to President
Marcos, and his report demonstrates intimate familiarity with the firm's affairs and
problems.
19. Marcos' Response to Reports
President Marcos lost no time in acting on his subordinates' recommendations,
particularly as regards the "spin-off" and the "linkage scheme" relative to
"BASECO's amortization payments."
a. Instructions re "Spin-Off"
Under date of September 28, 1977, he addressed a Memorandum to Secretary
Geronimo Velasco of the Philippine National Oil Company and Chairman
Constante Fariñas of the National Development Company, directing them "to
participate in the formation of a new corporation resulting from the spin-off of the
shipbuilding component of BASECO along the following guidelines:
a. Equity participation of government shall be through LUSTEVECO and NDC in
the amount of P115,903,000 consisting of the following obligations of BASECO
which are hereby authorized to be converted to equity of the said new corporation,
to wit:
1. NDC P83,865,000 (P31.165M loan & P52.2M Reparation)
2. LUSTEVECO P32,538,000 (Reparation)
b. Equity participation of government shall be in the form of non- voting shares.
For immediate compliance. 92
Mr. Marcos' guidelines were promptly complied with by his subordinates. Twenty-
two (22) days after receiving their president's memorandum, Messrs. Hilario M.
Ruiz, Constante L. Fariñas and Geronimo Z. Velasco, in representation of their
respective corporations, executed a PRE-INCORPORATION AGREEMENT dated
October 20, 1977. 93 In it, they undertook to form a shipbuilding corporation to be
known as "PHIL-ASIA SHIPBUILDING CORPORATION," to bring to realization
their president's instructions. It would seem that the new corporation ultimately
formed was actually named "Philippine Dockyard Corporation (PDC)." 94
b. Letter of Instructions No. 670
Mr. Marcos did not forget Capt. Romualdez' recommendation for a letter of
instructions. On February 14, 1978, he issued Letter of Instructions No. 670
addressed to the Reparations Commission REPACOM the Philippine National Oil
Company (PNOC), the Luzon Stevedoring Company (LUSTEVECO), and the
National Development Company (NDC). What is commanded therein is
summarized by the Solicitor General, with pithy and not inaccurate observations
as to the effects thereof (in italics), as follows:
* * 1) the shipbuilding equipment procured by BASECO through reparations be
transferred to NDC subject to reimbursement by NDC to BASECO (of) the amount
of s allegedly representing the handling and incidental expenses incurred by
BASECO in the installation of said equipment (so instead of NDC getting paid on
its loan to BASECO, it was made to pay BASECO instead the amount of
P18.285M); 2) the shipbuilding equipment procured from reparations through
EPZA, now in the possession of BASECO and BSDI (Bay Shipyard & Drydocking,
Inc.) be transferred to LUSTEVECO through PNOC; and 3) the shipbuilding
equipment (thus) transferred be invested by LUSTEVECO, acting through PNOC
and NDC, as the government's equity participation in a shipbuilding corporation to
be established in partnership with the private sector.
xxx xxx xxx
And so, through a simple letter of instruction and memorandum, BASECO's loan
obligation to NDC and REPACOM * * in the total amount of P83.365M and BSD's
REPACOM loan of P32.438M were wiped out and converted into non-voting
preferred shares. 95
20. Evidence of Marcos'
Ownership of BASECO
It cannot therefore be gainsaid that, in the context of the proceedings at bar, the
actuality of the control by President Marcos of BASECO has been sufficiently
shown.
Other evidence submitted to the Court by the Solicitor General proves that
President Marcos not only exercised control over BASECO, but also that he
actually owns well nigh one hundred percent of its outstanding stock.
It will be recalled that according to petitioner- itself, as of April 23, 1986, there were
218,819 shares of stock outstanding, ostensibly owned by twenty (20)
stockholders. 96 Four of these twenty are juridical persons: (1) Metro Bay Drydock,
recorded as holding 136,370 shares; (2) Fidelity Management, Inc., 65,882 shares;
(3) Trident Management, 7,412 shares; and (4) United Phil. Lines, 1,240 shares.
The first three corporations, among themselves, own an aggregate of 209,664
shares of BASECO stock, or 95.82% of the outstanding stock.
Now, the Solicitor General has drawn the Court's attention to the intriguing
circumstance that found in Malacanang shortly after the sudden flight of President
Marcos, were certificates corresponding to more than ninety-five percent (95%) of
all the outstanding shares of stock of BASECO, endorsed in blank, together with
deeds of assignment of practically all the outstanding shares of stock of the three
(3) corporations above mentioned (which hold 95.82% of all BASECO stock),
signed by the owners thereof although not notarized. 97
More specifically, found in Malacanang (and now in the custody of the PCGG)
were:
1) the deeds of assignment of all 600 outstanding shares of Fidelity Management
Inc. — which supposedly owns as aforesaid 65,882 shares of BASECO stock;
2) the deeds of assignment of 2,499,995 of the 2,500,000 outstanding shares of
Metro Bay Drydock Corporation — which allegedly owns 136,370 shares of
BASECO stock;
3) the deeds of assignment of 800 outstanding shares of Trident Management Co.,
Inc. — which allegedly owns 7,412 shares of BASECO stock, assigned in blank;
98 and
4) stock certificates corresponding to 207,725 out of the 218,819 outstanding
shares of BASECO stock; that is, all but 5 % — all endorsed in blank. 99
While the petitioner's counsel was quick to dispute this asserted fact, assuring this
Court that the BASECO stockholders were still in possession of their respective
stock certificates and had "never endorsed * * them in blank or to anyone else,"
100 that denial is exposed by his own prior and subsequent recorded statements
as a mere gesture of defiance rather than a verifiable factual declaration.
By resolution dated September 25, 1986, this Court granted BASECO's counsel a
period of 10 days "to SUBMIT, as undertaken by him, * * the certificates of stock
issued to the stockholders of * * BASECO as of April 23, 1986, as listed in Annex
'P' of the petition.' 101 Counsel thereafter moved for extension; and in his motion
dated October 2, 1986, he declared inter alia that "said certificates of stock are in
the possession of third parties, among whom being the respondents themselves *
* and petitioner is still endeavoring to secure copies thereof from them." 102 On
the same day he filed another motion praying that he be allowed "to secure copies
of the Certificates of Stock in the name of Metro Bay Drydock, Inc., and of all other
Certificates, of Stock of petitioner's stockholders in possession of respondents."
103
In a Manifestation dated October 10, 1986,, 104 the Solicitor General not
unreasonably argued that counsel's aforestated motion to secure copies of the
stock certificates "confirms the fact that stockholders of petitioner corporation are
not in possession of * * (their) certificates of stock," and the reason, according to
him, was "that 95% of said shares * * have been endorsed in blank and found in
Malacañang after the former President and his family fled the country." To this
manifestation BASECO's counsel replied on November 5, 1986, as already
mentioned, Stubbornly insisting that the firm's stockholders had not really assigned
their stock. 105
In view of the parties' conflicting declarations, this Court resolved on November 27,
1986 among other things "to require * * the petitioner * * to deposit upon proper
receipt with Clerk of Court Juanito Ranjo the originals of the stock certificates
alleged to be in its possession or accessible to it, mentioned and described in
Annex 'P' of its petition, (and other pleadings) * * within ten (10) days from notice."
106 In a motion filed on December 5, 1986, 107 BASECO's counsel made the
statement, quite surprising in the premises, that "it will negotiate with the owners
(of the BASECO stock in question) to allow petitioner to borrow from them, if
available, the certificates referred to" but that "it needs a more sufficient time
therefor" (sic). BASECO's counsel however eventually had to confess inability to
produce the originals of the stock certificates, putting up the feeble excuse that
while he had "requested the stockholders to allow * * (him) to borrow said
certificates, * * some of * * (them) claimed that they had delivered the certificates
to third parties by way of pledge and/or to secure performance of obligations, while
others allegedly have entrusted them to third parties in view of last national
emergency." 108 He has conveniently omitted, nor has he offered to give the
details of the transactions adverted to by him, or to explain why he had not
impressed on the supposed stockholders the primordial importance of convincing
this Court of their present custody of the originals of the stock, or if he had done
so, why the stockholders are unwilling to agree to some sort of arrangement so
that the originals of their certificates might at the very least be exhibited to the
Court. Under the circumstances, the Court can only conclude that he could not get
the originals from the stockholders for the simple reason that, as the Solicitor
General maintains, said stockholders in truth no longer have them in their
possession, these having already been assigned in blank to then President
Marcos.
21. Facts Justify Issuance of Sequestration and Takeover Orders
In the light of the affirmative showing by the Government that, prima facie at least,
the stockholders and directors of BASECO as of April, 1986 109 were mere
"dummies," nominees or alter egos of President Marcos; at any rate, that they are
no longer owners of any shares of stock in the corporation, the conclusion cannot
be avoided that said stockholders and directors have no basis and no standing
whatever to cause the filing and prosecution of the instant proceeding; and to grant
relief to BASECO, as prayed for in the petition, would in effect be to restore the
assets, properties and business sequestered and taken over by the PCGG to
persons who are "dummies," nominees or alter egos of the former president.
From the standpoint of the PCGG, the facts herein stated at some length do indeed
show that the private corporation known as BASECO was "owned or controlled by
former President Ferdinand E. Marcos * * during his administration, * * through
nominees, by taking advantage of * * (his) public office and/or using * * (his)
powers, authority, influence * *," and that NASSCO and other property of the
government had been taken over by BASECO; and the situation justified the
sequestration as well as the provisional takeover of the corporation in the public
interest, in accordance with the terms of Executive Orders No. 1 and 2, pending
the filing of the requisite actions with the Sandiganbayan to cause divestment of
title thereto from Marcos, and its adjudication in favor of the Republic pursuant to
Executive Order No. 14.
As already earlier stated, this Court agrees that this assessment of the facts is
correct; accordingly, it sustains the acts of sequestration and takeover by the
PCGG as being in accord with the law, and, in view of what has thus far been set
out in this opinion, pronounces to be without merit the theory that said acts, and
the executive orders pursuant to which they were done, are fatally defective in not
according to the parties affected prior notice and hearing, or an adequate remedy
to impugn, set aside or otherwise obtain relief therefrom, or that the PCGG had
acted as prosecutor and judge at the same time.
22. Executive Orders Not a Bill of Attainder
Neither will this Court sustain the theory that the executive orders in question are
a bill of attainder. 110 "A bill of attainder is a legislative act which inflicts
punishment without judicial trial." 111 "Its essence is the substitution of a legislative
for a judicial determination of guilt." 112
In the first place, nothing in the executive orders can be reasonably construed as
a determination or declaration of guilt. On the contrary, the executive orders,
inclusive of Executive Order No. 14, make it perfectly clear that any judgment of
guilt in the amassing or acquisition of "ill-gotten wealth" is to be handed down by a
judicial tribunal, in this case, the Sandiganbayan, upon complaint filed and
prosecuted by the PCGG. In the second place, no punishment is inflicted by the
executive orders, as the merest glance at their provisions will immediately make
apparent. In no sense, therefore, may the executive orders be regarded as a bill of
attainder.
23. No Violation of Right against Self-Incrimination and Unreasonable Searches
and Seizures
BASECO also contends that its right against self incrimination and unreasonable
searches and seizures had been transgressed by the Order of April 18, 1986 which
required it "to produce corporate records from 1973 to 1986 under pain of contempt
of the Commission if it fails to do so." The order was issued upon the authority of
Section 3 (e) of Executive Order No. 1, treating of the PCGG's power to "issue
subpoenas requiring * * the production of such books, papers, contracts, records,
statements of accounts and other documents as may be material to the
investigation conducted by the Commission, " and paragraph (3), Executive Order
No. 2 dealing with its power to "require all persons in the Philippines holding * *
(alleged "ill-gotten") assets or properties, whether located in the Philippines or
abroad, in their names as nominees, agents or trustees, to make full disclosure of
the same * *." The contention lacks merit.
It is elementary that the right against self-incrimination has no application to
juridical persons.
While an individual may lawfully refuse to answer incriminating questions unless
protected by an immunity statute, it does not follow that a corporation, vested with
special privileges and franchises, may refuse to show its hand when charged with
an abuse ofsuchprivileges * * 113
Relevant jurisprudence is also cited by the Solicitor General. 114
* * corporations are not entitled to all of the constitutional protections which private
individuals have. * * They are not at all within the privilege against self-
incrimination, although this court more than once has said that the privilege runs
very closely with the 4th Amendment's Search and Seizure provisions. It is also
settled that an officer of the company cannot refuse to produce its records in its
possession upon the plea that they will either incriminate him or may incriminate
it." (Oklahoma Press Publishing Co. v. Walling, 327 U.S. 186; emphasis, the
Solicitor General's).
* * The corporation is a creature of the state. It is presumed to be incorporated for
the benefit of the public. It received certain special privileges and franchises, and
holds them subject to the laws of the state and the limitations of its charter. Its
powers are limited by law. It can make no contract not authorized by its charter. Its
rights to act as a corporation are only preserved to it so long as it obeys the laws
of its creation. There is a reserve right in the legislature to investigate its contracts
and find out whether it has exceeded its powers. It would be a strange anomaly to
hold that a state, having chartered a corporation 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. The defense amounts to this, that
an officer of the corporation which is charged with a criminal violation of the statute
may plead the criminality of such corporation as a refusal to produce its books. To
state this proposition is to answer it. While an individual may lawfully refuse to
answer incriminating questions unless protected by an immunity statute, it does
not follow that a corporation, vested with special privileges and franchises may
refuse to show its hand when charged with an abuse of such privileges. (Wilson v.
United States, 55 Law Ed., 771, 780 [emphasis, the Solicitor General's])
At any rate, Executive Order No. 14-A, amending Section 4 of Executive Order No.
14 assures protection to individuals required to produce evidence before the
PCGG against any possible violation of his right against self-incrimination. It gives
them immunity from prosecution on the basis of testimony or information he is
compelled to present. As amended, said Section 4 now provides that —
xxx xxx xxx
The witness may not refuse to comply with the order on the basis of his privilege
against self-incrimination; but no testimony or other information compelled under
the order (or any information directly or indirectly derived from such testimony, or
other information) may be used against the witness in any criminal case, except a
prosecution for perjury, giving a false statement, or otherwise failing to comply with
the order.
The constitutional safeguard against unreasonable searches and seizures finds no
application to the case at bar either. There has been no search undertaken by any
agent or representative of the PCGG, and of course no seizure on the occasion
thereof.
24. Scope and Extent of Powers of the PCGG
One other question remains to be disposed of, that respecting the scope and extent
of the powers that may be wielded by the PCGG with regard to the properties or
businesses placed under sequestration or provisionally taken over. Obviously, it is
not a question to which an answer can be easily given, much less one which will
suffice for every conceivable situation.
a. PCGG May Not Exercise Acts of Ownership
One thing is certain, and should be stated at the outset: the PCGG cannot exercise
acts of dominion over property sequestered, frozen or provisionally taken over. AS
already earlier stressed with no little insistence, the act of sequestration; freezing
or provisional takeover of property does not import or bring about a divestment of
title over said property; does not make the PCGG the owner thereof. In relation to
the property sequestered, frozen or provisionally taken over, the PCGG is a
conservator, not an owner. Therefore, it can not perform acts of strict ownership;
and this is specially true in the situations contemplated by the sequestration rules
where, unlike cases of receivership, for example, no court exercises effective
supervision or can upon due application and hearing, grant authority for the
performance of acts of dominion.
Equally evident is that the resort to the provisional remedies in question should
entail the least possible interference with business operations or activities so that,
in the event that the accusation of the business enterprise being "ill gotten" be not
proven, it may be returned to its rightful owner as far as possible in the same
condition as it was at the time of sequestration.
b. PCGG Has Only Powers of Administration
The PCGG may thus exercise only powers of administration over the property or
business sequestered or provisionally taken over, much like a court-appointed
receiver, 115 such as to bring and defend actions in its own name; receive rents;
collect debts due; pay outstanding debts; and generally do such other acts and
things as may be necessary to fulfill its mission as conservator and administrator.
In this context, it may in addition enjoin or restrain any actual or threatened
commission of acts by any person or entity that may render moot and academic,
or frustrate or otherwise make ineffectual its efforts to carry out its task; punish for
direct or indirect contempt in accordance with the Rules of Court; and seek and
secure the assistance of any office, agency or instrumentality of the government.
116 In the case of sequestered businesses generally (i.e., going concerns,
businesses in current operation), as in the case of sequestered objects, its
essential role, as already discussed, is that of conservator, caretaker, "watchdog"
or overseer. It is not that of manager, or innovator, much less an owner.
c. Powers over Business Enterprises Taken Over by Marcos or Entities or Persons
Close to him; Limitations Thereon
Now, in the special instance of a business enterprise shown by evidence to have
been "taken over by the government of the Marcos Administration or by entities or
persons close to former President Marcos," 117 the PCGG is given power and
authority, as already adverted to, to "provisionally take (it) over in the public interest
or to prevent * * (its) disposal or dissipation;" and since the term is obviously
employed in reference to going concerns, or business enterprises in operation,
something more than mere physical custody is connoted; the PCGG may in this
case exercise some measure of control in the operation, running, or management
of the business itself. But even in this special situation, the intrusion into
management should be restricted to the minimum degree necessary to accomplish
the legislative will, which is "to prevent the disposal or dissipation" of the business
enterprise. There should be no hasty, indiscriminate, unreasoned replacement or
substitution of management officials or change of policies, particularly in respect
of viable establishments. In fact, such a replacement or substitution should be
avoided if at all possible, and undertaken only when justified by demonstrably
tenable grounds and in line with the stated objectives of the PCGG. And it goes
without saying that where replacement of management officers may be called for,
the greatest prudence, circumspection, care and attention - should accompany that
undertaking to the end that truly competent, experienced and honest managers
may be recruited. There should be no role to be played in this area by rank
amateurs, no matter how wen meaning. The road to hell, it has been said, is paved
with good intentions. The business is not to be experimented or played around
with, not run into the ground, not driven to bankruptcy, not fleeced, not ruined. Sight
should never be lost sight of the ultimate objective of the whole exercise, which is
to turn over the business to the Republic, once judicially established to be "ill-
gotten." Reason dictates that it is only under these conditions and circumstances
that the supervision, administration and control of business enterprises
provisionally taken over may legitimately be exercised.
d. Voting of Sequestered Stock; Conditions Therefor
So, too, it is within the parameters of these conditions and circumstances that the
PCGG may properly exercise the prerogative to vote sequestered stock of
corporations, granted to it by the President of the Philippines through a
Memorandum dated June 26, 1986. That Memorandum authorizes the PCGG,
"pending the outcome of proceedings to determine the ownership of * *
(sequestered) shares of stock," "to vote such shares of stock as it may have
sequestered in corporations at all stockholders' meetings called for the election of
directors, declaration of dividends, amendment of the Articles of Incorporation,
etc." The Memorandum should be construed in such a manner as to be consistent
with, and not contradictory of the Executive Orders earlier promulgated on the
same matter. There should be no exercise of the right to vote simply because the
right exists, or because the stocks sequestered constitute the controlling or a
substantial part of the corporate voting power. The stock is not to be voted to
replace directors, or revise the articles or by-laws, or otherwise bring about
substantial changes in policy, program or practice of the corporation except for
demonstrably weighty and defensible grounds, and always in the context of the
stated purposes of sequestration or provisional takeover, i.e., to prevent the
dispersion or undue disposal of the corporate assets. Directors are not to be voted
out simply because the power to do so exists. Substitution of directors is not to be
done without reason or rhyme, should indeed be shunned if at an possible, and
undertaken only when essential to prevent disappearance or wastage of corporate
property, and always under such circumstances as assure that the replacements
are truly possessed of competence, experience and probity.
In the case at bar, there was adequate justification to vote the incumbent directors
out of office and elect others in their stead because the evidence showed prima
facie that the former were just tools of President Marcos and were no longer
owners of any stock in the firm, if they ever were at all. This is why, in its Resolution
of October 28, 1986; 118 this Court declared that —
Petitioner has failed to make out a case of grave abuse or excess of jurisdiction in
respondents' calling and holding of a stockholders' meeting for the election of
directors as authorized by the Memorandum of the President * * (to the PCGG)
dated June 26, 1986, particularly, where as in this case, the government can,
through its designated directors, properly exercise control and management over
what appear to be properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on behalf of BASECO
have failed to show any right or even any shareholding in said corporation.
It must however be emphasized that the conduct of the PCGG nominees in the
BASECO Board in the management of the company's affairs should henceforth be
guided and governed by the norms herein laid down. They should never for a
moment allow themselves to forget that they are conservators, not owners of the
business; they are fiduciaries, trustees, of whom the highest degree of diligence
and rectitude is, in the premises, required.
25. No Sufficient Showing of Other Irregularities
As to the other irregularities complained of by BASECO, i.e., the cancellation or
revision, and the execution of certain contracts, inclusive of the termination of the
employment of some of its executives, 119 this Court cannot, in the present state
of the evidence on record, pass upon them. It is not necessary to do so. The issues
arising therefrom may and will be left for initial determination in the appropriate
action. But the Court will state that absent any showing of any important cause
therefor, it will not normally substitute its judgment for that of the PCGG in these
individual transactions. It is clear however, that as things now stand, the petitioner
cannot be said to have established the correctness of its submission that the acts
of the PCGG in question were done without or in excess of its powers, or with
grave abuse of discretion.
WHEREFORE, the petition is dismissed. The temporary restraining order issued
on October 14, 1986 is lifted.
Yap, Fernan, Paras, Gancayco and Sarmiento, JJ., concur.

Separate Opinions

TEEHANKEE, CJ., concurring:

I fully concur with the masterly opinion of Mr. Justice Narvasa. In the process of
disposing of the issues raised by petitioner BASECO in the case at bar, it
comprehensively discusses the laws and principles governing the Presidential
Commission on Good Government (PCGG) and defines the scope and extent of
its powers in the discharge of its monumental task of recovering the "ill-gotten
wealth, accumulated by former President Ferdinand E. Marcos, his immediate
family, relatives, subordinates and close associates, whether located in the
Philippines or abroad (and) business enterprises and entities owned or controlled
by them during I . . .(the Marcos) administration, directly or through nominees, by
taking undue advantage of their public office and/or using their powers, authority,
influence, connections or relationship." 1
The Court is unanimous insofar as the judgment at bar upholds the imperative
need of recovering the ill-gotten properties amassed by the previous regime, which
"deserves the fullest support of the judiciary and all sectors of society." 2 To quote
the pungent language of Mr. Justice Cruz, "(T)here is no question that all lawful
efforts should be taken to recover the tremendous wealth plundered from the
people by the past regime in the most execrable thievery perpetrated in all history.
No right-thinking Filipino can quarrel with this necessary objective, and on this
score I am happy to concur with the ponencia." 3
The Court is likewise unanimous in its judgment dismissing the petition to declare
unconstitutional and void Executive Orders Nos. 1 and 2 to annul the sequestration
order of April 14, 1986. For indeed, the 1987 Constitution overwhelmingly adopted
by the people at the February 2, 1987 plebiscite expressly recognized in Article
XVIII, section 26 thereof 4 the vital functions of respondent PCGG to achieve the
mandate of the people to recover such ill-gotten wealth and properties as ordained
by Proclamation No. 3 promulgated on March 25, 1986.
The Court is likewise unanimous as to the general rule set forth in the main opinion
that "the PCGG cannot exercise acts of dominion over property sequestered,
frozen or provisionally taken over" and "(T)he PCGG may thus exercise only
powers of administration over the property or business sequestered or
provisionally taken over, much like a court-appointed receiver, such as to bring and
defend actions in its own name; receive rents; collect debts due; pay outstanding
debts; and generally do such other acts and things as may be necessary to fulfill
its mission as conservator and administrator. In this context, it may in addition
enjoin or restrain any actual or threatened commission of acts by any person or
entity that may render moot and academic, or frustrate or otherwise make
ineffectual its efforts to carry out its task; punish for direct or indirect contempt in
accordance with the Rules of Court; and seek and secure the assistance of any
office, agency or instrumentality of the government. In the case of sequestered
businesses generally (i.e. going concerns, business in current operation), as in the
case of sequestered objects, its essential role, as already discussed, is that of
conservator, caretaker, 'watchdog' or overseer. It is not that of manager, or
innovator, much less an owner." 5
Now, the case at bar involves one where the third and most encompassing and
rarely invoked of provisional remedies, 6 the provisional takeover of the Baseco
properties and business operations has been availed of by the PCGG, simply
because the evidence on hand, not only prima facie but convincingly with
substantial and documentary evidence of record establishes that the corporation
known as petitioner BASECO "was owned or controlled by President Marcos
'during his administration, through nominees, by taking undue advantage of his
public office and/or using his powers, authority, or influence;' and that it was by
and through the same means, that BASECO had taken over the business and/or
assets of the [government-owned] National Shipyard and Engineering Co., Inc.,
and other government-owned or controlled entities." The documentary evidence
shows that petitioner BASECO (read Ferdinand E. Marcos) in successive
transactions all directed and approved by the former President-in an orgy of what
according to the PCGG's then chairman, Jovito Salonga, in his statement before
the 1986 Constitutional Commission, "Mr. Ople once called 'organized pillage' "-
gobbled up the government corporation National Shipyard & Steel Corporation
NASSCO its shipyard at Mariveles, 300 hectares of land in Mariveles from the
Export Processing Zone Authority, Engineer Island itself in Manila and its complex
of equipment and facilities including structures, buildings, shops, quarters, houses,
plants and expendable or semi-expendable assets and obtained huge loans of
$19,000,000.00 from the last available Japanese war damage fund,
P30,000,000.00 from the NDC and P12,400,000.00 from the GSIS. The sordid
details are set forth in detail in Paragraphs 1 1 to 20 of the main opinion. They
include confidential reports from then BASECO president Hilario M. Ruiz and the
deposed President's brother-in- law, then Captain (later Commodore) Alfredo
Romualdez, who although not on record as an officer or stockholder of BASECO
reported directly to the deposed President on its affairs and made the
recommendations, all approved by the latter, for the gobbling up by BASECO of all
the choice government assets and properties.
All this evidence has been placed of record in the case at bar. And petitioner has
had all the time and opportunity to refute it, submittals to the contrary
notwithstanding, but has dismally failed to do so. To cite one glaring instance: as
stated in the main opinion, the evidence submitted to this Court by the Solicitor
General "proves that President Marcos not only exercised control over BASECO,
but also that he actually owns well nigh one hundred percent of its outstanding
stock." It cites the fact that three corporations, evidently front or dummy
corporations, among twenty shareholders, in name, of BASECO, namely Metro
Bay Drydock, Fidelity Management, Inc. and Trident Management hold 209,664
shares or 95.82%, of BASECO's outstanding stock. Now, the Solicitor General
points out further than BASECO certificates "corresponding to more than ninety-
five percent (95%) of all the outstanding shares of stock of BASECO, endorsed in
blank, together with deeds of assignment of practically all the outstanding shares
of stock of the three (3) corporations above mentioned (which hold 95.82% of all
BASECO stock), signed by the owners thereof although not notarized" 7 were
found in Malacañang shortly after the deposed President's sudden flight from the
country on the night of February 25, 1986. Thus, the main opinion's unavoidable
conclusion that "(W)hile the petitioner's counsel was quick to dispute this asserted
fact, assuring this Court that the BASECO stockholders were still in possession of
their respective stock certificates and had 'never endorsed * * * them in blank or to
anyone else,' that denial is exposed by his own prior and subsequent recorded
statements as a mere gesture of defiance rattler than a verifiable factual
declaration . . . . Under the circumstances, the Court can only conclude that he
could not get the originals from the stockholders for the simple reason that as the
Solicitor General maintains, said stockholders in truth no longer have them in their
possession, these having already been assigned in blank to President Marcos." 8
With this strong unrebutted evidence of record in this Court, Justice Melencio-
Herrera, joined by Justice Feliciano, expressly concurs with the main opinion
upholding the commission's take-over, stating that "(I) have no objection to
according the right to vote sequestered stock in case of a takeover of business
actually belonging to the government or whose capitalization comes from public
funds but which, somehow, landed in the hands of private persons, as in the case
of BASECO." They merely qualify their concurrence with the injunction that such
takeovers be exercised with "caution and prudence" pending the determination of
"the true and real ownership" of the sequestered shares. Suffice it to say in this
regard that each case has to be judged from the pertinent facts and circumstances
and that the main opinion emphasizes sufficiently that it is only in the special
instances specified in the governing laws grounded on the superior national
interest and welfare and the practical necessity of preserving the property and
preventing its loss or disposition that the provisional remedy of provisional take-
over is exercised.
Here, according to the dissenting opinion, "the PCGG concludes that sequestered
property is ill-gotten wealth and proceeds to exercise acts of ownership over said
properties . . . . and adds that "the fact of ownership must be established in a proper
suit before a court of justice"-which this Court has preempted with its finding that
"in the context of the proceedings at bar, the actuality of the control by President
Marcos of BASECO has been sufficiently shown."
But BASECO who has instituted this action to set aside the sequestration and take-
over orders of respondent commission has chosen to raise these very issues in
this Court. We cannot ostrich-like hide our head in the sand and say that it has not
yet been established in the proper court that what the PCGG has taken over here
are government properties, as a matter of record and public notice and knowledge,
like the NASSCO, its Engineer Island and Mariveles Shipyard and entire complex,
which have been pillaged and placed in the name of the dummy or front company
named BASECO but from all the documentary evidence of record shown by its
street certificates all found in Malacanang should in reality read "Ferdinand E.
Marcos" and/or his brother-in-law. Such take-over can in no way be termed
"lawless usurpation," for the government does not commit any act of usurpation in
taking over its own properties that have been channeled to dummies, who are
called upon to prove in the proper court action what they have failed to do in this
Court, that they have lawfully acquired ownership of said properties, contrary to
the documentary evidence of record, which they must likewise explain away. This
Court, in the exercise of its jurisdiction on certiorari and as the guardian of the
Constitution and protector of the people's basic constitutional rights, has
entertained many petitions on the part of parties claiming to be adversely affected
by sequestration and other orders of the PCGG, This Court set the criterion that
such orders should issue only upon showing of a prima facie case, which criterion
was adopted in the 1987 Constitution. The Court's judgment cannot be faulted if
much more than a prima facie has been shown in this case, which the faceless
figures claiming to represent BASECO have failed to refute or disprove despite all
the opportunity to do so.
The record plainly shows that petitioner BASECO which is but a mere shell to mask
its real owner did not and could not explain how and why they received such
favored and preferred treatment with tailored Letters of Instruction and handwritten
personal approval of the deposed President that handed it on a silver platter the
whole complex and properties of NASSCO and Engineer Island and the Mariveles
Shipyard.
It certainly would be the height of absurdity and helplessness if this government
could not here and now take over the possession and custody of its very own
properties and assets that had been stolen from it and which it had pledged to
recover for the benefit and in the greater interest of the Filipino people, whom the
past regime had saddled with a huge $27-billion foreign debt that has since
ballooned to $28.5-billion.
Thus, the main opinion correctly concludes that "(I)n the light of the affirmative
showing by the Government that, prima facie at least, the stockholders and
directors of BASECO as of April, 1986 were mere 'dummies,' nominees or alter
egos of President Marcos; at any rate, that they are no longer owners of any shares
of stock in the corporation, the conclusion cannot be avoided that said stockholders
and directors have no basis and no standing whatever to cause the filing and
prosecution of the instant proceeding; and to grant relief to BASECO, as prayed
for in the petition, would in effect be to restore the assets, properties and business
sequestered and taken over by the PCGG to persons who are 'dummies' nominees
or alter egos of the former President." 9
And Justice Padilla in his separate concurrence "called a spade a spade," citing
the street certificates representing 95 % of BASECO's outstanding stock found in
Malacañang after Mr. Marcos' hasty flight in February, 1986 and the extent of the
control he exercised over policy decisions affecting BASECO and concluding that
"Consequently, even ahead of judicial proceedings, I am convinced that the
Republic of the Philippines, thru the PCGG, has the right and even the duty to take
over full control and supervision of BASECO."
Indeed, the provisional remedies available to respondent commission are rooted
in the police power of the State, the most pervasive and the least limitable of the
powers of Government since it represents "the power of sovereignty, the power to
govern men and things within the limits of its domain." 10 Police power has been
defined as the power inherent in the State "to prescribe regulations to promote the
health, morals, education, good order or safety, and general welfare of the people."
11 Police power rests upon public necessity and upon the right of the State and of
the public to self-protection. 12 "Salus populi suprema est lex" or "the welfare of
the people is the Supreme Law." 13 For this reason, it is co-extensive with the
necessities of the case and the safeguards of public interest. 14 Its scope expands
and contracts with changing needs. 15 "It may be said in a general way that the
police power extends to all the great public needs. It may be put forth in aid of what
is sanctioned by usage, or held by the prevailing morality or strong and
preponderant opinion to be greatly and immediately necessary to the public
welfare." 16 That the public interest or the general welfare is subserved by
sequestering the purported ill-gotten assets and properties and taking over stolen
properties of the government channeled to dummy or front companies is stating
the obvious. The recovery of these ill-gotten assets and properties would greatly
aid our financially crippled government and hasten our national economic
recovery, not to mention the fact that they rightfully belong to the people. While as
a measure of self-protection, if, in the interest of general welfare, police power may
be exercised to protect citizens and their businesses in financial and economic
matters, it may similarly be exercised to protect the government itself against
potential financial loss and the possible disruption of governmental functions. 17
Police power as the power of self-protection on the part of the community bears
the same relation to the community that the principle of self-defense bears to the
individual. 18 Truly, it may be said that even more than self- defense, the recovery
of ill-gotten wealth and of the government's own properties involves the material
and moral survival of the nation, marked as the past regime was by the obliteration
of any line between private funds and the public treasury and abuse of unlimited
power and elimination of any accountability in public office, as the evidence of
record amply shows.
It should be mentioned that the tracking down of the deposed President's actual
ownership of the BASECO shares was fortuitously facilitated by the recovery of
the street certificates in Malacañang after his hasty flight from the country last year.
This is not generally the case.
For example, in the ongoing case filed by the government to recover from the
Marcoses valuable real estate holdings in New York and the Lindenmere estate in
Long Island, former PCGG chairman Jovito Salonga has revealed that their names
"do not appear on any title to the property. Every building in New York is titled in
the name of a Netherlands Antilles corporation, which in turn is purportedly owned
by three Panamanian corporations, with bearer shares. This means that the shares
of this corporation can change hands any time, since they can be transferred,
under the law of Panama, without previous registration on the books of the
corporation. One of the first documents that we discovered shortly after the
February revolution was a declaration of trust handwritten by Mr. Joseph Bernstein
on April 4, 1982 on a Manila Peninsula Hotel stationery stating that he would act
as a trustee for the benefit of President Ferdinand Marcos and would act solely
pursuant to the instructions of Marcos with respect to the Crown Building in New
York." 19
This is just to stress the difficulties of the tasks confronting respondent PCGG,
which nevertheless has so far commendably produced unprecedented positive
results. As stated by then chairman Salonga:
PCGG has turned over to the Office of the President around 2 billion pesos in cash,
free of any lien. It has also delivered to the President-as a result of a compromise
settlement-around 200 land titles involving vast tracks of land in Metro Manila,
Rizal, Laguna, Cavite, and Bataan, worth several billion pesos. These lands are
now available for low-cost housing projects for the benefit of the poor and the
dispossessed amongst our people.
In the legal custody of the Commission as a result of sequestration proceedings,
are expensive jewelry amounting to 310 million pesos, 42 aircraft amounting to 718
million pesos, vessels amounting to 748 million pesos, and shares of stock
amounting to around 215 million pesos.
But, as I said, the bulk of the ill-gotten wealth is located abroad, not in the
Philippines. Through the efforts of the PCGG, we have caused the freezing or
sequestration of properties, deposits, and securities probably worth many billions
of pesos in New York, New Jersey, Hawaii, California, and more importantly-in
Switzerland. Due to favorable developments in Switzerland, we may expect,
according to our Swiss lawyers, the first deliveries of the Swiss deposits in the
foreseeable future, perhaps in less than a year's time. In New York, PCGG through
its lawyers who render their services free of cost to the Philippine government,
succeeded in getting injunctive relief against Mr. and Mrs. Marcos and their
nominees and agents. There is now an offer for settlement that is being studied
and explored by our lawyers there.
If we succeed in recovering not an (since this is impossible) but a substantial part
of the ill-gotten wealth here and in various countries of the world — something the
revolutionary governments of China, Ethiopia, Iran and Nicaragua were not able to
accomplish at all with respect to properties outside their territorial boundaries —
the Presidential Commission on Good Government, which has undertaken the
difficult and thankless task of trying to undo what had been done so secretly and
effectively in the last twenty years, shall have more than justified its existence. 20
The misdeeds of some PCGG volunteers and personnel cited in the dissenting
opinion do not detract at an from the PCGG's accomplishments, just as no one
would do away with newspapers because of some undesirable elements. The point
is that all such misdeeds have been subject to public exposure and as stated in
the dissent itself, the erring PCGG representatives have been forthwith dismissed
and replaced.
The magnitude of the tasks that confront respondent PCGG with its limited
resources and staff support and volunteers should be appreciated, together with
the assistance that foreign governments and lawyers have spontaneously given
the commission.
A word about the PCGG's firing of the BASECO lawyers who filed the present
petition challenging its questioned orders, filing a motion to withdraw the petition,
after it had put in eight of its representatives as directors of the BASECO board of
directors. This was entirely proper and in accordance with the Court's Resolution
of October 28, 1986, which denied BASECO's motion for the issuance of a
restraining order against such take-over and declared that "the government can,
through its designated directors, properly exercise control and management over
what appear to be properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on behalf of BASECO
have failed to show any eight or even any shareholding in said corporation." In
other words, these dummies or fronts cannot seek to question the government's
right to recover the very properties and assets that have been stolen from it by
using the very same stolen properties and funds derived therefrom. If they wish to
pursue their own empty claim, they must do it on their own, after first establishing
that they indeed have a lawful right and/or shareholding in BASECO.
Under the 1987 Constitution, the PCGG is called upon to file the judicial
proceedings for forfeiture and recovery of the sequestered or frozen properties
covered by its orders issued before the ratification of the Constitution on February
2, 1987, within six months from such ratification, or by August 2, 1987. (For those
orders issued after such ratification, the judicial action or proceeding must be
commenced within six months from the issuance thereof.) The PCGG has not
really been given much time, considering the magnitude of its tasks. It is entitled
to some forbearance, in availing of the maximum time granted it for the filing of the
corresponding judicial action with the Sandiganbayan.
PADILLA, J., concurring:
The majority opinion penned by Mr. Justice Narvasa maintains and upholds the
valid distinction between acts of conservation and preservation of assets and acts
of ownership. Sequestration, freeze and temporary take-over encompass the first
type of acts. They do not include the second type of acts which are reserved only
to the rightful owner of the assets or business sequestered or temporarily taken
over.
The removal and election of members of the board of directors of a corporate
enterprise is, to me, a clear act of ownership on the part of the shareholders of the
corporation. Under ordinary circumstances, I would deny the PCGG the authority
to change and elect the members of BASECO's Board of Directors. However,
under the facts as disclosed by the records, it appears that the certificates of stock
representing about ninety-five (95%) per cent of the total ownership in BASECO's
capital stock were found endorsed in blank in Malacanang (presumably in the
possession and control of Mr. Marcos) at the time he and his family fled in February
1986. This circumstance let alone the extent of the control Mr. Marcos exercised,
while in power, over policy decisions affecting BASECO, entirely satisfies my mind
that BASECO was owned and controlled by Mr. Marcos. This is calling a spade a
spade. I am also entirely satisfied in my mind that Mr. Marcos could not have
acquired the ownership of BASECO out of his lawfully-gotten wealth.
Consequently, even ahead of judicial proceedings, I am convinced that the
Republic of the Philippines, through the PCGG, has the right and even the duty to
take-over full control and supervision of BASECO.
MELENCIO-HERRERA, J., concurring:
I would like to qualify my concurrence in so far as the voting of sequestered stork
is concerned.
The voting of sequestered stock is, to my mind, an exercise of an attribute of
ownership. It goes beyond the purpose of a writ of sequestration, which is
essentially to preserve the property in litigation (Article 2005, Civil Code).
Sequestration is in the nature of a judicial deposit (ibid.).
I have no objection to according the right to vote sequestered stock in case of a
take-over of business actually belonging to the government or whose capitalization
comes from public funds but which, somehow, landed in the hands of private
persons, as in the case of BASECO. To my mind, however, caution and prudence
should be exercised in the case of sequestered shares of an on-going private
business enterprise, specially the sensitive ones, since the true and real ownership
of said shares is yet to be determined and proven more conclusively by the Courts.
It would be more in keeping with legal norms if forfeiture proceedings provided for
under Republic Act No. 1379 be filed in Court and the PCGG seek judicial
appointment as a receiver or administrator, in which case, it would be empowered
to vote sequestered shares under its custody (Section 55, Corporation Code).
Thereby, the assets in litigation are brought within the Court's jurisdiction and the
presence of an impartial Judge, as a requisite of due process, is assured. For,
even in its historical context, sequestration is a judicial matter that is best handled
by the Courts.
I consider it imperative that sequestration measures be buttressed by judicial
proceedings the soonest possible in order to settle the matter of ownership of
sequestered shares and to determine whether or not they are legally owned by the
stockholders of record or are "ill-gotten wealth" subject to forfeiture in favor of the
State. Sequestration alone, being actually an ancillary remedy to a principal action,
should not be made the basis for the exercise of acts of dominion for an indefinite
period of time.
Sequestration is an extraordinary, harsh, and severe remedy. It should be confined
to its lawful parameters and exercised, with due regard, in the words of its enabling
laws, to the requirements of fairness, due process (Executive Order No. 14, palay
7, 1986), and Justice (Executive Order No. 2, March 12, 1986).
Feliciano, J., concur.

GUTIERREZ, JR., J., concurring and dissenting:

I concur, in part, in the erudite opinion penned for the Court by my distinguished
colleague Mr. Justice Andres R. Narvasa. I agree insofar as it states the principles
which must govern PCGG sequestrations and emphasizes the limitations in the
exercise of its broad grant of powers.
I concur in the general propositions embodied in or implied from the majority
opinion, among them:
(1) The efforts of Government to recover ill-gotten properties amassed by the
previous regime deserve the fullest support of the judiciary and all sectors of
society. I believe, however, that a nation professing adherence to the rule of law
and fealty to democratic processes must adopt ways and means which are always
within the bounds of lawfully granted authority and which meet the tests of due
process and other Bill of Rights protections.
(2) Sequestration is intended to prevent the destruction, concealment, or
dissipation of ill-gotten wealth. The object is conservation and preservation. Any
exercise of power beyond these objectives is lawless usurpation.
(3) The PCGG exercises only such powers as are granted by law and not
proscribed by the Constitution. The remedies it enforces are provisional and
contingent. Whether or not sequestered property is indeed ill-gotten must be-
determined by a court of justice. The PCGG has absolutely no power to divest title
over sequestered property or to act as if its findings are final.
(4) The PCGG does not own sequestered property. It cannot and must not exercise
acts of ownership. To quote the majority opinion, "one thing is certain ..., the PCGG
cannot exercise acts of dominion."
(5) The provisional takeover in a sequestration should not be indefinitely
maintained. It is the duty of the PCGG to immediately file appropriate criminal or
civil cases once the evidence has been gathered.
It is the difference between what the Court says and what the PCGG does which
constrains me to dissent. Even as the Court emphasizes principles of due process
and fair play, it has unfortunately validated ultra vires acts violative of those very
same principles. While we stress the rules which must govern the PCGG in the
exercise of its powers, the Court has failed to stop or check acts which go beyond
the power of sequestration given by law to the PCGG.
We are all agreed in the Court that the PCGG is not a judge. It is an investigator
and prosecutor. Sequestration is only a preliminary or ancillary remedy. There
must be a principal and independent suit filed in court to establish the true
ownership of sequestered properties. The factual premise that a sequestered
property was ill-gotten by former President Marcos, his family, relatives,
subordinates, and close associates cannot be assumed. The fact of ownership
must be established in a proper suit before a court of justice.
But what has the Court, in effect, ruled?
Pages 21 to 33 of the majority opinion are dedicated to a statement of facts which
conclusively and indubitably shows that BASECO is owned by President Marcos-
and that it was acquired and vastly enlarged by the former President's taking undue
advantage of his public office and using his powers, authority, or influence.
There has been no court hearing, no trial, and no presentation of evidence. All that
we have is what the PCGG has given us. The petitioner has not even been allowed
to see the evidence, much less refute it.
What the PCGG has gathered in the course of its seizures and investigations may
be gospel truth. However, that truth must be properly established in a trial court,
not unilaterally determined by the PCGG or declared by this Court in a special
proceeding which only asks us to set aside or enjoin an illegal exercise of power.
After this decision, there is nothing more for a trial court to ascertain. Certainly, no
lower court would dare to arrive at findings contrary to this Court's conclusions, no
matter how insistent we may be in labelling such conclusions as "prima facie." To
me, this is the basic flaw in PCGG procedures that the Court is, today, unwittingly
legitimating. Even before the institution of a court case, the PCGG concludes that
sequestered property is ill-gotten wealth and proceeds to exercise acts of
ownership over said properties. It treats sequestered property as its own even
before the oppositor-owners have been divested of their titles.
The Court declares that a state of seizure is not to be indefinitely maintained. This
means that court proceedings to either forfeit the sequestered properties or clear
the names and titles of the petitioners must be filed as soon as possible.
This case is a good example of disregard or avoidance of this requirement. With
the kind of evidence which the PCGG professes to possess, the forfeiture case
could have been filed simultaneously with the issuance of sequestration orders or
shortly thereafter.
And yet, the records show that the PCGG appears to concentrate more on the
means rather than the ends, in running the BASECO, taking over the board of
directors and management, getting rid of security guards, disposing of scrap,
entering into new contracts and otherwise behaving as if it were already the owner.
At this late date and with all the evidence PCGG claims to have, no court case has
been filed.
Among the interesting items elicited during the oral arguments or found in the
records of this petition are:
(1) Upon sequestering BASECO, some PCGG personnel lost no time in digging
up paved premises with jack hammers in a frantic search for buried gold bars.
(2) Two top PCGG volunteers charged each other with stealing properties under
their custody. The PCGG had to step in, dismiss the erring representatives, and
replace them with new ones.
(3) The petitioner claims that the lower bid of a rock quarry operator was accepted
even as a higher and more favorable bid was offered. When the questionable deal
was brought to our attention, the awardee allegedly raised his bid to the level of
the better offer. The successful bidder later submitted a comment in intervention
explaining his side. Whoever is telling the truth, the fact remains that multi-million
peso contracts involving the operations of sequestered companies should be
entered into under the supervision of a court, not freely executed by the PCGG
even when the petitioner-owners question the propriety and integrity of those
transactions.
(4) The PCGG replaced eight out of eleven members of the BASECO board of
directors with its own men. Upon taking over full control of the corporation, the
newly installed board reversed the efforts of the former owners to protect their
interests. The new board fired the BASECO lawyers who instituted the instant
petition. It then filed a motion to withdraw this very same petition we are now
deciding. In other words, the "new owners" did not want the Supreme Court to
continue poking into the legality of their acts. They moved to abort the petition filed
with us.
Any suspicion of impropriety would have been avoided if the PCGG had filed the
required court proceedings and exercised its acts of management and control
under court supervision. The requirements of due process would have been met.
One other matter I wish to discuss in this separate opinion is PCGG's selection of
eight out of the eleven members of the BASECO board of directors.
The election of the members of a board of directors is distinctly and unqualifiedly
an act of ownership. When stockholders of a corporation elect or remove members
of a board of directors, they exercise their right of ownership in the company they
own, By no stretch of the imagination can the revamp of a board of directors be
considered as a mere act of conserving assets or preventing the dissipation of
sequestered assets. The broad powers of a sequestrator are more than enough to
protect sequestered assets. There is no need and no legal basis to reach out
further and exercise ultimate acts of ownership.
Under the powers which PCGG has assumed and wields, it can amend the articles
and by-laws of a sequestered corporation, decrease the capital stock, or sell
substantially all corporate assets without any effective check from the owners not
yet divested of their titles or from a court of justice. The PCGG is tasked to preserve
assets but when it exercises the acts of an owner, it could also very well destroy. I
hope that the case of the Philippine Daily Express, a major newspaper closed by
the PCGG, is an isolated example. Otherwise, banks, merchandizing firms,
investment institutions, and other sensitive businesses will find themselves in a
similar quandary.
I join the PCGG and all right thinking Filipinos in condemning the totalitarian acts
which made possible the accumulation of ill-gotten wealth. I, however, dissent
when authoritarian and ultra vires methods are used to recover that stolen wealth.
One wrong cannot be corrected by the employment of another wrong.
I, therefore, vote to grant the petition. Pending the filing of an appropriate case in
court, the PCGG must be enjoined from exercising any and all acts of ownership
over the sequestered firm.
Bidin and Cortes, JJ., concur and dissent.

CRUZ, J., dissenting:

My brother Narvasa has written a truly outstanding decision that bespeaks a
penetrating and analytical mind and a masterly grasp of the serious problem we
are asked to resolve. He deserves and I offer him my sincere admiration.
There is no question that all lawful efforts should be taken to recover the
tremendous wealth plundered from the people by the past regime in the most
execrable thievery perpetrated in all history. No right-thinking Filipino can quarrel
with this necessary objective, and on this score I am happy to concur with the
ponencia.
But for all my full agreement with the basic thesis of the majority, I regret I find
myself unable to support its conclusions in favor Of the respondent PCGG. My
view is that these conclusions clash with the implacable principles of the free
society. foremost among which is due process. This demands our reverent regard.
Due process protects the life, liberty and property of every person, whoever he
may be. Even the most despicable criminal is entitled to this protection. Granting
this distinction to Marcos, we are still not justified in depriving him of this guaranty
on the mere justification that he appears to own the BASECO shares.
I am convinced and so submit that the PCGG cannot at this time take over the
BASECO without any court order and exercise thereover acts of ownership without
court supervision. Voting the shares is an act of ownership. Reorganizing the board
of directors is an act of ownership. Such acts are clearly unauthorized. As the
majority opinion itself stresses, the PCGG is merely an administrator whose
authority is limited to preventing the sequestered properties from being dissipated
or clandestinely transferred.
The court action prescribed in the Constitution is not inadequate and is available
to the PCGG. The advantage of this remedy is that, unlike the ad libitum measures
now being take it is authorized and at the same time also limited by the
fundamental law. I see no reason why it should not now be employed by the
PCGG, to remove all doubts regarding the legality of its acts and all suspicions
concerning its motives.

Separate Opinions
TEEHANKEE, CJ., concurring:
I fully concur with the masterly opinion of Mr. Justice Narvasa. In the process of
disposing of the issues raised by petitioner BASECO in the case at bar, it
comprehensively discusses the laws and principles governing the Presidential
Commission on Good Government (PCGG) and defines the scope and extent of
its powers in the discharge of its monumental task of recovering the "ill-gotten
wealth, accumulated by former President Ferdinand E. Marcos, his immediate
family, relatives, subordinates and close associates, whether located in the
Philippines or abroad (and) business enterprises and entities owned or controlled
by them during I . . .(the Marcos) administration, directly or through nominees, by
taking undue advantage of their public office and/or using their powers, authority,
influence, connections or relationship." 1
The Court is unanimous insofar as the judgment at bar upholds the imperative
need of recovering the ill-gotten properties amassed by the previous regime,
which "deserves the fullest support of the judiciary and all sectors of society." 2
To quote the pungent language of Mr. Justice Cruz, "(T)here is no question that
all lawful efforts should be taken to recover the tremendous wealth plundered
from the people by the past regime in the most execrable thievery perpetrated in
all history. No right-thinking Filipino can quarrel with this necessary objective, and
on this score I am happy to concur with the ponencia." 3
The Court is likewise unanimous in its judgment dismissing the petition to declare
unconstitutional and void Executive Orders Nos. 1 and 2 to annul the
sequestration order of April 14, 1986. For indeed, the 1987 Constitution
overwhelmingly adopted by the people at the February 2, 1987 plebiscite
expressly recognized in Article XVIII, section 26 thereof 4 the vital functions of
respondent PCGG to achieve the mandate of the people to recover such ill-
gotten wealth and properties as ordained by Proclamation No. 3 promulgated on
March 25, 1986.
The Court is likewise unanimous as to the general rule set forth in the main
opinion that "the PCGG cannot exercise acts of dominion over property
sequestered, frozen or provisionally taken over" and "(T)he PCGG may thus
exercise only powers of administration over the property or business sequestered
or provisionally taken over, much like a court-appointed receiver, such as to bring
and defend actions in its own name; receive rents; collect debts due; pay
outstanding debts; and generally do such other acts and things as may be
necessary to fulfill its mission as conservator and administrator. In this context, it
may in addition enjoin or restrain any actual or threatened commission of acts by
any person or entity that may render moot and academic, or frustrate or
otherwise make ineffectual its efforts to carry out its task; punish for direct or
indirect contempt in accordance with the Rules of Court; and seek and secure the
assistance of any office, agency or instrumentality of the government. In the case
of sequestered businesses generally (i.e. going concerns, business in current
operation), as in the case of sequestered objects, its essential role, as already
discussed, is that of conservator, caretaker, 'watchdog' or overseer. It is not that
of manager, or innovator, much less an owner." 5
Now, the case at bar involves one where the third and most encompassing and
rarely invoked of provisional remedies, 6 the provisional takeover of the Baseco
properties and business operations has been availed of by the PCGG, simply
because the evidence on hand, not only prima facie but convincingly with
substantial and documentary evidence of record establishes that the corporation
known as petitioner BASECO "was owned or controlled by President Marcos
'during his administration, through nominees, by taking undue advantage of his
public office and/or using his powers, authority, or influence;' and that it was by
and through the same means, that BASECO had taken over the business and/or
assets of the [government-owned] National Shipyard and Engineering Co., Inc.,
and other government-owned or controlled entities." The documentary evidence
shows that petitioner BASECO (read Ferdinand E. Marcos) in successive
transactions all directed and approved by the former President-in an orgy of what
according to the PCGG's then chairman, Jovito Salonga, in his statement before
the 1986 Constitutional Commission, "Mr. Ople once called 'organized pillage' "-
gobbled up the government corporation National Shipyard & Steel Corporation
NASSCO its shipyard at Mariveles, 300 hectares of land in Mariveles from the
Export Processing Zone Authority, Engineer Island itself in Manila and its
complex of equipment and facilities including structures, buildings, shops,
quarters, houses, plants and expendable or semi-expendable assets and
obtained huge loans of $19,000,000.00 from the last available Japanese war
damage fund, P30,000,000.00 from the NDC and P12,400,000.00 from the GSIS.
The sordid details are set forth in detail in Paragraphs 1 1 to 20 of the main
opinion. They include confidential reports from then BASECO president Hilario M.
Ruiz and the deposed President's brother-in- law, then Captain (later
Commodore) Alfredo Romualdez, who although not on record as an officer or
stockholder of BASECO reported directly to the deposed President on its affairs
and made the recommendations, all approved by the latter, for the gobbling up by
BASECO of all the choice government assets and properties.
All this evidence has been placed of record in the case at bar. And petitioner has
had all the time and opportunity to refute it, submittals to the contrary
notwithstanding, but has dismally failed to do so. To cite one glaring instance: as
stated in the main opinion, the evidence submitted to this Court by the Solicitor
General "proves that President Marcos not only exercised control over BASECO,
but also that he actually owns well nigh one hundred percent of its outstanding
stock." It cites the fact that three corporations, evidently front or dummy
corporations, among twenty shareholders, in name, of BASECO, namely Metro
Bay Drydock, Fidelity Management, Inc. and Trident Management hold 209,664
shares or 95.82%, of BASECO's outstanding stock. Now, the Solicitor General
points out further than BASECO certificates "corresponding to more than ninety-
five percent (95%) of all the outstanding shares of stock of BASECO, endorsed in
blank, together with deeds of assignment of practically all the outstanding shares
of stock of the three (3) corporations above mentioned (which hold 95.82% of all
BASECO stock), signed by the owners thereof although not notarized" 7 were
found in Malacañang shortly after the deposed President's sudden flight from the
country on the night of February 25, 1986. Thus, the main opinion's unavoidable
conclusion that "(W)hile the petitioner's counsel was quick to dispute this
asserted fact, assuring this Court that the BASECO stockholders were still in
possession of their respective stock certificates and had 'never endorsed * * *
them in blank or to anyone else,' that denial is exposed by his own prior and
subsequent recorded statements as a mere gesture of defiance rattler than a
verifiable factual declaration . . . . Under the circumstances, the Court can only
conclude that he could not get the originals from the stockholders for the simple
reason that as the Solicitor General maintains, said stockholders in truth no
longer have them in their possession, these having already been assigned in
blank to President Marcos." 8
With this strong unrebutted evidence of record in this Court, Justice Melencio-
Herrera, joined by Justice Feliciano, expressly concurs with the main opinion
upholding the commission's take-over, stating that "(I) have no objection to
according the right to vote sequestered stock in case of a takeover of business
actually belonging to the government or whose capitalization comes from public
funds but which, somehow, landed in the hands of private persons, as in the case
of BASECO." They merely qualify their concurrence with the injunction that such
takeovers be exercised with "caution and prudence" pending the determination of
"the true and real ownership" of the sequestered shares. Suffice it to say in this
regard that each case has to be judged from the pertinent facts and
circumstances and that the main opinion emphasizes sufficiently that it is only in
the special instances specified in the governing laws grounded on the superior
national interest and welfare and the practical necessity of preserving the
property and preventing its loss or disposition that the provisional remedy of
provisional take-over is exercised.
Here, according to the dissenting opinion, "the PCGG concludes that
sequestered property is ill-gotten wealth and proceeds to exercise acts of
ownership over said properties . . . . and adds that "the fact of ownership must be
established in a proper suit before a court of justice"-which this Court has
preempted with its finding that "in the context of the proceedings at bar, the
actuality of the control by President Marcos of BASECO has been sufficiently
shown."
But BASECO who has instituted this action to set aside the sequestration and
take-over orders of respondent commission has chosen to raise these very
issues in this Court. We cannot ostrich-like hide our head in the sand and say
that it has not yet been established in the proper court that what the PCGG has
taken over here are government properties, as a matter of record and public
notice and knowledge, like the NASSCO, its Engineer Island and Mariveles
Shipyard and entire complex, which have been pillaged and placed in the name
of the dummy or front company named BASECO but from all the documentary
evidence of record shown by its street certificates all found in Malacanang should
in reality read "Ferdinand E. Marcos" and/or his brother-in-law. Such take-over
can in no way be termed "lawless usurpation," for the government does not
commit any act of usurpation in taking over its own properties that have been
channeled to dummies, who are called upon to prove in the proper court action
what they have failed to do in this Court, that they have lawfully acquired
ownership of said properties, contrary to the documentary evidence of record,
which they must likewise explain away. This Court, in the exercise of its
jurisdiction on certiorari and as the guardian of the Constitution and protector of
the people's basic constitutional rights, has entertained many petitions on the
part of parties claiming to be adversely affected by sequestration and other
orders of the PCGG, This Court set the criterion that such orders should issue
only upon showing of a prima facie case, which criterion was adopted in the 1987
Constitution. The Court's judgment cannot be faulted if much more than a prima
facie has been shown in this case, which the faceless figures claiming to
represent BASECO have failed to refute or disprove despite all the opportunity to
do so.
The record plainly shows that petitioner BASECO which is but a mere shell to
mask its real owner did not and could not explain how and why they received
such favored and preferred treatment with tailored Letters of Instruction and
handwritten personal approval of the deposed President that handed it on a silver
platter the whole complex and properties of NASSCO and Engineer Island and
the Mariveles Shipyard.
It certainly would be the height of absurdity and helplessness if this government
could not here and now take over the possession and custody of its very own
properties and assets that had been stolen from it and which it had pledged to
recover for the benefit and in the greater interest of the Filipino people, whom the
past regime had saddled with a huge $27-billion foreign debt that has since
ballooned to $28.5-billion.
Thus, the main opinion correctly concludes that "(I)n the light of the affirmative
showing by the Government that, prima facie at least, the stockholders and
directors of BASECO as of April, 1986 were mere 'dummies,' nominees or alter
egos of President Marcos; at any rate, that they are no longer owners of any
shares of stock in the corporation, the conclusion cannot be avoided that said
stockholders and directors have no basis and no standing whatever to cause the
filing and prosecution of the instant proceeding; and to grant relief to BASECO,
as prayed for in the petition, would in effect be to restore the assets, properties
and business sequestered and taken over by the PCGG to persons who are
'dummies' nominees or alter egos of the former President." 9
And Justice Padilla in his separate concurrence "called a spade a spade," citing
the street certificates representing 95 % of BASECO's outstanding stock found in
Malacañang after Mr. Marcos' hasty flight in February, 1986 and the extent of the
control he exercised over policy decisions affecting BASECO and concluding that
"Consequently, even ahead of judicial proceedings, I am convinced that the
Republic of the Philippines, thru the PCGG, has the right and even the duty to
take over full control and supervision of BASECO."
Indeed, the provisional remedies available to respondent commission are rooted
in the police power of the State, the most pervasive and the least limitable of the
powers of Government since it represents "the power of sovereignty, the power
to govern men and things within the limits of its domain." 10 Police power has
been defined as the power inherent in the State "to prescribe regulations to
promote the health, morals, education, good order or safety, and general welfare
of the people." 11 Police power rests upon public necessity and upon the right of
the State and of the public to self-protection. 12 "Salus populi suprema est lex" or
"the welfare of the people is the Supreme Law." 13 For this reason, it is co-
extensive with the necessities of the case and the safeguards of public interest.
14 Its scope expands and contracts with changing needs. 15 "It may be said in a
general way that the police power extends to all the great public needs. It may be
put forth in aid of what is sanctioned by usage, or held by the prevailing morality
or strong and preponderant opinion to be greatly and immediately necessary to
the public welfare." 16 That the public interest or the general welfare is
subserved by sequestering the purported ill-gotten assets and properties and
taking over stolen properties of the government channeled to dummy or front
companies is stating the obvious. The recovery of these ill-gotten assets and
properties would greatly aid our financially crippled government and hasten our
national economic recovery, not to mention the fact that they rightfully belong to
the people. While as a measure of self-protection, if, in the interest of general
welfare, police power may be exercised to protect citizens and their businesses
in financial and economic matters, it may similarly be exercised to protect the
government itself against potential financial loss and the possible disruption of
governmental functions. 17 Police power as the power of self-protection on the
part of the community bears the same relation to the community that the principle
of self-defense bears to the individual. 18 Truly, it may be said that even more
than self- defense, the recovery of ill-gotten wealth and of the government's own
properties involves the material and moral survival of the nation, marked as the
past regime was by the obliteration of any line between private funds and the
public treasury and abuse of unlimited power and elimination of any
accountability in public office, as the evidence of record amply shows.
It should be mentioned that the tracking down of the deposed President's actual
ownership of the BASECO shares was fortuitously facilitated by the recovery of
the street certificates in Malacañang after his hasty flight from the country last
year. This is not generally the case.
For example, in the ongoing case filed by the government to recover from the
Marcoses valuable real estate holdings in New York and the Lindenmere estate
in Long Island, former PCGG chairman Jovito Salonga has revealed that their
names "do not appear on any title to the property. Every building in New York is
titled in the name of a Netherlands Antilles corporation, which in turn is
purportedly owned by three Panamanian corporations, with bearer shares. This
means that the shares of this corporation can change hands any time, since they
can be transferred, under the law of Panama, without previous registration on the
books of the corporation. One of the first documents that we discovered shortly
after the February revolution was a declaration of trust handwritten by Mr. Joseph
Bernstein on April 4, 1982 on a Manila Peninsula Hotel stationery stating that he
would act as a trustee for the benefit of President Ferdinand Marcos and would
act solely pursuant to the instructions of Marcos with respect to the Crown
Building in New York." 19
This is just to stress the difficulties of the tasks confronting respondent PCGG,
which nevertheless has so far commendably produced unprecedented positive
results. As stated by then chairman Salonga:
PCGG has turned over to the Office of the President around 2 billion pesos in
cash, free of any lien. It has also delivered to the President-as a result of a
compromise settlement-around 200 land titles involving vast tracks of land in
Metro Manila, Rizal, Laguna, Cavite, and Bataan, worth several billion pesos.
These lands are now available for low-cost housing projects for the benefit of the
poor and the dispossessed amongst our people.
In the legal custody of the Commission as a result of sequestration proceedings,
are expensive jewelry amounting to 310 million pesos, 42 aircraft amounting to
718 million pesos, vessels amounting to 748 million pesos, and shares of stock
amounting to around 215 million pesos.
But, as I said, the bulk of the ill-gotten wealth is located abroad, not in the
Philippines. Through the efforts of the PCGG, we have caused the freezing or
sequestration of properties, deposits, and securities probably worth many billions
of pesos in New York, New Jersey, Hawaii, California, and more importantly-in
Switzerland. Due to favorable developments in Switzerland, we may expect,
according to our Swiss lawyers, the first deliveries of the Swiss deposits in the
foreseeable future, perhaps in less than a year's time. In New York, PCGG
through its lawyers who render their services free of cost to the Philippine
government, succeeded in getting injunctive relief against Mr. and Mrs. Marcos
and their nominees and agents. There is now an offer for settlement that is being
studied and explored by our lawyers there.
If we succeed in recovering not an (since this is impossible) but a substantial part
of the ill-gotten wealth here and in various countries of the world-something the
revolutionary governments of China, Ethiopia, Iran and Nicaragua were not able
to accomplish at all with respect to properties outside their territorial boundaries-
the Presidential Commission on Good Government, which has undertaken the
difficult and thankless task of trying to undo what had been done so secretly and
effectively in the last twenty years, shall have more than justified its existence. 20
The misdeeds of some PCGG volunteers and personnel cited in the dissenting
opinion do not detract at an from the PCGG's accomplishments, just as no one
would do away with newspapers because of some undesirable elements. The
point is that all such misdeeds have been subject to public exposure and as
stated in the dissent itself, the erring PCGG representatives have been forthwith
dismissed and replaced.
The magnitude of the tasks that confront respondent PCGG with its limited
resources and staff support and volunteers should be appreciated, together with
the assistance that foreign governments and lawyers have spontaneously given
the commission.
A word about the PCGG's firing of the BASECO lawyers who filed the present
petition challenging its questioned orders, filing a motion to withdraw the petition,
after it had put in eight of its representatives as directors of the BASECO board of
directors. This was entirely proper and in accordance with the Court's Resolution
of October 28, 1986, which denied BASECO's motion for the issuance of a
restraining order against such take-over and declared that "the government can,
through its designated directors, properly exercise control and management over
what appear to be properties and assets owned and belonging to the government
itself and over which the persons who appear in this case on behalf of BASECO
have failed to show any eight or even any shareholding in said corporation." In
other words, these dummies or fronts cannot seek to question the government's
right to recover the very properties and assets that have been stolen from it by
using the very same stolen properties and funds derived therefrom. If they wish
to pursue their own empty claim, they must do it on their own, after first
establishing that they indeed have a lawful right and/or shareholding in BASECO.
Under the 1987 Constitution, the PCGG is called upon to file the judicial
proceedings for forfeiture and recovery of the sequestered or frozen properties
covered by its orders issued before the ratification of the Constitution on
February 2, 1987, within six months from such ratification, or by August 2, 1987.
(For those orders issued after such ratification, the judicial action or proceeding
must be commenced within six months from the issuance thereof.) The PCGG
has not really been given much time, considering the magnitude of its tasks. It is
entitled to some forbearance, in availing of the maximum time granted it for the
filing of the corresponding judicial action with the Sandiganbayan.
PADILLA, J., concurring:
The majority opinion penned by Mr. Justice Narvasa maintains and upholds the
valid distinction between acts of conservation and preservation of assets and
acts of ownership. Sequestration, freeze and temporary take-over encompass
the first type of acts. They do not include the second type of acts which are
reserved only to the rightful owner of the assets or business sequestered or
temporarily taken over.
The removal and election of members of the board of directors of a corporate
enterprise is, to me, a clear act of ownership on the part of the shareholders of
the corporation. Under ordinary circumstances, I would deny the PCGG the
authority to change and elect the members of BASECO's Board of Directors.
However, under the facts as disclosed by the records, it appears that the
certificates of stock representing about ninety-five (95%) per cent of the total
ownership in BASECO's capital stock were found endorsed in blank in
Malacanang (presumably in the possession and control of Mr. Marcos) at the
time he and his family fled in February 1986. This circumstance let alone the
extent of the control Mr. Marcos exercised, while in power, over policy decisions
affecting BASECO, entirely satisfies my mind that BASECO was owned and
controlled by Mr. Marcos. This is calling a spade a spade. I am also entirely
satisfied in my mind that Mr. Marcos could not have acquired the ownership of
BASECO out of his lawfully-gotten wealth.
Consequently, even ahead of judicial proceedings, I am convinced that the
Republic of the Philippines, through the PCGG, has the right and even the duty to
take-over full control and supervision of BASECO.
MELENCIO-HERRERA, J., concurring:
I would like to qualify my concurrence in so far as the voting of sequestered stork
is concerned.
The voting of sequestered stock is, to my mind, an exercise of an attribute of
ownership. It goes beyond the purpose of a writ of sequestration, which is
essentially to preserve the property in litigation (Article 2005, Civil Code).
Sequestration is in the nature of a judicial deposit (ibid.).
I have no objection to according the right to vote sequestered stock in case of a
take-over of business actually belonging to the government or whose
capitalization comes from public funds but which, somehow, landed in the hands
of private persons, as in the case of BASECO. To my mind, however, caution
and prudence should be exercised in the case of sequestered shares of an on-
going private business enterprise, specially the sensitive ones, since the true and
real ownership of said shares is yet to be determined and proven more
conclusively by the Courts.
It would be more in keeping with legal norms if forfeiture proceedings provided for
under Republic Act No. 1379 be filed in Court and the PCGG seek judicial
appointment as a receiver or administrator, in which case, it would be
empowered to vote sequestered shares under its custody (Section 55,
Corporation Code). Thereby, the assets in litigation are brought within the Court's
jurisdiction and the presence of an impartial Judge, as a requisite of due process,
is assured. For, even in its historical context, sequestration is a judicial matter
that is best handled by the Courts.
I consider it imperative that sequestration measures be buttressed by judicial
proceedings the soonest possible in order to settle the matter of ownership of
sequestered shares and to determine whether or not they are legally owned by
the stockholders of record or are "ill-gotten wealth" subject to forfeiture in favor of
the State. Sequestration alone, being actually an ancillary remedy to a principal
action, should not be made the basis for the exercise of acts of dominion for an
indefinite period of time.
Sequestration is an extraordinary, harsh, and severe remedy. It should be
confined to its lawful parameters and exercised, with due regard, in the words of
its enabling laws, to the requirements of fairness, due process (Executive Order
No. 14, palay 7, 1986), and Justice (Executive Order No. 2, March 12, 1986).
Feliciano, J., concur.

GUTIERREZ, JR., J., concurring and dissenting:

I concur, in part, in the erudite opinion penned for the Court by my distinguished
colleague Mr. Justice Andres R. Narvasa. I agree insofar as it states the
principles which must govern PCGG sequestrations and emphasizes the
limitations in the exercise of its broad grant of powers.
I concur in the general propositions embodied in or implied from the majority
opinion, among them:
(1) The efforts of Government to recover ill-gotten properties amassed by the
previous regime deserve the fullest support of the judiciary and all sectors of
society. I believe, however, that a nation professing adherence to the rule of law
and fealty to democratic processes must adopt ways and means which are
always within the bounds of lawfully granted authority and which meet the tests of
due process and other Bill of Rights protections.
(2) Sequestration is intended to prevent the destruction, concealment, or
dissipation of ill-gotten wealth. The object is conservation and preservation. Any
exercise of power beyond these objectives is lawless usurpation.
(3) The PCGG exercises only such powers as are granted by law and not
proscribed by the Constitution. The remedies it enforces are provisional and
contingent. Whether or not sequestered property is indeed ill-gotten must be-
determined by a court of justice. The PCGG has absolutely no power to divest
title over sequestered property or to act as if its findings are final.
(4) The PCGG does not own sequestered property. It cannot and must not
exercise acts of ownership. To quote the majority opinion, "one thing is certain ...,
the PCGG cannot exercise acts of dominion."
(5) The provisional takeover in a sequestration should not be indefinitely
maintained. It is the duty of the PCGG to immediately file appropriate criminal or
civil cases once the evidence has been gathered.
It is the difference between what the Court says and what the PCGG does which
constrains me to dissent. Even as the Court emphasizes principles of due
process and fair play, it has unfortunately validated ultra vires acts violative of
those very same principles. While we stress the rules which must govern the
PCGG in the exercise of its powers, the Court has failed to stop or check acts
which go beyond the power of sequestration given by law to the PCGG.
We are all agreed in the Court that the PCGG is not a judge. It is an investigator
and prosecutor. Sequestration is only a preliminary or ancillary remedy. There
must be a principal and independent suit filed in court to establish the true
ownership of sequestered properties. The factual premise that a sequestered
property was ill-gotten by former President Marcos, his family, relatives,
subordinates, and close associates cannot be assumed. The fact of ownership
must be established in a proper suit before a court of justice.
But what has the Court, in effect, ruled?
Pages 21 to 33 of the majority opinion are dedicated to a statement of facts
which conclusively and indubitably shows that BASECO is owned by President
Marcos-and that it was acquired and vastly enlarged by the former President's
taking undue advantage of his public office and using his powers, authority, or
influence.
There has been no court hearing, no trial, and no presentation of evidence. All
that we have is what the PCGG has given us. The petitioner has not even been
allowed to see the evidence, much less refute it.
What the PCGG has gathered in the course of its seizures and investigations
may be gospel truth. However, that truth must be properly established in a trial
court, not unilaterally determined by the PCGG or declared by this Court in a
special proceeding which only asks us to set aside or enjoin an illegal exercise of
power. After this decision, there is nothing more for a trial court to ascertain.
Certainly, no lower court would dare to arrive at findings contrary to this Court's
conclusions, no matter how insistent we may be in labelling such conclusions as
"prima facie." To me, this is the basic flaw in PCGG procedures that the Court is,
today, unwittingly legitimating. Even before the institution of a court case, the
PCGG concludes that sequestered property is ill-gotten wealth and proceeds to
exercise acts of ownership over said properties. It treats sequestered property as
its own even before the oppositor-owners have been divested of their titles.
The Court declares that a state of seizure is not to be indefinitely maintained.
This means that court proceedings to either forfeit the sequestered properties or
clear the names and titles of the petitioners must be filed as soon as possible.
This case is a good example of disregard or avoidance of this requirement. With
the kind of evidence which the PCGG professes to possess, the forfeiture case
could have been filed simultaneously with the issuance of sequestration orders or
shortly thereafter.
And yet, the records show that the PCGG appears to concentrate more on the
means rather than the ends, in running the BASECO, taking over the board of
directors and management, getting rid of security guards, disposing of scrap,
entering into new contracts and otherwise behaving as if it were already the
owner. At this late date and with all the evidence PCGG claims to have, no court
case has been filed.
Among the interesting items elicited during the oral arguments or found in the
records of this petition are:
(1) Upon sequestering BASECO, some PCGG personnel lost no time in digging
up paved premises with jack hammers in a frantic search for buried gold bars.
(2) Two top PCGG volunteers charged each other with stealing properties under
their custody. The PCGG had to step in, dismiss the erring representatives, and
replace them with new ones.
(3) The petitioner claims that the lower bid of a rock quarry operator was
accepted even as a higher and more favorable bid was offered. When the
questionable deal was brought to our attention, the awardee allegedly raised his
bid to the level of the better offer. The successful bidder later submitted a
comment in intervention explaining his side. Whoever is telling the truth, the fact
remains that multi-million peso contracts involving the operations of sequestered
companies should be entered into under the supervision of a court, not freely
executed by the PCGG even when the petitioner-owners question the propriety
and integrity of those transactions.
(4) The PCGG replaced eight out of eleven members of the BASECO board of
directors with its own men. Upon taking over full control of the corporation, the
newly installed board reversed the efforts of the former owners to protect their
interests. The new board fired the BASECO lawyers who instituted the instant
petition. It then filed a motion to withdraw this very same petition we are now
deciding. In other words, the "new owners" did not want the Supreme Court to
continue poking into the legality of their acts. They moved to abort the petition
filed with us.
Any suspicion of impropriety would have been avoided if the PCGG had filed the
required court proceedings and exercised its acts of management and control
under court supervision. The requirements of due process would have been met.
One other matter I wish to discuss in this separate opinion is PCGG's selection of
eight out of the eleven members of the BASECO board of directors.
The election of the members of a board of directors is distinctly and unqualifiedly
an act of ownership. When stockholders of a corporation elect or remove
members of a board of directors, they exercise their right of ownership in the
company they own, By no stretch of the imagination can the revamp of a board of
directors be considered as a mere act of conserving assets or preventing the
dissipation of sequestered assets. The broad powers of a sequestrator are more
than enough to protect sequestered assets. There is no need and no legal basis
to reach out further and exercise ultimate acts of ownership.
Under the powers which PCGG has assumed and wields, it can amend the
articles and by-laws of a sequestered corporation, decrease the capital stock, or
sell substantially all corporate assets without any effective check from the owners
not yet divested of their titles or from a court of justice. The PCGG is tasked to
preserve assets but when it exercises the acts of an owner, it could also very well
destroy. I hope that the case of the Philippine Daily Express, a major newspaper
closed by the PCGG, is an isolated example. Otherwise, banks, merchandizing
firms, investment institutions, and other sensitive businesses will find themselves
in a similar quandary.
I join the PCGG and all right thinking Filipinos in condemning the totalitarian acts
which made possible the accumulation of ill-gotten wealth. I, however, dissent
when authoritarian and ultra vires methods are used to recover that stolen
wealth. One wrong cannot be corrected by the employment of another wrong.
I, therefore, vote to grant the petition. Pending the filing of an appropriate case in
court, the PCGG must be enjoined from exercising any and all acts of ownership
over the sequestered firm.
Bidin and Cortes, JJ., concur and dissent.

CRUZ, J., dissenting:

My brother Narvasa has written a truly outstanding decision that bespeaks a
penetrating and analytical mind and a masterly grasp of the serious problem we
are asked to resolve. He deserves and I offer him my sincere admiration.
There is no question that all lawful efforts should be taken to recover the
tremendous wealth plundered from the people by the past regime in the most
execrable thievery perpetrated in all history. No right-thinking Filipino can quarrel
with this necessary objective, and on this score I am happy to concur with the
ponencia.
But for all my full agreement with the basic thesis of the majority, I regret I find
myself unable to support its conclusions in favor Of the respondent PCGG. My
view is that these conclusions clash with the implacable principles of the free
society. foremost among which is due process. This demands our reverent
regard.
Due process protects the life, liberty and property of every person, whoever he
may be. Even the most despicable criminal is entitled to this protection. Granting
this distinction to Marcos, we are still not justified in depriving him of this guaranty
on the mere justification that he appears to own the BASECO shares.
I am convinced and so submit that the PCGG cannot at this time take over the
BASECO without any court order and exercise thereover acts of ownership
without court supervision. Voting the shares is an act of ownership. Reorganizing
the board of directors is an act of ownership. Such acts are clearly unauthorized.
As the majority opinion itself stresses, the PCGG is merely an administrator
whose authority is limited to preventing the sequestered properties from being
dissipated or clandestinely transferred.
The court action prescribed in the Constitution is not inadequate and is available
to the PCGG. The advantage of this remedy is that, unlike the ad libitum
measures now being take it is authorized and at the same time also limited by the
fundamental law. I see no reason why it should not now be employed by the
PCGG, to remove all doubts regarding the legality of its acts and all suspicions
concerning its motives.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 125986 January 28, 1999

LUXURIA HOMES, INC., and/or AIDA M. POSADAS, petitioners,
vs.
HONORABLE COURT OF APPEALS, JAMES BUILDER CONSTRUCTION
and/or JAIME T. BRAVO, respondents.

MARTINEZ, J.:
This petition for review assails the decision of the respondent Court of Appeals
dated March 15, 1996, 1 which affirmed with modification the judgment of default
rendered by the Regional Trial Court of Muntinlupa, Branch 276, in Civil Case
No. 92-2592 granting all the reliefs prayed for in the complaint of private
respondents James Builder Construction and/or Jaime T. Bravo.
As culled from the record, the facts are as follows:
Petitioner Aida M. Posadas and her two (2) minor children co-owned a 1.6
hectare property in Sucat, Muntinlupa, which was occupied by squatters.
Petitioner Posadas entered into negotiations with private respondent Jaime T.
Bravo regarding the development of the said property into a residential
subdivision. On May 3, 1989, she authorized private respondent to negotiate with
the squatters to leave the said property. With a written authorization, respondent
Bravo buckled down to work and started negotiations with the squatters.
Meanwhile, some seven (7) months later, on December 11, 1989, petitioner
Posadas and her two (2) children, through a Deed of Assignment, assigned the
said property to petitioner Luxuria Homes, Inc., purportedly for organizational and
tax avoidance purposes. Respondent Bravo signed as one of the witnesses to
the execution of the Deed of Assignment and the Articles of Incorporation of
petitioner Luxuria Homes, Inc.
Then sometime in 1992, the harmonious and congenial relationship of petitioner
Posadas and respondent Bravo turned sour when the former supposedly could
not accept the management contracts to develop the 1.6 hectare property into a
residential subdivision, the latter was proposing. In retaliation, respondent Bravo
demanded payment for services rendered in connection with the development of
the land. In his statement of account dated 21 August 1991 2 respondent
demanded the payment of P1,708,489.00 for various services rendered, i.e.,
relocation of squatters, preparation of the architectural design and site
development plan, survey and fencing.
Petitioner Posadas refused to pay the amount demanded. Thus, in September
1992, private respondents James Builder Construction and Jaime T. Bravo
instituted a complaint for specific performance before the trial court against
petitioners Posadas and Luxuria Homes, Inc. Private respondents alleged therein
that petitioner Posadas asked them to clear the subject parcel of land of
squatters for a fee of P1,100,000.00 for which they were partially paid the amount
of P461,511.50, leaving a balance of P638,488.50. They were also supposedly
asked to prepare a site development plan and an architectural design for a
contract price of P450,000.00 for which they were partially paid the amount of
P25,000.00, leaving a balance of P425,000.00. And in anticipation of the signing
of the land development contract, they had to construct a bunkhouse and
warehouse on the property which amounted to P300,000.00, and a hollow blocks
factory for P60,000.00. Private respondents also claimed that petitioner Posadas
agreed that private respondents will develop the land into a first class subdivision
thru a management contract and that petitioner Posadas is unjustly refusing to
comply with her obligation to finalize the said management contract.
The prayer in the complaint of the private respondents before the trial court reads
as follows:
WHEREFORE, premises considered, it is respectfully prayed of this Honorable
Court that after hearing/trial judgment be rendered ordering defendant to:
a) Comply with its obligation to deliver/finalize Management Contract of its land in
Sucat, Muntinlupa, Metro Manila and to pay plaintiff its balance in the amount of
P1,708,489.00:
b) Pay plaintiff moral and exemplary damages in the amount of P500.000.00;
c) Pay plaintiff actual damages in the amount of P500.000.00
(Bunkhouse/warehouse- P300.000.00, Hollow-block factory-P60.000.00, lumber,
cement, etc., P120.000.00, guard-P20.000.00);
d) Pay plaintiff attorney's fee of P50.000 plus P700 per appearance in court and
5% of that which may be awarded by the court to plaintiff re its monetary claims:
e) Pay cost of this suit. 3
On September 27, 1993, the trial court declared petitioner Posadas in default and
allowed the private respondents to present their evidence ex-parte. On March 8,
1994, it ordered petitioner Posadas, jointly and in solidum with petitioner Luxuria
Homes, Inc., to pay private respondents as follows:
1. . . . the balance of the payment for the various services performed by Plaintiff
with respect to the land covered by TCT NO. 167895 previously No. 158290 in
the total amount of P1,708,489.00.
2. . . . actual damages incurred for the construction of the warehouse/bunks, and
for the material used in the total sum of P1,500.000.00.
3. Moral and exemplary damages of P500.000.00.
4. Attorney's fee of P50,000.00.
5. And cost of this proceedings.
Defendant Aida Posadas as the Representative of the Corporation Luxuria
Homes, Incorporated, is further directed to execute the management contract she
committed to do, also in consideration of the various undertakings that Plaintiff
rendered for her. 4
Aggrieved by the aforecited decision, petitioners appealed to respondent Court of
Appeals, which, as aforestated, affirmed with modification the decision of the trial
court. The appellate court deleted the award of moral damages on the ground
that respondent James Builder Construction is a corporation and hence could not
experience physical suffering and mental anguish. It also reduced the award of
exemplary damages. The dispositive portion of the decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED with the
modification that the award of moral damages is ordered deleted and the award
of exemplary damages to the plaintiff's-appellee should only be in the amount of
FIFTY THOUSAND (P50,000.00) PESOS. 5
Petitioners' motion for reconsideration was denied, prompting the filing of this
petition for review before this Court.
On January 15, 1997, the Third Division of this Court denied due course to this
petition for failing to show convincingly any reversible error on the part of the
Court of Appeals. This Court however deleted the grant of exemplary damages
and attorney's fees. The Court also reduced the trial court's award of actual
damages from P1,500,000.00 to P500,000.00 reasoning that the grant should not
exceed the amount prayed for in the complaint. In the prayer in the complaint
respondents asked for actual damages in the amount of P500,000.00 only.
Still feeling aggrieved with the resolution of this Court, petitioners filed a motion
for reconsideration. On March 17, 1997, this Court found merit in the petitioners'
motion for reconsideration and reinstated this petition for review.
From their petition for review and motion for reconsideration before this Court, we
now synthesize the issues as follows:
1. Were private respondents able to present ex-parte sufficient evidence to
substantiate the allegations in their complaint and entitle them to their prayers?
2. Can petitioner Luxuria Homes, Inc., be held liable to private respondents for
the transactions supposedly entered into between petitioner Posadas and private
respondents?
3. Can petitioners be compelled to enter into a management contract with private
respondents?
Petitioners who were declared in default assert that the private respondents who
presented their evidence ex-parte nonetheless utterly failed to substantiate the
allegations in their complaint and as such cannot be entitled to the reliefs prayed
for.
A perusal of the record shows that petitioner Posadas contracted respondent
Bravo to render various services for the initial development of the property as
shown by vouchers evidencing payments made by petitioner Posadas to
respondent Bravo for squatter relocation, architectural design, survey and
fencing.
Respondents prepared the architectural design, site development plan and
survey in connection with petitioner Posadas' application with the Housing and
Land Use Regulatory Board (HLURB) for the issuance of the Development
Permit, Preliminary Approval and Locational Clearance. 6 Petitioner benefited
from said services as the Development Permit and the Locational Clearance
were eventually issued by the HLURB in her favor. Petitioner Posadas is
therefore liable to pay for these services rendered by respondents. The contract
price for the survey of the land is P140,000.00. Petitioner made partial payments
totaling P130,000.00 leaving a payable balance of P10,000.00.
In his testimony, 7 he alleged that the agreed price for the preparation of the site
development plan is P500,000.00 and that the preparation of the architectural
designs is for P450,000, or a total of P950,000.00 for the two contracts. In his
complaint however, respondent Bravo alleged that he was asked "to prepare the
site development plan and the architectural designs . . . for a contract price of
P450,000.00 . . . " 8 The discrepancy or inconsistency was never reconciled and
clarified.
We reiterate that we cannot award an amount higher than what was claimed in
the complaint. Consequently for the preparation of both the architectural design
and site development plan, respondent is entitled to the amount of P450,000.00
less partial payments made in the amount of P25,000.00. In Policarpio v. RTC of
Quezon City, 9 it was held that a court is bereft of jurisdiction to award, in a
judgment by default, a relief other than that specifically prayed for in the
complaint.
As regards the contracts for the ejectment of squatters and fencing, we believe
however that respondents failed to show proof that they actually fulfilled their
commitments therein. Aside from the bare testimony of respondent Bravo, no
other evidence was presented to show that all the squatters were ejected from
the property. Respondent Bravo failed to show how many shanties or structures
were actually occupying the property before he entered the same, to serve as
basis for concluding whether the task was finished or not. His testimony alone
that he successfully negotiated for the ejectment of all the squatters from the
property will not suffice.
Likewise, in the case of fencing, there is no proof that it was accomplished as
alleged. Respondent Bravo claims that he finished sixty percent (60%) of the
fencing project but he failed to present evidence showing the area sought to be
fenced and the actual area fenced by him. We therefore have no basis to
determining the veracity respondent's allegations. We cannot assume that the
said services rendered for it will be unfair to require petitioner to pay the full
amount claimed in case the respondents obligations were not completely fulfilled.
For respondents' failure to show proof of accomplishment of the aforesaid
services, their claims cannot be granted. In P.T. Cerna Corp. v. Court of Appeals,
10 we ruled that in civil cases, the burden of proof rests upon the party who, as
determined by the pleadings or the nature of the case, asserts the affirmative of
an issue. In this case the burden lies on the complainant, who is duty bound to
prove the allegations in the complaint. As this Court has held, he who alleges a
fact has the burden of proving it and A MERE ALLEGATION IS NOT EVIDENCE.
And the rules do not change even if the defendant is declared in default. In the
leading case of Lopez v. Mendezona, 11 this Court ruled that after entry of
judgment in default against a defendant who has neither appeared nor answered,
and before final judgment in favor of the plaintiff, the latter must establish by
competent evidence all the material allegations of his complaint upon which he
bases his prayer for relief. In De los Santos v. De la Cruz, 12 this Court declared
that a judgement by default against a defendant does not imply a waiver of rights
except that of being heard and of presenting evidence in his favor. It does not
imply admission by the defendant of the facts and causes of action of the plaintiff,
because the codal section requires the latter to adduce his evidence in support of
his allegations as an indispensable condition before final judgment could be
given in his favor. Nor could it be interpreted as an admission by the defendant
that the plaintiff's causes of action finds support in the law or that the latter is
entitled to the relief prayed for.
We explained the rule in judgments by default in Pascua v. Florendo, 13 where
we said that nowhere is it stated that the complainants are automatically entitled
to the relief prayed for, once the defendants are declared in default. Favorable
relief can be granted only after the court has ascertained that the evidence
offered and the facts proven by the presenting party warrant the grant of the
same. Otherwise it would be meaningless to require presentation of evidence if
everytime the other party is declared in default, a decision would automatically be
rendered in favor of the non-defaulting party and exactly according to the tenor of
his prayer. In Lim Tanhu v. Ramolete 14 we elaborated and said that a defaulted
defendant is not actually thrown out of court. The rules see to it that any
judgment against him must be in accordance with law. The evidence to support
the plaintiff's cause is, of course, presented in his absence, but the court is not
supposed to admit that which is basically incompetent. Although the defendant
would not be in a position to object, elementary justice requires that only legal
evidence should be considered against him. If the evidence presented should not
be sufficient to justify a judgment for the plaintiff, the complaint must be
dismissed. And if an unfavorable judgment should be justifiable, it cannot exceed
the amount or be different in kind from what is prayed for in the complaint.
The prayer for actual damages in the amount of P500,000.00, supposedly for the
bunkhouse/warehouse, hollow-block factory, lumber, cement, guard, etc., which
the trial court granted and even increased to P1,500,000.00, and which this Court
would have rightly reduced to the amount prayed for in the complaint, was not
established, as shown upon further review of the record. No receipts or vouchers
were presented by private respondents to show that they actually spent the
amount. In Salas v. Court of Appeals, 15 we said that the burden of proof of the
damages suffered is on the party claiming the same. It his duty to present
evidence to support his claim for actual damages. If he failed to do so, he has
only himself to blame if no award for actual damages is handed down.
In fine, as we declared in PNOC Shipping & Transport Corp. v. Court of Appeals,
16 basic is the rule that to recover actual damages, the amount of loss must not
only be capable of proof but must actually be proven with reasonable degree of
certainty, premised upon competent proof or best evidence obtainable of the
actual amount thereof.
We go to the second issue of whether Luxuria Homes, Inc., was a party to the
transactions entered into by petitioner Posadas and private respondents and thus
could be held jointly and severally with petitioner Posadas. Private respondents
contend that petitioner Posadas surreptitiously formed Luxuria Homes, Inc., and
transferred the subject parcel of land to it to evade payment and defraud
creditors, including private respondents. This allegation does not find support in
the evidence on record.
On the contrary we hold that respondent Court of Appeals committed a reversible
error when it upheld the factual finding of the trial court that petitioners' liability
was aggravated by the fact that Luxuria Homes, Inc., was formed by petitioner
Posadas after demand for payment had been made, evidently for her to evade
payment of her obligation, thereby showing that the transfer of her property to
Luxuria Homes, Inc., was in fraud of creditors.
We easily glean from the record that private respondents sent demand letters on
21 August 1991 and 14 September 1991, or more than a year and a half after the
execution of the Deed of Assignment on 11 December 1989, and the issuance of
the Articles of Incorporation of petitioner Luxuria Homes on 26 January 1990.
And, the transfer was made at the time the relationship between petitioner
Posadas and private respondents was supposedly very pleasant. In fact the
Deed of Assignment dated 11 December 1989 and the Articles of Incorporation
of Luxuria Homes, Inc., issued 26 January 1990 were both signed by respondent
Bravo himself as witness. It cannot be said then that the incorporation of
petitioner Luxuria Homes and the eventual transfer of the subject property to it
were in fraud of private respondents as such were done with the full knowledge
of respondent Bravo himself.
Besides petitioner Posadas is not the majority stockholder of petitioner Luxuria
Homes, Inc., as erroneously stated by the lower court. The Articles of
Incorporation of petitioner Luxuria Homes, Inc., clearly show that petitioner
Posadas owns approximately 33% only of the capital stock. Hence petitioner
Posadas cannot be considered as an alter ego of petitioner Luxuria Homes, Inc.
To disregard the separate juridical personality of a corporation, the wrongdoing
must be clearly and convincingly established. It cannot be presumed. This is
elementary. Thus in Bayer-Roxas v. Court of Appeals, 17 we said that the
separate personality of the corporation may be disregarded only when the
corporation is used as a cloak or cover for fraud or illegality, or to work injustice,
or where necessary for the protection of the creditors. Accordingly in Del Roscrrio
v. NLRC, 18 where the Philsa International Placement and Services Corp. was
organized and registered with the POEA in 1981, several years before the
complainant was filed a case in 1985, we held that this cannot imply fraud.
Obviously in the instant case, private respondents failed to show proof that
petitioner Posadas acted in bad faith. Consequently since private respondents
failed to show that petitioner Luxuria Homes, Inc., was a party to any of the
supposed transactions, not even to the agreement to negotiate with and relocate
the squatters, it cannot be held liable, nay jointly and in solidum, to pay private
respondents. In this case since it was petitioner Aida M. Posadas who contracted
respondent Bravo to render the subject services, only she is liable to pay the
amounts adjudged herein.
We now resolve the third and final issue. Private respondents urge the court to
compel petitioners to execute a management contract with them on the basis of
the authorization letter dated May 3, 1989. The full text of Exh. "D" reads:
I hereby certify that we have duly authorized the bearer, Engineer Bravo to
negotiate, in our behalf, the ejectment of squatters from our property of 1.6
hectares, more or less, in Sucat Muntinlupa. This authority is extended to him as
the representative of the Managers; under our agreement for them to undertake
the development of said area and the construction of housing units intended to
convert the land into a first class subdivision.
The aforecited document is nothing more than a "to-whom-it-may-concern"
authorization letter to negotiate with the squatters. Although it appears that there
was an agreement for the development of the area, there is no showing that
same was ever perfected and finalized. Private respondents presented in
evidence only drafts of a proposed management contract with petitioner's
handwritten marginal notes but the management contract was not put in its final
form. The reason why there was no final uncorrected draft was because the
parties could not agree on the stipulations of said contract, which even private
respondents admitted as found by the trial court. 19 As a consequence the
management drafts submitted by the private respondents should at best be
considered as mere unaccepted offers. We find no cogent reason, considering
that the parties no longer are in a harmonious relationship, for the execution of a
contract to develop a subdivision.
It is fundamental that there can be no contract in the true sense in the absence of
the element of agreement, or of mutual assent of the parties. To compel
petitioner Posadas, whether as representative of petitioner Luxuria Homes or in
her personal capacity, to execute a management contract under the terms and
conditions of private respondents would be to violate the principle of
consensuality of contracts. In Philippine National Bank v. Court of Appeals, 20 we
held that if the assent is wanting on the part of one who contracts, his act has no
more efficacy than if it had been done under duress or by a person of unsound
mind. In ordering petitioner Posadas to execute a management contract with
private respondents, the trial court in effect is putting her under duress.
The parties are bound to fulfill the stipulations in a contract only upon its
perfection. At anytime prior to the perfection of a contract, unaccepted offers and
proposals remain as such and cannot be considered as binding commitments;
hence not demandable.
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed decision
dated March 15, 1996, of respondent Honorable Court of Appeals and its
Resolution dated August 12, 1996, are MODIFIED ordering PETITIONER AIDA
M. POSADAS to pay PRIVATE RESPONDENTS the amount of P435,000.00 as
balance for the preparation of the architectural design, site development plan and
survey. All other claims of respondents are hereby DENIED for lack of
merit.1âwphi1.nêt
SO ORDERED.
Davide, Jr., C.J., Melo, Kapunan and Pardo, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 108734 May 29, 1996

CONCEPT BUILDERS, INC., petitioner,
vs.
THE NATIONAL LABOR RELATIONS COMMISSION, (First Division); and
Norberto Marabe; Rodolfo Raquel, Cristobal Riego, Manuel Gillego,
Palcronio Giducos, Pedro Aboigar, Norberto Comendador, Rogelio Salut,
Emilio Garcia, Jr., Mariano Rio, Paulina Basea, Alfredo Albera, Paquito Salut,
Domingo Guarino, Romeo Galve, Dominador Sabina, Felipe Radiana, Gavino
Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben
Robalos, respondents.

HERMOSISIMA, JR., J.:p

The corporate mask may be lifted and the corporate veil may be pierced when a
corporation is just but the alter ego of a person or of another corporation. Where
badges of fraud exist; where public convenience is defeated; where a wrong is
sought to be justified thereby, the corporate fiction or the notion of legal entity
should come to naught. The law in these instances will regard the corporation as
a mere association of persons and, in case of two corporations, merge them into
one.
Thus, where a sister corporation is used as a shield to evade a corporation's
subsidiary liability for damages, the corporation may not be heard to say that it has
a personality separate and distinct from the other corporation. The piercing of the
corporate veil comes into play.
This special civil action ostensibly raises the question of whether the National
Labor Relations Commission committed grave abuse of discretion when it issued
a "break-open order" to the sheriff to be enforced against personal property found
in the premises of petitioner's sister company.
Petitioner Concept Builders, Inc., a domestic corporation, with principal office at
355 Maysan Road, Valenzuela, Metro Manila, is engaged in the construction
business. Private respondents were employed by said company as laborers,
carpenters and riggers.
On November, 1981, private respondents were served 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, that at the time of the
termination of private respondent's employment, the project in which they were
hired had not yet been finished and completed. Petitioner had to engage the
services of sub-contractors whose workers performed the functions of private
respondents.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor
practice and non-payment of their legal holiday pay, overtime pay and thirteenth-
month pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner
to reinstate private respondents and to pay them back wages equivalent to one
year or three hundred working days.
On November 27, 1985, the National Labor Relations Commission (NLRC)
dismissed the motion for reconsideration filed by petitioner on the ground that the
said decision had already become final and executory. 2
On October 16, 1986, the NLRC Research and Information Department made the
finding that private respondents' back wages amounted to P199,800.00. 3
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the
sheriff to execute the Decision, dated December 19, 1984. The writ was partially
satisfied through garnishment of sums from petitioner's debtor, the Metropolitan
Waterworks and Sewerage Authority, in the amount of P81,385.34. Said amount
was turned over to the cashier of the NLRC.
On February 1, 1989, an Alias Writ of Execution was issued by the Labor Arbiter
directing the sheriff to collect from herein petitioner the sum of P117,414.76,
representing the balance of the judgment award, and to reinstate private
respondents to their former positions.
On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias
writ of execution on petitioner through the security guard on duty but the service
was refused on the ground that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter
issued a second alias writ of execution.
The said writ had not been enforced by the special sheriff because, as stated in
his progress report, dated November 2, 1989:
1. All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela,
Metro Manila, claimed that they were employees of Hydro Pipes Philippines, Inc.
(HPPI) and not by respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the
properties he had levied upon. 4
The said special sheriff recommended that a "break-open order" be issued to
enable him to enter petitioner's premises so that he could proceed with the public
auction sale of the aforesaid personal properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with
the Labor Arbiter alleging that the properties sought to be levied upon by the sheriff
were owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President.
On November 23, 1989, private respondents filed a "Motion for Issuance of a
Break-Open Order," alleging that HPPI and petitioner corporation were owned by
the same incorporator/stockholders. They also alleged that petitioner temporarily
suspended its business operations in order to evade its legal obligations to them
and that private respondents were willing to post an indemnity bond to answer for
any damages which petitioner and HPPI may suffer because of the issuance of the
break-open order.
In support of their claim against HPPI, private respondents presented duly certified
copies of the General Informations Sheet, dated May 15, 1987, submitted by
petitioner to the Securities Exchange Commission (SEC) and the General
Information Sheet, dated May 25, 1987, submitted by HPPI to the Securities and
Exchange Commission.
The General Information Sheet submitted by the petitioner revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
HPPI P 6,999,500.00
Antonio W. Lim 2,900,000.00
Dennis S. Cuyegkeng 300.00
Elisa C. Lim 100,000.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Dennis S. Cuyegkeng Member
Elisa C. Lim Member
Teodulo R. Dino Member
Virgilio O. Casino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa O. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road
Valenzuela, Metro Manila. 5
On the other hand, the General Information Sheet of HPPI revealed the following:
1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
Antonio W. Lim P 400,000.00
Elisa C. Lim 57,700.00
AWL Trading 455,000.00
Dennis S. Cuyegkeng 40,100.00
Teodulo R. Dino 100.00
Virgilio O. Casino 100.00
2. Board of Directors
Antonio W. Lim Chairman
Elisa C. Lim Member
Dennis S. Cuyegkeng Member
Virgilio O. Casino Member
Teodulo R. Dino Member
3. Corporate Officers
Antonio W. Lim President
Dennis S. Cuyegkeng Assistant to the President
Elisa C. Lim Treasurer
Virgilio O. Casino Corporate Secretary
4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila. 6
On February 1, 1990, HPPI filed an Opposition to private respondents' motion for
issuance of a break-open order, contending that HPPI is a corporation which is
separate and distinct from petitioner. HPPI also alleged that the two corporations
are engaged in two different kinds of businesses, i.e., HPPI is a manufacturing
firm while petitioner was then engaged in construction.
On March 2, 1990, the Labor Arbiter issued an Order which denied private
respondents' motion for break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC
set aside the order of the Labor Arbiter, issued a break-open order and directed
private respondents to file a bond. Thereafter, it directed the sheriff to proceed
with the auction sale of the properties already levied upon. It dismissed the third-
party claim for lack of merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a
Resolution, dated December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of discretion when it
ordered the execution of its decision despite a third-party claim on the levied
property. Petitioner further contends, that the doctrine of piercing the corporate
veil should not have been applied, in this case, in the absence of any showing
that it created HPPI in order to evade its liability to private respondents. It also
contends that HPPI is engaged in the manufacture and sale of steel, concrete
and iron pipes, a business which is distinct and separate from petitioner's
construction business. Hence, it is of no consequence that petitioner and HPPI
shared the same premises, the same President and the same set of officers and
subscribers. 7
We find petitioner's contention to be unmeritorious.
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. 8 But, this separate and distinct personality of a corporation is
merely a fiction created by law for convenience and to promote justice. 9 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 the labor laws, 10 this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. 11 This is true likewise when
the corporation is merely an adjunct, a business conduit or an alter ego of
another corporation. 12
The conditions under which the juridical entity may be disregarded vary
according to the peculiar facts and circumstances of each case. No hard and fast
rule can be accurately laid down, but certainly, there are some probative factors
of identity that will justify the application of the doctrine of piercing the corporate
veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business. 13
The SEC en banc explained the "instrumentality rule" which the courts have
applied in disregarding the separate juridical personality of corporations as
follows:
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 is as follows:
1. Control, not mere majority or complete stock control, but complete domination,
not only of finances but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to commit fraud or wrong,
to perpetuate the violation of a statutory or other positive legal duty or dishonest
and unjust act in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate veil."
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. 14
Thus the question of whether a corporation is a mere alter ego, a mere sheet or
paper corporation, a sham or a subterfuge is purely one of fact. 15
In this case, the NLRC noted that, while petitioner claimed that it ceased its
business operations on April 29, 1986, it filed an Information Sheet with the
Securities and Exchange Commission on May 15, 1987, stating that its office
address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand,
HPPI, the third-party claimant, submitted on the same day, a similar information
sheet stating that its office address is at 355 Maysan Road, Valenzuela, Metro
Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casiño as the
corporate secretary of both corporations. It would also not be amiss to note that
both corporations had the same president, the same board of directors, the same
corporate officers, and substantially the same subscribers.
From the foregoing, it appears that, among other things, the respondent (herein
petitioner) and the third-party claimant shared the same address and/or
premises. Under this circumstances, (sic) it cannot be said that the property
levied upon by the sheriff were not of respondents. 16
Clearly, petitioner ceased its business operations in order to evade the payment
to private respondents of back wages and to bar their reinstatement to their
former positions. HPPI is obviously a business conduit of petitioner corporation
and its emergence was skillfully orchestrated to avoid the financial liability that
already attached to petitioner corporation.
The facts in this case are analogous to Claparols v. Court of Industrial Relations,
17 where we had the occasion to rule:
Respondent court's findings that indeed the Claparols Steel and Nail Plant, which
ceased operation of June 30, 1957, was SUCCEEDED by the Claparols Steel
Corporation effective the next day, July 1, 1957, up to December 7, 1962, when
the latter finally ceased to operate, were not disputed by petitioner. It is very clear
that the latter corporation was a continuation and successor of the first entity . . . .
Both predecessors and successor were owned and controlled by petitioner
Eduardo Claparols and there was no break in the succession and continuity of
the same business. This "avoiding-the-liability" scheme is very patent,
considering that 90% of the subscribed shares of stock of the Claparols Steel
Corporation (the second corporation) was owned by respondent . . . Claparols
himself, and all the assets of the dissolved Claparols Steel and Nail plant were
turned over to the emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as
it was deliberately and maliciously designed to evade its financial obligation to its
employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the
property subject of the execution, private respondents had no other recourse but
to apply for a break-open order after the third-party claim of HPPI was dismissed
for lack of merit by the NLRC. This is in consonance with Section 3, Rule VII of
the NLRC Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit the Sheriff
or his representative entry to the place where the property subject of execution is
located or kept, the judgment creditor may apply to the Commission or Labor
Arbiter concerned for a break-open order.
Furthermore, our perusal of the records shows that the twin requirements of due
notice and hearing were complied with. Petitioner and the third-party claimant
were given the opportunity to submit evidence in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed
the break-open order issued by the Labor Arbiter.
Finally, we do not find any reason to disturb the rule that factual findings of quasi-
judicial agencies supported by substantial evidence are binding on this Court and
are entitled to great respect, in the absence of showing of grave abuse of a
discretion. 18
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the
NLRC, dated April 23, 1992 and December 3, 1992, are AFFIRMED.
SO ORDERED.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-23893 October 29, 1968
VILLA REY TRANSIT, INC., plaintiff-appellant,
vs.
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and
PUBLIC SERVICE COMMISSION, defendants.
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC.,
defendants-appellants.
PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant,
vs.
JOSE M. VILLARAMA, third-party defendant-appellee.
Chuidian Law Office for plaintiff-appellant.
Bengzon, Zarraga & Villegas for
defendant-appellant / third-party plaintiff-appellant.
Laurea & Pison for third-party
defendant-appellee.
ANGELES, J.:
This is a tri-party appeal from the decision of the Court of First Instance of Manila,
Civil Case No. 41845, declaring null and void the sheriff's sale of two certificates
of public convenience in favor of defendant Eusebio E. Ferrer and the subsequent
sale thereof by the latter to defendant Pangasinan Transportation Co., Inc.;
declaring the plaintiff Villa Rey Transit, Inc., to be the lawful owner of the said
certificates of public convenience; and ordering the private defendants, jointly and
severally, to pay to the plaintiff, the sum of P5,000.00 as and for attorney's fees.
The case against the PSC was dismissed.
The rather ramified circumstances of the instant case can best be understood by
a chronological narration of the essential facts, to wit:
Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under
the business name of Villa Rey Transit, pursuant to certificates of public
convenience granted him by the Public Service Commission (PSC, for short) in
Cases Nos. 44213 and 104651, which authorized him to operate a total of thirty-
two (32) units on various routes or lines from Pangasinan to Manila, and vice-
versa. On January 8, 1959, he sold the aforementioned two certificates of public
convenience to the Pangasinan Transportation Company, Inc. (otherwise known
as Pantranco), for P350,000.00 with the condition, among others, 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."
Barely three months thereafter, or on March 6, 1959: a corporation called Villa Rey
Transit, Inc. (which shall be referred to hereafter as the Corporation) was organized
with a capital stock of P500,000.00 divided into 5,000 shares of the par value of
P100.00 each; P200,000.00 was the subscribed stock; Natividad R. Villarama (wife
of Jose M. Villarama) was one of the incorporators, and she subscribed for
P1,000.00; the balance of P199,000.00 was subscribed by the brother and sister-
in-law of Jose M. Villarama; of the subscribed capital stock, P105,000.00 was paid
to the treasurer of the corporation, who was Natividad R. Villarama.
In less than a month after its registration with the Securities and Exchange
Commission (March 10, 1959), the Corporation, on April 7, 1959, bought five
certificates of public convenience, forty-nine buses, tools and equipment from one
Valentin Fernando, for the sum of P249,000.00, of which P100,000.00 was paid
upon the signing of the contract; P50,000.00 was payable upon the final approval
of the sale by the PSC; P49,500.00 one year after the final approval of the sale;
and the balance of P50,000.00 "shall be paid by the BUYER to the different
suppliers of the SELLER."
The very same day that the aforementioned contract of sale was executed, the
parties thereto immediately applied with the PSC for its approval, with a prayer for
the issuance of a provisional authority in favor of the vendee Corporation to operate
the service therein involved.1 On May 19, 1959, the PSC granted the provisional
permit prayed for, upon the condition that "it may be modified or revoked by the
Commission at any time, shall be subject to whatever action that may be taken on
the basic application and shall be valid only during the pendency of said
application." Before the PSC could take final action on said application for approval
of sale, however, the Sheriff of Manila, on July 7, 1959, levied on two of the five
certificates of public convenience involved therein, namely, those issued under
PSC cases Nos. 59494 and 63780, pursuant to a writ of execution issued by the
Court of First Instance of Pangasinan in Civil Case No. 13798, in favor of Eusebio
Ferrer, plaintiff, judgment creditor, against Valentin Fernando, defendant,
judgment debtor. The Sheriff made and entered the levy in the records of the PSC.
On July 16, 1959, a public sale was conducted by the Sheriff of the said two
certificates of public convenience. Ferrer was the highest bidder, and a certificate
of sale was issued in his name.
Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and
jointly submitted for approval their corresponding contract of sale to the PSC.2
Pantranco therein prayed that it be authorized provisionally to operate the service
involved in the said two certificates.
The applications for approval of sale, filed before the PSC, by Fernando and the
Corporation, Case No. 124057, and that of Ferrer and Pantranco, Case No.
126278, were scheduled for a joint hearing. In the meantime, to wit, on July 22,
1959, the PSC issued an order disposing that during the pendency of the cases
and before a final resolution on the aforesaid applications, the 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,3 which
decreed, after deliberation, 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.
On November 4, 1959, the Corporation filed in the Court of First Instance of Manila,
a complaint for the annulment of the sheriff's sale of the aforesaid two certificates
of public convenience (PSC Cases Nos. 59494 and 63780) in favor of the
defendant Ferrer, and the subsequent sale thereof by the latter to Pantranco,
against Ferrer, Pantranco and the PSC. The plaintiff Corporation prayed therein
that all the orders of the PSC relative to the parties' dispute over the said
certificates be annulled.
In separate answers, the defendants Ferrer and Pantranco averred that the plaintiff
Corporation had no valid title to the certificates in question because the contract
pursuant to which it acquired them from Fernando was subject to a suspensive
condition — the approval of the PSC — which has not yet been fulfilled, and,
therefore, the Sheriff's levy and the consequent sale at public auction of the
certificates referred to, as well as the sale of the same by Ferrer to Pantranco,
were valid and regular, and vested unto Pantranco, a superior right thereto.
Pantranco, on its part, filed a third-party complaint against Jose M. Villarama,
alleging that Villarama and the Corporation, are one and the same; that Villarama
and/or the Corporation was disqualified from operating the two certificates in
question by virtue of the aforementioned agreement between said Villarama and
Pantranco, which stipulated that 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."
Upon the joinder of the issues in both the complaint and third-party complaint, the
case was tried, and thereafter decision was rendered in the terms, as above stated.
As stated at the beginning, all the parties involved have appealed from the
decision. They submitted a joint record on appeal.
Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey
Transit, Inc. (Corporation) is a distinct and separate entity from Jose M. Villarama;
that the restriction clause in the contract of January 8, 1959 between Pantranco
and Villarama is null and void; that the Sheriff's sale of July 16, 1959, is likewise
null and void; and the failure to award damages in its favor and against Villarama.
Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale
is null and void; and the sale of the two certificates in question by Valentin
Fernando to the Corporation, is valid. He also assails the award of P5,000.00 as
attorney's fees in favor of the Corporation, and the failure to award moral damages
to him as prayed for in his counterclaim.
The Corporation, on the other hand, prays for a review of that portion of the
decision awarding only P5,000.00 as attorney's fees, and insisting that it is entitled
to an award of P100,000.00 by way of exemplary damages.
After a careful study of the facts obtaining in the case, the vital issues to be
resolved are: (1) Does the stipulation between Villarama and Pantranco, as
contained in the deed of sale, that the former "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," apply to new lines only or does
it include existing lines?; (2) Assuming that said stipulation covers all kinds of lines,
is such stipulation valid and enforceable?; (3) In the affirmative, that said stipulation
is valid, did it bind the Corporation?
For convenience, We propose to discuss the foregoing issues by starting with the
last proposition.
The evidence has disclosed that Villarama, albeit was not an incorporator or
stockholder of the Corporation, alleging that he did not become such, because he
did not have sufficient funds to invest, his wife, however, was an incorporator with
the least subscribed number of shares, and was elected treasurer of the
Corporation. The finances of the Corporation which, under all concepts in the law,
are supposed to be under the control and administration of the treasurer keeping
them as trust fund for the Corporation, were, nonetheless, manipulated and
disbursed as if they were the private funds of Villarama, in such a way and extent
that Villarama appeared to be the actual owner-treasurer of the business without
regard to the rights of the stockholders. The following testimony of Villarama,4
together with the other evidence on record, attests to that effect:
Q. Doctor, I want to go back again to the incorporation of the Villa Rey Transit,
Inc. You heard the testimony presented here by the bank regarding the initial
opening deposit of ONE HUNDRED FIVE THOUSAND PESOS, of which amount
Eighty-Five Thousand Pesos was a check drawn by yourself personally. In the
direct examination you told the Court that the reason you drew a check for Eighty-
Five Thousand Pesos was because you and your wife, or your wife, had spent the
money of the stockholders given to her for incorporation. Will you please tell the
Honorable Court if you knew at the time your wife was spending the money to pay
debts, you personally knew she was spending the money of the incorporators?
A. You know my money and my wife's money are one. We never talk about
those things.
Q. Doctor, your answer then is that since your money and your wife's money
are one money and you did not know when your wife was paying debts with the
incorporator's money?
A. Because sometimes she uses my money, and sometimes the money given
to her she gives to me and I deposit the money.
Q. Actually, aside from your wife, you were also the custodian of some of the
incorporators here, in the beginning?
A. Not necessarily, they give to my wife and when my wife hands to me I did
not know it belonged to the incorporators.
Q. It supposes then your wife gives you some of the money received by her in
her capacity as treasurer of the corporation?
A. Maybe.
Q. What did you do with the money, deposit in a regular account?
A. Deposit in my account.
Q. Of all the money given to your wife, she did not receive any check?
A. I do not remember.
Q. Is it usual for you, Doctor, to be given Fifty Thousand Pesos without even
asking what is this?
xxx xxx xxx
JUDGE: Reform the question.
Q. The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two Thousand
Pesos, did your wife give you Fifty-two Thousand Pesos?
A. I have testified before that sometimes my wife gives me money and I do not
know exactly for what.
The evidence further shows that the initial cash capitalization of the corporation of
P105,000.00 was mostly financed by Villarama. Of the P105,000.00 deposited in
the First National City Bank of New York, representing the initial paid-up capital of
the Corporation, P85,000.00 was covered by Villarama's personal check. The
deposit slip for the said amount of P105,000.00 was admitted in evidence as Exh.
23, which shows on its face that P20,000.00 was paid in cash and P85,000.00
thereof was covered by Check No. F-50271 of the First National City Bank of New
York. The testimonies of Alfonso Sancho5 and Joaquin Amansec,6 both
employees of said bank, have proved that the drawer of the check was Jose
Villarama himself.
Another witness, Celso Rivera, accountant of the Corporation, testified that while
in the books of the corporation there appears an entry that the treasurer received
P95,000.00 as second installment of the paid-in subscriptions, and, subsequently,
also P100,000.00 as the first installment of the offer for second subscriptions worth
P200,000.00 from the original subscribers, yet Villarama directed him (Rivera) to
make vouchers liquidating the sums.7 Thus, it was made to appear that the
P95,000.00 was delivered to Villarama in payment for equipment purchased from
him, and the P100,000.00 was loaned as advances to the stockholders. The said
accountant, however, testified that he was not aware of any amount of money that
had actually passed hands among the parties involved,8 and actually the only
money of the corporation was the P105,000.00 covered by the deposit slip Exh.
23, of which as mentioned above, P85,000.00 was paid by Villarama's personal
check.
Further, the evidence shows that when the Corporation was in its initial months of
operation, Villarama purchased and paid with his personal checks Ford trucks for
the Corporation. Exhibits 20 and 21 disclose that the said purchases were paid by
Philippine Bank of Commerce Checks Nos. 992618-B and 993621-B, respectively.
These checks have been sufficiently established by Fausto Abad, Assistant
Accountant of Manila Trading & Supply Co., from which the trucks were
purchased9 and Aristedes Solano, an employee of the Philippine Bank of
Commerce,10 as having been drawn by Villarama.
Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries and
vouchers showing that Villarama had co-mingled his personal funds and
transactions with those made in the name of the Corporation, are very illuminating
evidence. Villarama has assailed the admissibility of these exhibits, contending
that no evidentiary value whatsoever should be given to them since "they were
merely photostatic copies of the originals, the best evidence being the originals
themselves." According to him, at the time Pantranco offered the said exhibits, it
was the most likely possessor of the originals thereof because they were stolen
from the files of the Corporation and only Pantranco was able to produce the
alleged photostat copies thereof.
Section 5 of Rule 130 of the Rules of Court provides for the requisites for the
admissibility of secondary evidence when the original is in the custody of the
adverse party, thus: (1) opponent's possession of the original; (2) reasonable
notice to opponent to produce the original; (3) satisfactory proof of its existence;
and (4) failure or refusal of opponent to produce the original in court.11 Villarama
has practically admitted the second and fourth requisites.12 As to the third, he
admitted their previous existence in the files of the Corporation and also that he
had seen some of them.13 Regarding the first element, Villarama's theory is that
since even at the time of the issuance of the subpoena duces tecum, the originals
were already missing, therefore, the Corporation was no longer in possession of
the same. However, it is not necessary for a party seeking to introduce secondary
evidence to show that the original is in the actual possession of his adversary. It is
enough that the circumstances are such as to indicate that the writing is in his
possession or under his control. Neither is it required that the party entitled to the
custody of the instrument should, on being notified to produce it, admit having it in
his possession.14 Hence, secondary evidence is admissible where he denies
having it in his possession. The party calling for such evidence may introduce a
copy thereof as in the case of loss. For, among the exceptions to the best evidence
rule is "when the original has been lost, destroyed, or cannot be produced in
court."15 The originals of the vouchers in question must be deemed to have been
lost, as even the Corporation admits such loss. Viewed upon this light, there can
be no doubt as to the admissibility in evidence of Exhibits 6 to 19 and 22.
Taking account of the foregoing evidence, together with Celso Rivera's
testimony,16 it would appear that: Villarama supplied the organization expenses
and the assets of the Corporation, such as trucks and equipment;17 there was no
actual payment by the original subscribers of the amounts of P95,000.00 and
P100,000.00 as appearing in the books;18 Villarama made use of the money of
the Corporation and deposited them to his private accounts;19 and the Corporation
paid his personal accounts.20
Villarama himself admitted that he mingled the corporate funds with his own
money.21 He also admitted that gasoline purchases of the Corporation were made
in his name22 because "he had existing account with Stanvac which was properly
secured and he wanted the Corporation to benefit from the rebates that he
received."23
The foregoing 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. They show
beyond doubt that the Corporation is his alter ego.
It is significant that not a single one of the acts enumerated above as proof of
Villarama's oneness with the Corporation has been denied by him. On the contrary,
he has admitted them with offered excuses.
Villarama has admitted, for instance, having paid P85,000.00 of the initial capital
of the Corporation with the lame excuse that "his wife had requested him to
reimburse the amount entrusted to her by the incorporators and which she had
used to pay the obligations of Dr. Villarama (her husband) incurred while he was
still the owner of Villa Rey Transit, a single proprietorship." But with his admission
that he had received P350,000.00 from Pantranco for the sale of the two
certificates and one unit,24 it becomes difficult to accept Villarama's explanation
that he and his wife, after consultation,25 spent the money of their relatives (the
stockholders) when they were supposed to have their own money. Even if
Pantranco paid the P350,000.00 in check to him, as claimed, it could have been
easy for Villarama to have deposited said check in his account and issued his own
check to pay his obligations. And there is no evidence adduced that the said
amount of P350,000.00 was all spent or was insufficient to settle his prior
obligations in his business, and in the light of the stipulation in the deed of sale
between Villarama and Pantranco that P50,000.00 of the selling price was
earmarked for the payments of accounts due to his creditors, the excuse appears
unbelievable.
On his having paid for purchases by the Corporation of trucks from the Manila
Trading & Supply Co. with his personal checks, his reason was that he was only
sharing with the Corporation his credit with some companies. And his main reason
for mingling his funds with that of the Corporation and for the latter's paying his
private bills is that it would be more convenient that he kept the money to be used
in paying the registration fees on time, and since he had loaned money to the
Corporation, this would be set off by the latter's paying his bills. Villarama admitted,
however, that the corporate funds in his possession were not only for registration
fees but for other important obligations which were not specified.26
Indeed, while Villarama was not the Treasurer of the Corporation but was,
allegedly, only a part-time manager,27 he admitted not only having held the
corporate money but that he advanced and lent funds for the Corporation, and yet
there was no Board Resolution allowing it.28
Villarama's explanation on the matter of his involvement with the corporate affairs
of the Corporation only renders more credible Pantranco's claim that his control
over the corporation, especially in the management and disposition of its funds,
was so extensive and intimate that it is impossible to segregate and identify which
money belonged to whom. 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. 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.29 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,30 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.
Upon the foregoing considerations, We are of the opinion, and so hold, that the
preponderance of evidence have shown that the Villa Rey Transit, Inc. is an alter
ego of Jose M. 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. For the rule is that a seller or promisor may not make use of a
corporate entity as a means of evading the obligation of his covenant.31 Where
the Corporation is substantially the alter ego of the covenantor to the restrictive
agreement, it can be enjoined from competing with the covenantee.32
The Corporation contends that even on the supposition that Villa Rey Transit, Inc.
and Villarama are one and the same, the restrictive clause in the contract between
Villarama and Pantranco does not include the purchase of existing lines but it only
applies to application for the new lines. The clause in dispute reads thus:
(4) The SELLER shall not, for a period of ten (10) years from the date of this sale
apply for any TPU service identical or competing with the BUYER. (Emphasis
supplied)
As We read the disputed clause, it is evident from the context thereof that the
intention of the parties was to eliminate the seller as a competitor of the buyer for
ten years along the lines of operation covered by the certificates of public
convenience subject of their transaction. The word "apply" as broadly used has for
frame of reference, a service by the seller on lines or routes that would compete
with the buyer along the routes acquired by the latter. In this jurisdiction, prior
authorization is needed before anyone can operate a TPU service,33whether the
service consists in a new line or an old one acquired from a previous operator. The
clear intention of the parties was to prevent the seller from conducting any
competitive line for 10 years since, anyway, he has bound himself not to apply for
authorization to operate along such lines for the duration of such period.34
If the prohibition is to be applied only to the acquisition of new certificates of public
convenience thru an application with the Public Service Commission, this would,
in effect, allow the seller just the same to compete with the buyer as long as his
authority to operate is only acquired thru transfer or sale from a previous operator,
thus defeating the intention of the parties. For what would prevent the seller, under
the circumstances, from having a representative or dummy apply in the latter's
name and then later on transferring the same by sale to the seller? Since
stipulations in a contract is the law between the contracting parties,
Every person must, in the exercise of his rights and in the performance of his
duties, act with justice, give everyone his due, and observe honesty and good faith.
(Art. 19, New Civil Code.)
We are not impressed of Villarama's contention that the re-wording of the two
previous drafts of the contract of sale between Villarama and Pantranco is
significant in that as it now appears, the parties intended to effect the least
restriction. We are persuaded, after an examination of the supposed drafts, that
the scope of the final stipulation, while not as long and prolix as those in the drafts,
is just as broad and comprehensive. At most, it can be said that the re-wording
was done merely for brevity and simplicity.
The evident intention behind the restriction was to eliminate the sellers as a
competitor, and this must be, considering such factors as the good will35 that the
seller had already gained from the riding public and his adeptness and proficiency
in the trade. On this matter, Corbin, an authority on Contracts has this to say.36
When one buys the business of another as a going concern, he usually wishes to
keep it going; he wishes to get the location, the building, the stock in trade, and the
customers. He wishes to step into the seller's shoes and to enjoy the same
business relations with other men. He is willing to pay much more if he can get the
"good will" of the business, meaning by this the good will of the customers, that
they may continue to tread the old footpath to his door and maintain with him the
business relations enjoyed by the seller.
... In order to be well assured of this, he obtains and pays for the seller's promise
not to reopen business in competition with the business sold.
As to whether or not such a stipulation in restraint of trade is valid, our
jurisprudence on the matter37says:
The law concerning contracts which tend to restrain business or trade has gone
through a long series of changes from time to time with the changing condition of
trade and commerce. With trifling exceptions, said changes have been a
continuous development of a general rule. The early cases show plainly a
disposition to avoid and annul all contract which prohibited or restrained any one
from using a lawful trade "at any time or at any place," as being against the benefit
of the state. Later, however, the rule became well established that if the restraint
was limited to "a certain time" and within "a certain place," such contracts were
valid and not "against the benefit of the state." Later cases, and we think the rule
is now well established, have held that a contract in restraint of trade is valid
providing there is a limitation upon either time or place. A contract, however, which
restrains a man from entering into business or trade without either a limitation as
to time or place, will be held invalid.
The public welfare of course must always be considered and if it be not involved
and the restraint upon one party is not greater than protection to the other requires,
contracts like the one we are discussing will be sustained. The general tendency,
we believe, of modern authority, is to make the test whether the restraint is
reasonably necessary for the protection of the contracting parties. If the contract is
reasonably necessary to protect the interest of the parties, it will be upheld.
(Emphasis supplied.)
Analyzing the characteristics of the questioned stipulation, We find that although it
is in the nature of an agreement suppressing competition, it is, however, merely
ancillary or incidental to the main agreement which is that of sale. The suppression
or restraint is only partial or limited: first, in scope, it refers only to application for
TPU by the seller in competition with the lines sold to the buyer; second, in
duration, it is only for ten (10) years; and third, with respect to situs or territory, the
restraint is only along the lines covered by the certificates sold. In view of these
limitations, coupled with the consideration of P350,000.00 for just two certificates
of public convenience, and considering, furthermore, that the disputed stipulation
is only incidental to a main agreement, the same is reasonable and it is not harmful
nor obnoxious to public service.38 It does not appear that the ultimate result of the
clause or stipulation would be to leave solely to Pantranco the right to operate
along the lines in question, thereby establishing monopoly or predominance
approximating thereto. We believe the main purpose of the restraint was to protect
for a limited time the business of the buyer.
Indeed, the evils of monopoly are farfetched here. There can be no danger of price
controls or deterioration of the service because of the close supervision of the
Public Service Commission.39 This Court had stated long ago,40 that "when one
devotes his property to a use in which the public has an interest, he virtually grants
to the public an interest in that use and submits it to such public use under
reasonable rules and regulations to be fixed by the Public Utility Commission."
Regarding that aspect of the clause that it is merely ancillary or incidental to a
lawful agreement, the underlying reason sustaining its validity is well explained in
36 Am. Jur. 537-539, to wit:
... Numerous authorities hold that a covenant which is incidental to the sale and
transfer of a trade or business, and which purports to bind the seller not to engage
in the same business in competition with the purchaser, is lawful and enforceable.
While such covenants are designed to prevent competition on the part of the seller,
it is ordinarily neither their purpose nor effect to stifle competition generally in the
locality, nor to prevent it at all in a way or to an extent injurious to the public. The
business in the hands of the purchaser is carried on just as it was in the hands of
the seller; the former merely takes the place of the latter; the commodities of the
trade are as open to the public as they were before; the same competition exists
as existed before; there is the same employment furnished to others after as
before; the profits of the business go as they did before to swell the sum of public
wealth; the public has the same opportunities of purchasing, if it is a mercantile
business; and production is not lessened if it is a manufacturing plant.
The reliance by the lower court on tile case of Red Line Transportation Co. v.
Bachrach41 and finding that the stipulation is illegal and void seems misplaced. In
the said Red Line case, the agreement therein sought to be enforced was virtually
a division of territory between two operators, each company imposing upon itself
an obligation not to operate in any territory covered by the routes of the other.
Restraints of this type, among common carriers have always been covered by the
general rule invalidating agreements in restraint of trade. 42
Neither are the other cases relied upon by the plaintiff-appellee applicable to the
instant case. In Pampanga Bus Co., Inc. v. Enriquez,43the undertaking of the
applicant therein not to apply for the lifting of restrictions imposed on his certificates
of public convenience was not an ancillary or incidental agreement. The restraint
was the principal objective. On the other hand, in Red Line Transportation Co., Inc.
v. Gonzaga,44 the restraint there in question not to ask for extension of the line, or
trips, or increase of equipment — was not an agreement between the parties but
a condition imposed in the certificate of public convenience itself.
Upon the foregoing considerations, Our conclusion is that the stipulation
prohibiting Villarama for a period of 10 years to "apply" for TPU service along the
lines covered by the certificates of public convenience sold by him to Pantranco is
valid and reasonable. Having arrived at this conclusion, and considering that the
preponderance of the evidence have shown that Villa Rey Transit, Inc. is itself the
alter ego of Villarama, We hold, as prayed for in Pantranco's third party complaint,
that the said Corporation should, until the expiration of the 1-year period
abovementioned, be enjoined from operating the line subject of the prohibition.
To avoid any misunderstanding, it is here to be emphasized that the 10-year
prohibition upon Villarama is not against his application for, or purchase of,
certificates of public convenience, but merely the operation of TPU along the lines
covered by the certificates sold by him to Pantranco. Consequently, the sale
between Fernando and the Corporation is valid, such that the rightful ownership of
the disputed certificates still belongs to the plaintiff being the prior purchaser in
good faith and for value thereof. In view of the ancient rule of caveat emptor
prevailing in this jurisdiction, what was acquired by Ferrer in the sheriff's sale was
only the right which Fernando, judgment debtor, had in the certificates of public
convenience on the day of the sale.45
Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of Public
Service was notified that "by virtue of an Order of Execution issued by the Court of
First Instance of Pangasinan, the rights, interests, or participation which the
defendant, VALENTIN A. FERNANDO — in the above entitled case may have in
the following realty/personalty is attached or levied upon, to wit: The rights,
interests and participation on the Certificates of Public Convenience issued to
Valentin A. Fernando, in Cases Nos. 59494, etc. ... Lines — Manila to Lingayen,
Dagupan, etc. vice versa." Such notice of levy only shows that Ferrer, the vendee
at auction of said certificates, merely stepped into the shoes of the judgment
debtor. Of the same principle is the provision of Article 1544 of the Civil Code, that
"If the same thing should have been sold to different vendees, the ownership shall
be transferred to the person who may have first taken possession thereof in good
faith, if it should be movable property."
There is no merit in Pantranco and Ferrer's theory that the sale of the certificates
of public convenience in question, between the Corporation and Fernando, was
not consummated, it being only a conditional sale subject to the suspensive
condition of its approval by the Public Service Commission. While section 20(g) of
the Public Service Act provides that "subject to established limitation and
exceptions and saving provisions to the contrary, it shall be unlawful for any public
service or for the owner, lessee or operator thereof, without the approval and
authorization of the Commission previously had ... to sell, alienate, mortgage,
encumber or lease its property, franchise, certificates, privileges, or rights or any
part thereof, ...," the same section also provides:
... Provided, however, That nothing herein contained shall be construed to prevent
the transaction from being negotiated or completed before its approval or to
prevent the sale, alienation, or lease by any public service of any of its property in
the ordinary course of its business.
It is clear, therefore, that the requisite approval of the PSC is not a condition
precedent for the validity and consummation of the sale.
Anent the question of damages allegedly suffered by the parties, each of the
appellants has its or his own version to allege.
Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants
(Pantranco and Ferrer) in acquiring the certificates of public convenience in
question, despite constructive and actual knowledge on their part of a prior sale
executed by Fernando in favor of the said corporation, which necessitated the latter
to file the action to annul the sheriff's sale to Ferrer and the subsequent transfer to
Pantranco, it is entitled to collect actual and compensatory damages, and
attorney's fees in the amount of P25,000.00. The evidence on record, however,
does not clearly show that said defendants acted in bad faith in their acquisition of
the certificates in question. They believed that because the bill of sale has yet to
be approved by the Public Service Commission, the transaction was not a
consummated sale, and, therefore, the title to or ownership of the certificates was
still with the seller. The award by the lower court of attorney's fees of P5,000.00 in
favor of Villa Rey Transit, Inc. is, therefore, without basis and should be set aside.
Eusebio Ferrer's charge that by reason of the filing of the action to annul the
sheriff's sale, he had suffered and should be awarded moral, exemplary damages
and attorney's fees, cannot be entertained, in view of the conclusion herein
reached that the sale by Fernando to the Corporation was valid.
Pantranco, on the other hand, justifies its claim for damages with the allegation
that when it purchased ViIlarama's business for P350,000.00, it intended to build
up the traffic along the lines covered by the certificates but it was rot afforded an
opportunity to do so since barely three months had elapsed when the contract was
violated by Villarama operating along the same lines in the name of Villa Rey
Transit, Inc. It is further claimed by Pantranco that the underhanded manner in
which Villarama violated the contract is pertinent in establishing punitive or moral
damages. Its contention as to the proper measure of damages is that it should be
the purchase price of P350,000.00 that it paid to Villarama. While We are fully in
accord with Pantranco's claim of entitlement to damages it suffered as a result of
Villarama's breach of his contract with it, the record does not sufficiently supply the
necessary evidentiary materials upon which to base the award and there is need
for further proceedings in the lower court to ascertain the proper amount.
PREMISES CONSIDERED, the judgment appealed from is hereby modified as
follows:
1. The sale of the two certificates of public convenience in question by Valentin
Fernando to Villa Rey Transit, Inc. is declared preferred over that made by the
Sheriff at public auction of the aforesaid certificate of public convenience in favor
of Eusebio Ferrer;
2. Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan
Transportation Co. against Jose M. Villarama, holding that Villa Rey Transit, Inc.
is an entity distinct and separate from the personality of Jose M. Villarama, and
insofar as it awards the sum of P5,000.00 as attorney's fees in favor of Villa Rey
Transit, Inc.;
3. The case is remanded to the trial court for the reception of evidence in
consonance with the above findings as regards the amount of damages suffered
by Pantranco; and
4. On equitable considerations, without costs. So ordered

[G.R. No. 100812. June 25, 1999]

FRANCISCO MOTORS CORPORATION, petitioner, vs. COURT OF APPEALS
and SPOUSES GREGORIO and LIBRADA MANUEL, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari, under Rule 45 of the Rules of Court,
seeks to annul the decision[if !supportFootnotes][1][endif] of the Court of Appeals
in C.A. G.R. CV No. 10014 affirming the decision rendered by Branch 135,
Regional Trial Court of Makati, Metro Manila. The procedural antecedents of this
petition are as follows:
On January 23, 1985, petitioner filed a complaint[if
!supportFootnotes][2][endif] against private respondents to recover three thousand
four hundred twelve and six centavos (P3,412.06), representing the balance of the
jeep body purchased by the Manuels from petitioner; an additional sum of twenty
thousand four hundred fifty-four and eighty centavos (P20,454.80) representing
the unpaid balance on the cost of repair of the vehicle; and six thousand pesos
(P6,000.00) for cost of suit and attorneys fees.[if !supportFootnotes][3][endif] To
the original balance on the price of jeep body were added the costs of repair.[if
!supportFootnotes][4][endif] In their answer, private respondents interposed a
counterclaim for unpaid legal services by Gregorio Manuel in the amount of fifty
thousand pesos (P50,000) which was not paid by the incorporators, directors and
officers of the petitioner. The trial court decided the case on June 26, 1985, in favor
of petitioner in regard to the petitioners claim for money, but also allowed the
counter-claim of private respondents. Both parties appealed. On April 15, 1991,
the Court of Appeals sustained the trial courts decision.[if
!supportFootnotes][5][endif] Hence, the present petition.
For our review in particular is the propriety of the permissive counterclaim
which private respondents filed together with their answer to petitioners complaint
for a sum of money. Private respondent Gregorio Manuel alleged as an affirmative
defense that, while he was petitioners Assistant Legal Officer, he represented
members of the Francisco family in the intestate estate proceedings of the late
Benita Trinidad. However, even after the termination of the proceedings, his
services were not paid. Said family members, he said, were also incorporators,
directors and officers of petitioner. Hence to counter petitioners collection suit, he
filed a permissive counterclaim for the unpaid attorneys fees.[if
!supportFootnotes][6][endif]
For failure of petitioner to answer the counterclaim, the trial court declared
petitioner in default on this score, and evidence ex-parte was presented on the
counterclaim. The trial court ruled in favor of private respondents and found that
Gregorio Manuel indeed rendered legal services to the Francisco family in Special
Proceedings Number 7803- In the Matter of Intestate Estate of Benita Trinidad.
Said court also found that his legal services were not compensated despite
repeated demands, and thus ordered petitioner to pay him the amount of fifty
thousand (P50,000.00) pesos.[if !supportFootnotes][7][endif]
Dissatisfied with the trial courts order, petitioner elevated the matter to the
Court of Appeals, posing the following issues:
I.
WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS
NULL AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE
PERSON OF THE DEFENDANT.
II.
WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN
THE ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD LIABLE TO
THE CLAIM OF DEFENDANT-APPELLEES.
III.
WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-
APPELLANT TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM.[if
!supportFootnotes][8][endif]
Petitioner contended that the trial court did not acquire jurisdiction over it
because no summons was validly served on it together with the copy of the answer
containing the permissive counterclaim. Further, petitioner questions the propriety
of its being made party to the case because it was not the real party in interest but
the individual members of the Francisco family concerned with the intestate case.
In its assailed decision now before us for review, respondent Court of
Appeals held that a counterclaim must be answered in ten (10) days, pursuant to
Section 4, Rule 11, of the Rules of Court; and nowhere does it state in the Rules
that a party still needed to be summoned anew if a counterclaim was set up against
him. Failure to serve summons, said respondent court, did not effectively negate
trial courts jurisdiction over petitioner in the matter of the counterclaim. It likewise
pointed out that there was no reason for petitioner to be excused from answering
the counterclaim. Court records showed that its former counsel, Nicanor G.
Alvarez, received the copy of the answer with counterclaim two (2) days prior to
his withdrawal as counsel for petitioner. Moreover when petitioners new counsel,
Jose N. Aquino, entered his appearance, three (3) days still remained within the
period to file an answer to the counterclaim. Having failed to answer, petitioner was
correctly considered in default by the trial court.[if !supportFootnotes][9][endif]
Even assuming that the trial court acquired no jurisdiction over petitioner,
respondent court also said, but having filed a motion for reconsideration seeking
relief from the said order of default, petitioner was estopped from further
questioning the trial courts jurisdiction.[if !supportFootnotes][10][endif]
On the question of its liability for attorneys fees owing to private respondent
Gregorio Manuel, petitioner argued that being a corporation, it should not be held
liable therefor because these fees were owed by the incorporators, directors and
officers of the corporation in their personal capacity as heirs of Benita Trinidad.
Petitioner stressed that the personality of the corporation, vis--vis the individual
persons who hired the services of private respondent, is separate and distinct,[if
!supportFootnotes][11][endif] hence, the liability of said individuals did not become
an obligation chargeable against petitioner.
Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:
However, this distinct and separate personality is merely a fiction created by law
for convenience and to promote justice. Accordingly, 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 found (sic) illegality, or to work an
injustice, or where necessary to achieve equity or when necessary for the
protection of creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347)
Corporations are composed of natural persons and the legal fiction of a separate
corporate personality is not a shield for the commission of injustice and inequity.
(Chemplex Philippines, Inc. vs. Pamatian, 57 SCRA 408)
In the instant case, evidence shows that the plaintiff-appellant Francisco Motors
Corporation is composed of the heirs of the late Benita Trinidad as directors and
incorporators for whom defendant Gregorio Manuel rendered legal services in the
intestate estate case of their deceased mother. Considering the aforestated
principles and circumstances established in this case, equity and justice
demands plaintiff-appellants veil of corporate identity should be pierced and the
defendant be compensated for legal services rendered to the heirs, who are
directors of the plaintiff-appellant corporation.[if !supportFootnotes][12][endif]
Now before us, petitioner assigns the following errors:
I.
THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF
PIERCING THE VEIL OF CORPORATE ENTITY.
II.
THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS
JURISDICTION OVER PETITIONER WITH RESPECT TO THE
COUNTERCLAIM.[if !supportFootnotes][13][endif]
Petitioner submits that respondent court should not have resorted to piercing
the veil of corporate fiction because the transaction concerned only respondent
Gregorio Manuel and the heirs of the late Benita Trinidad. According to petitioner,
there was no cause of action by said respondent against petitioner; personal
concerns of the heirs should be distinguished from those involving corporate
affairs. Petitioner further contends that the present case does not fall among the
instances wherein the courts may look beyond the distinct personality of a
corporation. According to petitioner, the services for which respondent Gregorio
Manuel seeks to collect fees from petitioner are personal in nature. Hence, it avers
the heirs should have been sued in their personal capacity, and not involve the
corporation.[if !supportFootnotes][14][endif]
With regard to the permissive counterclaim, petitioner also insists that there
was no proper service of the answer containing the permissive counterclaim. It
claims that the counterclaim is a separate case which can only be properly served
upon the opposing party through summons. Further petitioner states that by
nature, a permissive counterclaim is one which does not arise out of nor is
necessarily connected with the subject of the opposing partys claim. Petitioner
avers that since there was no service of summons upon it with regard to the
counterclaim, then the court did not acquire jurisdiction over petitioner. Since a
counterclaim is considered an action independent from the answer, according to
petitioner, then in effect there should be two simultaneous actions between the
same parties: each party is at the same time both plaintiff and defendant with
respect to the other,[if !supportFootnotes][15][endif] requiring in each case
separate summonses.
In their Comment, private respondents focus on the two questions raised by
petitioner. They defend the propriety of piercing the veil of corporate fiction, but
deny the necessity of serving separate summonses on petitioner in regard to their
permissive counterclaim contained in the answer.
Private respondents maintain both trial and appellate courts found that
respondent Gregorio Manuel was employed as assistant legal officer of petitioner
corporation, and that his services were solicited by the incorporators, directors and
members to handle and represent them in Special Proceedings No. 7803,
concerning the Intestate Estate of the late Benita Trinidad. They assert that the
members of petitioner corporation took advantage of their positions by not
compensating respondent Gregorio Manuel after the termination of the estate
proceedings despite his repeated demands for payment of his services. They cite
findings of the appellate court that support piercing the veil of corporate identity in
this particular case. They assert that the corporate veil may be disregarded when
it is used to defeat public convenience, justify wrong, protect fraud, and defend
crime. It may also be pierced, according to them, where the corporate entity is
being used as an alter ego, adjunct, or business conduit for the sole benefit of the
stockholders or of another corporate entity. In these instances, they aver, the
corporation should be treated merely as an association of individual persons.[if
!supportFootnotes][16][endif]
Private respondents dispute petitioners claim that its right to due process was
violated when respondents counterclaim was granted due course, although no
summons was served upon it. They claim that no provision in the Rules of Court
requires service of summons upon a defendant in a counterclaim. Private
respondents argue that when the petitioner filed its complaint before the trial court
it voluntarily submitted itself to the jurisdiction of the court. As a consequence, the
issuance of summons on it was no longer necessary. Private respondents say they
served a copy of their answer with affirmative defenses and counterclaim on
petitioners former counsel, Nicanor G. Alvarez. While petitioner would have the
Court believe that respondents served said copy upon Alvarez after he had
withdrawn his appearance as counsel for the petitioner, private respondents assert
that this contention is utterly baseless. Records disclose that the answer was
received two (2) days before the former counsel for petitioner withdrew his
appearance, according to private respondents. They maintain that the present
petition is but a form of dilatory appeal, to set off petitioners obligations to the
respondents by running up more interest it could recover from them. Private
respondents therefore claim damages against petitioner.[if
!supportFootnotes][17][endif]
To resolve the issues in this case, we must first determine the propriety of
piercing the veil of corporate fiction.
Basic in corporation law is the principle that a corporation has a separate
personality distinct from its stockholders and from other corporations to which it
may be connected.[if !supportFootnotes][18][endif] However, under the doctrine of
piercing the veil of corporate entity, the corporations separate juridical personality
may be disregarded, for example, when the corporate identity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime. Also, where the
corporation is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to
make it merely an instrumentality, agency, conduit or adjunct of another
corporation, then its distinct personality may be ignored.[if
!supportFootnotes][19][endif] In these circumstances, the courts will treat the
corporation as a mere aggrupation of persons and the liability will directly attach to
them. The legal fiction of a separate corporate personality in those cited instances,
for reasons of public policy and in the interest of justice, will be justifiably set aside.
In our view, however, given the facts and circumstances of this case, the
doctrine of piercing the corporate veil has no relevant application here.
Respondent court erred in permitting the trial courts resort to this doctrine. The
rationale behind piercing a corporations identity in a given case is to remove the
barrier between the corporation from the persons comprising it to thwart the
fraudulent and illegal schemes of those who use the corporate personality as a
shield for undertaking certain proscribed activities. However, in the case at bar,
instead of holding certain individuals or persons responsible for an alleged
corporate act, the situation has been reversed. It is the petitioner as a corporation
which is being ordered to answer for the personal liability of certain individual
directors, officers and incorporators concerned. Hence, it appears to us that the
doctrine has been turned upside down because of its erroneous invocation. Note
that according to private respondent Gregorio Manuel his services were solicited
as counsel for members of the Francisco family to represent them in the intestate
proceedings over Benita Trinidads estate. These estate proceedings did not
involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco
family members but also from petitioner corporation on the claims that its
management had requested his services and he acceded thereto as an employee
of petitioner from whom it could be deduced he was also receiving a salary. His
move to recover unpaid legal fees through a counterclaim against Francisco
Motors Corporation, to offset the unpaid balance of the purchase and repair of a
jeep body could only result from an obvious misapprehension that petitioners
corporate assets could be used to answer for the liabilities of its individual directors,
officers, and incorporators. Such result if permitted could easily prejudice the
corporation, its own creditors, and even other stockholders; hence, clearly
inequitous to petitioner.
Furthermore, considering the nature of the legal services involved, whatever
obligation said incorporators, directors and officers of the corporation had incurred,
it was incurred in their personal capacity. When directors and officers of a
corporation are unable to compensate a party for a personal obligation, it is far-
fetched to allege that the corporation is perpetuating fraud or promoting injustice,
and be thereby held liable therefor by piercing its corporate veil. While there are
no hard and fast rules on disregarding separate corporate identity, we must always
be mindful of its function and purpose. A court should be careful in assessing the
milieu where the doctrine of piercing the corporate veil may be applied. Otherwise
an injustice, although unintended, may result from its erroneous application.
The personality of the corporation and those of its incorporators, directors
and officers in their personal capacities ought to be kept separate in this case. The
claim for legal fees against the concerned individual incorporators, officers and
directors could not be properly directed against the corporation without violating
basic principles governing corporations. Moreover, every action including a
counterclaim must be prosecuted or defended in the name of the real party in
interest.[if !supportFootnotes][20][endif] It is plainly an error to lay the claim for legal
fees of private respondent Gregorio Manuel at the door of petitioner (FMC) rather
than individual members of the Francisco family.
However, with regard to the procedural issue raised by petitioners allegation,
that it needed to be summoned anew in order for the court to acquire jurisdiction
over it, we agree with respondent courts view to the contrary. Section 4, Rule 11
of the Rules of Court provides that a counterclaim or cross-claim must be answered
within ten (10) days from service. Nothing in the Rules of Court says that summons
should first be served on the defendant before an answer to counterclaim must be
made. The purpose of a summons is to enable the court to acquire jurisdiction over
the person of the defendant. Although a counterclaim is treated as an entirely
distinct and independent action, the defendant in the counterclaim, being the
plaintiff in the original complaint, has already submitted to the jurisdiction of the
court. Following Rule 9, Section 3 of the 1997 Rules of Civil Procedure,[if
!supportFootnotes][21][endif] if a defendant (herein petitioner) fails to answer the
counterclaim, then upon motion of plaintiff, the defendant may be declared in
default. This is what happened to petitioner in this case, and this Court finds no
procedural error in the disposition of the appellate court on this particular issue.
Moreover, as noted by the respondent court, when petitioner filed its motion
seeking to set aside the order of default, in effect it submitted itself to the
jurisdiction of the court. As well said by respondent court:
Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records
show that upon its request, plaintiff-appellant was granted time to file a motion for
reconsideration of the disputed decision. Plaintiff-appellant did file its motion for
reconsideration to set aside the order of default and the judgment rendered on
the counterclaim.
Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the
counterclaim, as it vigorously insists, plaintiff-appellant is considered to have
submitted to the courts jurisdiction when it filed the motion for reconsideration
seeking relief from the court. (Soriano vs. Palacio, 12 SCRA 447). A party is
estopped from assailing the jurisdiction of a court after voluntarily submitting
himself to its jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a
bar against any claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA 37).[if
!supportFootnotes][22][endif]
WHEREFORE, the petition is hereby GRANTED and the assailed decision is
hereby REVERSED insofar only as it held Francisco Motors Corporation liable for
the legal obligation owing to private respondent Gregorio Manuel; but this
decision is without prejudice to his filing the proper suit against the concerned
members of the Francisco family in their personal capacity. No pronouncement
as to costs.
SO ORDERED.

SECOND DIVISION
[G.R. No. 142435. April 30, 2003]
ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners, vs. PACIFIC
BANKING CORPORATION, REGISTER OF DEEDS, RTC EX-OFFICIO
SHERIFF OF QUEZON CITY and the Heirs of EUGENIO D. TRINIDAD,
respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari seeks the reversal of the Decision[if
!supportFootnotes][1][endif] dated October 21, 1999 of the Court of Appeals in
CA-G.R. CV No. 41536 which dismissed herein petitioners appeal from the
Decision[if !supportFootnotes][2][endif] dated February 10, 1993 of the Regional
Trial Court (RTC) of Quezon City, Branch 84, in Civil Case No. Q-89-4152. The
trial court had dismissed petitioners complaint for annulment of real estate
mortgage and the extra-judicial foreclosure thereof. Likewise brought for our
review is the Resolution[if !supportFootnotes][3][endif] dated February 23, 2000
of the Court of Appeals which denied petitioners motion for reconsideration.
The facts, as culled from records, are as follows:
Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned Belas
Export Trading (BET), a single proprietorship with principal office at No. 814
Aurora Boulevard, Cubao, Quezon City. BET was engaged in the manufacture of
garments for domestic and foreign consumption. The Lipats also owned the
Mystical Fashions in the United States, which sells goods imported from the
Philippines through BET. Mrs. Lipat designated her daughter, Teresita B. Lipat, to
manage BET in the Philippines while she was managing Mystical Fashions in the
United States.
In order to facilitate the convenient operation of BET, Estelita Lipat executed on
December 14, 1978, a special power of attorney appointing Teresita Lipat as her
attorney-in-fact to obtain loans and other credit accommodations from
respondent Pacific Banking Corporation (Pacific Bank). She likewise authorized
Teresita to execute mortgage contracts on properties owned or co-owned by her
as security for the obligations to be extended by Pacific Bank including any
extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special power of attorney, was
able to secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from
Pacific Bank amounting to P583,854.00 to buy fabrics to be manufactured by
BET and exported to Mystical Fashions in the United States. As security therefor,
the Lipat spouses, as represented by Teresita, executed a Real Estate Mortgage
over their property located at No. 814 Aurora Blvd., Cubao, Quezon City. Said
property was likewise made to secure other additional or new loans, discounting
lines, overdrafts and credit accommodations, of whatever amount, which the
Mortgagor and/or Debtor may subsequently obtain from the Mortgagee as well as
any renewal or extension by the Mortgagor and/or Debtor of the whole or part of
said original, additional or new loans, discounting lines, overdrafts and other
credit accommodations, including interest and expenses or other obligations of
the Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or
indirectly, principal or secondary, as appears in the accounts, books and records
of the Mortgagee.[if !supportFootnotes][4][endif]
On September 5, 1979, BET was incorporated into a family corporation named
Belas Export Corporation (BEC) in order to facilitate the management of the
business. BEC was engaged in the business of manufacturing and exportation of
all kinds of garments of whatever kind and description[if
!supportFootnotes][5][endif] and utilized the same machineries and equipment
previously used by BET. Its incorporators and directors included the Lipat
spouses who owned a combined 300 shares out of the 420 shares subscribed,
Teresita Lipat who owned 20 shares, and other close relatives and friends of the
Lipats.[if !supportFootnotes][6][endif] Estelita Lipat was named president of BEC,
while Teresita became the vice-president and general manager.
Eventually, the loan was later restructured in the name of BEC and subsequent
loans were obtained by BEC with the corresponding promissory notes duly
executed by Teresita on behalf of the corporation. A letter of credit was also
opened by Pacific Bank in favor of A. O. Knitting Manufacturing Co., Inc., upon
the request of BEC after BEC executed the corresponding trust receipt therefor.
Export bills were also executed in favor of Pacific Bank for additional finances.
These transactions were all secured by the real estate mortgage over the Lipats
property.
The promissory notes, export bills, and trust receipt eventually became due and
demandable. Unfortunately, BEC defaulted in its payments. After receipt of
Pacific Banks demand letters, Estelita Lipat went to the office of the banks
liquidator and asked for additional time to enable her to personally settle BECs
obligations. The bank acceded to her request but Estelita failed to fulfill her
promise.
Consequently, the real estate mortgage was foreclosed and after compliance
with the requirements of the law the mortgaged property was sold at public
auction. On January 31, 1989, a certificate of sale was issued to respondent
Eugenio D. Trinidad as the highest bidder.
On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a
complaint for annulment of the real estate mortgage, extrajudicial foreclosure and
the certificate of sale issued over the property against Pacific Bank and Eugenio
D. Trinidad. The complaint, which was docketed as Civil Case No. Q-89-4152,
alleged, among others, that the promissory notes, trust receipt, and export bills
were all ultra vires acts of Teresita as they were executed without the requisite
board resolution of the Board of Directors of BEC. The Lipats also averred that
assuming said acts were valid and binding on BEC, the same were the
corporations sole obligation, it having a personality distinct and separate from
spouses Lipat. It was likewise pointed out that Teresitas authority to secure a
loan from Pacific Bank was specifically limited to Mrs. Lipats sole use and benefit
and that the real estate mortgage was executed to secure the Lipats and BETs
P583,854.00 loan only.
In their respective answers, Pacific Bank and Trinidad alleged in common that
petitioners Lipat cannot evade payments of the value of the promissory notes,
trust receipt, and export bills with their property because they and the BEC are
one and the same, the latter being a family corporation. Respondent Trinidad
further claimed that he was a buyer in good faith and for value and that
petitioners are estopped from denying BECs existence after holding themselves
out as a corporation.
After trial on the merits, the RTC dismissed the complaint, thus:
WHEREFORE, this Court holds that in view of the facts contained in the record,
the complaint filed in this case must be, as is hereby, dismissed. Plaintiffs
however has five (5) months and seventeen (17) days reckoned from the finality
of this decision within which to exercise their right of redemption. The writ of
injunction issued is automatically dissolved if no redemption is effected within that
period.
The counterclaims and cross-claim are likewise dismissed for lack of legal and
factual basis.
No costs.
IT IS SO ORDERED.[if !supportFootnotes][7][endif]
The trial court ruled that there was convincing and conclusive evidence proving
that BEC was a family corporation of the Lipats. As such, it was a mere extension
of petitioners personality and business and a mere alter ego or business conduit
of the Lipats established for their own benefit. Hence, to allow petitioners to
invoke the theory of separate corporate personality would sanction its use as a
shield to further an end subversive of justice.[if !supportFootnotes][8][endif] Thus,
the trial court pierced the veil of corporate fiction and held that Belas Export
Corporation and petitioners (Lipats) are one and the same. Pacific Bank had
transacted business with both BET and BEC on the supposition that both are one
and the same. Hence, the Lipats were estopped from disclaiming any obligations
on the theory of separate personality of corporations, which is contrary to
principles of reason and good faith.
The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R.
CV No. 41536. Said appeal, however, was dismissed by the appellate court for
lack of merit. The Court of Appeals found that there was ample evidence on
record to support the application of the doctrine of piercing the veil of corporate
fiction. In affirming the findings of the RTC, the appellate court noted that Mrs.
Lipat had full control over the activities of the corporation and used the same to
further her business interests.[if !supportFootnotes][9][endif] In fact, she had
benefited from the loans obtained by the corporation to finance her business. It
also found unnecessary a board resolution authorizing Teresita Lipat to secure
loans from Pacific Bank on behalf of BEC because the corporations by-laws
allowed such conduct even without a board resolution. Finally, the Court of
Appeals ruled that the mortgage property was not only liable for the original loan
of P583,854.00 but likewise for the value of the promissory notes, trust receipt,
and export bills as the mortgage contract equally applies to additional or new
loans, discounting lines, overdrafts, and credit accommodations which petitioners
subsequently obtained from Pacific Bank.
The Lipats then moved for reconsideration, but this was denied by the appellate
court in its Resolution of February 23, 2000.[if !supportFootnotes][10][endif]
Hence, this petition, with petitioners submitting that the court a quo erred
1) .IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF
CORPORATE FICTION APPLIES IN THIS CASE.
2) .IN HOLDING THAT PETITIONERS PROPERTY CAN BE HELD LIABLE
UNDER THE REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF
P583,854.00 BUT ALSO FOR THE FULL VALUE OF PROMISSORY NOTES,
TRUST RECEIPTS AND EXPORT BILLS OF BELAS EXPORT CORPORATION.
3) .IN HOLDING THAT THE IMPOSITION OF 15% ATTORNEYS FEES IN THE
EXTRA-JUDICIAL FORECLOSURE IS BEYOND THIS COURTS
JURISDICTION FOR IT IS BEING RAISED FOR THE FIRST TIME IN THIS
APPEAL.
4) .IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE
DISPUTED PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND
TRUST RECEIPTS DESPITE THE EVIDENT FACT THAT THEY WERE NOT
SIGNED BY HIM AND THEREFORE ARE NOT VALID OR ARE NOT BINDING
TO HIM.
5) .IN DENYING PETITIONERS MOTION FOR RECONSIDERATION AND IN
HOLDING THAT SAID MOTION FOR RECONSIDERATION IS AN
UNAUTHORIZED MOTION, A MERE SCRAP OF PAPER WHICH CAN
NEITHER BIND NOR BE OF ANY CONSEQUENCE TO APPELLANTS.[if
!supportFootnotes][11][endif]
In sum, the following are the relevant issues for our resolution:
1. Whether or not the doctrine of piercing the veil of corporate fiction is applicable
in this case;
2. Whether or not petitioners' property under the real estate mortgage is liable not
only for the amount of P583,854.00 but also for the value of the promissory
notes, trust receipt, and export bills subsequently incurred by BEC; and
3. Whether or not petitioners are liable to pay the 15% attorneys fees stipulated
in the deed of real estate mortgage.
On the first issue, petitioners contend that both the appellate and trial courts
erred in holding them liable for the obligations incurred by BEC through the
application of the doctrine of piercing the veil of corporate fiction absent any clear
showing of fraud on their part.
Respondents counter that there is clear and convincing evidence to show fraud
on part of petitioners given the findings of the trial court, as affirmed by the Court
of Appeals, that BEC was organized as a business conduit for the benefit of
petitioners.
Petitioners contentions fail to persuade this Court. A careful reading of the
judgment of the RTC and the resolution of the appellate court show that in finding
petitioners mortgaged property liable for the obligations of BEC, both courts
below relied upon the alter ego doctrine or instrumentality rule, rather than fraud
in piercing the veil of corporate fiction. When the corporation is the mere alter ego
or business conduit of a person, the separate personality of the corporation may
be disregarded.[if !supportFootnotes][12][endif] This is commonly referred to as
the instrumentality rule or the alter ego doctrine, which the courts have applied in
disregarding the separate juridical personality of corporations. As held in one
case,
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 finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or existence of its own, and
is but a conduit for its principal. xxx[if !supportFootnotes][13][endif]
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[if !supportFootnotes][14][endif] and were two of the incorporators and
majority stockholders of BEC.[if !supportFootnotes][15][endif] 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.[if
!supportFootnotes][16][endif] Incidentally, Teresita was designated as executive-
vice president and general manager of both BET and BEC, respectively.[if
!supportFootnotes][17][endif] We note further that: (1) Estelita and Alfredo Lipat
are the owners and majority shareholders of BET and BEC, respectively;[if
!supportFootnotes][18][endif] (2) both firms were managed by their daughter,
Teresita;[if !supportFootnotes][19][endif] (3) both firms were engaged in the
garment business, supplying products to Mystical Fashion, a U.S. firm
established by Estelita Lipat; (4) both firms held office in the same building
owned by the Lipats;[if !supportFootnotes][20][endif] (5) BEC is a family
corporation with the Lipats as its majority stockholders; (6) the business
operations of the BEC were so merged with those of Mrs. Lipat such that they
were practically indistinguishable; (7) the corporate funds were held by Estelita
Lipat and the corporation itself had no visible assets; (8) the board of directors of
BEC was composed of the Burgos and Lipat family members;[if
!supportFootnotes][21][endif] (9) Estelita had full control over the activities of and
decided business matters of the corporation;[if !supportFootnotes][22][endif] and
that (10) Estelita Lipat had benefited from the loans secured from Pacific Bank to
finance her business abroad[if !supportFootnotes][23][endif] and from the export
bills secured by BEC for the account of Mystical Fashion.[if
!supportFootnotes][24][endif] 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.
On the second issue, petitioners contend that their mortgaged property should
not be made liable for the subsequent credit lines and loans incurred by BEC
because, first, it was not covered by the mortgage contract of BET which only
covered the loan of P583,854.00 and which allegedly had already been paid;
and, second, it was secured by Teresita Lipat without any authorization or board
resolution of BEC.
We find petitioners contention untenable. As found by the Court of Appeals, the
mortgaged property is not limited to answer for the loan of P583,854.00. Thus:
Finally, the extent to which the Lipats property can be held liable under the real
estate mortgage is not limited to P583,854.00. It can be held liable for the value
of the promissory notes, trust receipt and export bills as well. For the mortgage
was executed not only for the purpose of securing the Belas Export Tradings
original loan of P583,854.00, but also for other additional or new loans,
discounting lines, overdrafts and credit accommodations, of whatever amount,
which the Mortgagor and/or Debtor may subsequently obtain from the mortgagee
as well as any renewal or extension by the Mortgagor and/or Debtor of the whole
or part of said original, additional or new loans, discounting lines, overdrafts and
other credit accommodations, including interest and expenses or other
obligations of the Mortgagor and/or Debtor owing to the Mortgagee, whether
directly, or indirectly principal or secondary, as appears in the accounts, books
and records of the mortgagee.[if !supportFootnotes][25][endif]
As a general rule, findings of fact of the Court of Appeals are final and
conclusive, and cannot be reviewed on appeal by the Supreme Court, provided
they are borne out by the record or based on substantial evidence.[if
!supportFootnotes][26][endif] As noted earlier, BEC merely succeeded BET as
petitioners alter ego; hence, petitioners mortgaged property must be held liable
for the subsequent loans and credit lines of BEC.
Further, petitioners contention that the original loan had already been paid,
hence, the mortgaged property should not be made liable to the loans of BEC, is
unsupported by any substantial evidence other than Estelita Lipats self-serving
testimony. Two disputable presumptions under the rules on evidence weigh
against petitioners, namely: (a) that a person takes ordinary care of his
concerns;[if !supportFootnotes][27][endif] and (b) that things have happened
according to the ordinary course of nature and the ordinary habits of life.[if
!supportFootnotes][28][endif] Here, if the original loan had indeed been paid, then
logically, petitioners would have asked from Pacific Bank for the required
documents evidencing receipt and payment of the loans and, as owners of the
mortgaged property, would have immediately asked for the cancellation of the
mortgage in the ordinary course of things. However, the records are bereft of any
evidence contradicting or overcoming said disputable presumptions.
Petitioners contend further that the mortgaged property should not bind the loans
and credit lines obtained by BEC as they were secured without any proper
authorization or board resolution. They also blame the bank for its laxity and
complacency in not requiring a board resolution as a requisite for approving the
loans.
Such contentions deserve scant consideration.
Firstly, it could not have been possible for BEC to release a board resolution
since per admissions by both petitioner Estelita Lipat and Alice Burgos,
petitioners rebuttal witness, no business or stockholders meetings were
conducted nor were there election of officers held since its incorporation. In fact,
not a single board resolution was passed by the corporate board[if
!supportFootnotes][29][endif] and it was Estelita Lipat and/or Teresita Lipat who
decided business matters.[if !supportFootnotes][30][endif]
Secondly, the principle of estoppel precludes petitioners from denying the validity
of the transactions entered into by Teresita Lipat with Pacific Bank, who in good
faith, relied on the authority of the former as manager to act on behalf of
petitioner Estelita Lipat and both BET and BEC. While the power and
responsibility to decide whether the corporation should enter into a contract that
will bind the corporation is lodged in its board of directors, subject to the articles
of incorporation, by-laws, or relevant provisions of law, yet, just as a natural
person may authorize another to do certain acts for and on his behalf, the board
of directors may validly delegate some of its functions and powers to officers,
committees, or agents. The authority of such individuals to bind the corporation is
generally derived from law, corporate by-laws, or authorization from the board,
either expressly or impliedly by habit, custom, or acquiescence in the general
course of business.[if !supportFootnotes][31][endif] Apparent authority, is derived
not merely from practice. Its existence may be ascertained through (1) the
general manner in which the corporation holds out an officer or agent as having
the power to act or, in other words, the apparent authority to act in general, with
which it clothes him; or (2) the acquiescence in his acts of a particular nature,
with actual or constructive knowledge thereof, whether within or beyond the
scope of his ordinary powers.[if !supportFootnotes][32][endif]
In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract
by virtue of a special power of attorney executed by Estelita Lipat. Recall that
Teresita Lipat acted as the manager of both BEC and BET and had been
deciding business matters in the absence of Estelita Lipat. Further, the export
bills secured by BEC were for the benefit of Mystical Fashion owned by Estelita
Lipat.[if !supportFootnotes][33][endif] Hence, Pacific Bank cannot be faulted for
relying on the same authority granted to Teresita Lipat by Estelita Lipat by virtue
of a special power of attorney. It is a familiar doctrine that if a corporation
knowingly permits one of its officers or any other agent to act within the scope of
an apparent authority, it holds him out to the public as possessing the power to
do those acts; thus, the corporation will, as against anyone who has in good faith
dealt with it through such agent, be estopped from denying the agents
authority.[if !supportFootnotes][34][endif]
We find no necessity to extensively deal with the liability of Alfredo Lipat for the
subsequent credit lines of BEC. Suffice it to state that Alfredo Lipat never
disputed the validity of the real estate mortgage of the original loan; hence, he
cannot now dispute the subsequent loans obtained using the same mortgage
contract since it is, by its very terms, a continuing mortgage contract.
On the third and final issue, petitioners assail the decision of the Court of Appeals
for not taking cognizance of the issue on attorneys fees on the ground that it was
raised for the first time on appeal. We find the conclusion of the Court of Appeals
to be in accord with settled jurisprudence. Basic is the rule that matters not raised
in the complaint cannot be raised for the first time on appeal.[if
!supportFootnotes][35][endif] A close perusal of the complaint yields no
allegations disputing the attorneys fees imposed under the real estate mortgage
and petitioners cannot now allege that they have impliedly disputed the same
when they sought the annulment of the contract.
In sum, we find no reversible error of law committed by the Court of Appeals in
rendering the decision and resolution herein assailed by petitioners.
WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999
and the Resolution dated February 23, 2000 of the Court of Appeals in CA-G.R.
CV No. 41536 are AFFIRMED. Costs against petitioners.
SO ORDERED.
Bellosillo, (Chairman), Austria-Martinez, and Callejo, Sr., JJ., concur.

FIRST DIVISION
[G.R. No. 163786. February 16, 2005]
TIMES TRANSPORTATION COMPANY, INC., petitioner, vs. SANTOS
SOTELO, CONRADO B. SALONGA, SAMSON C. SOLIVEN, BIENVENIDO F.
MALANA, JR., JOVITO V. ALCAUSIN, EFREN A. RAMOS, RODRIGO P.
CABUSAO, JR., EDGAR G. PONCE, RONALD ALLAN PARINAS, RODEL
PALO, REYNALDO R. RAGUCOS, MARIO T. TOLEDO, BERNARDINO
PADUA, DOMINGO P. BILAN, ARNEL VALLEDORES, RAMON RETUTA, JR.,
PANTALEON TABANGIN, ALBERTO PANDO, VIRGILIO E. OBAR, EULOGIO
D. DIGA, SR., DANIEL LLADO, RONILO BALTAZAR, MARITO PANDO,
LEOPOLDO FUNTILA, GERRY B. CARRIDO, WILLIAM A. TABUCOL,
ANTONIO L. RAMOS, SR., PABLO P. PADRE, HENRY B. GANIR, TEOTIMO
R. REQUILMAN, CIPRIANO ULPINDO, ROGER BABIDA, SAMUEL PERALTA,
BONIFACIO TUMALIP, EDGAR ABLOG, EFREN ABELLA, RODRIGO
RABOY, RENATO SILVA, GEORGE PERALTA, RONILO BARBOSA, JULIAN
BUENAFE, FLORENCIO CARIO, BERNIE TUMBAGA, RODRIGO CABAERO,
ELMER TAMO, LEOPOLDO NANA, NELIE BOSE, DEMETRIO HERRERA,
RODOLFO ABELLA, ALVIN ELEFANTE, REDENTOR GARCIA, JERRY
PALACPAC, JOSE PAET, ARTHUR IBEA, ELIZER BORJA, EDMUNDO
ASPIRAS, JOSE V. PESCADOR, WILLIAM GARCIA, ERNESTO P.
MANGULABNAN, BENJAMIN B. BLAZA, JOSELITO P. CACABELOS, LEON
R. GALANTA, JR., MARIANO P. TEJADA, PEDRITO C. ORTIZ, JR., NESTOR
E. BALCITA, FLOR BURBANO, HERNANDO A. PIMENTEL, ALEX A. GOMEZ,
ARNALDO P. BOSE, NAPOLEON BALDERAS, CARLINO V. RULLODA, JR.,
RANDY R. AMODO, CORNELIO R. RAGUINI, ROBERT CERIA, JUANITO U.
UGALDE, ALBERTO PAJO, ALFREDO VALOROSO, RUFINO ADRIATICO,
BARTOLOME C. EDROSOLAN, JR., REYNANTE A. ALCAIN, NOELITO SUSA
and VICENTE NAVA, respondents.
DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the decision of the Court of Appeals
dated January 30, 2004 in CA-G.R. SP No. 75291,[1] which set aside the
decision and resolution of the National Labor Relations Commission, and its
resolution dated May 24, 2004[2] denying reconsideration thereof.
Petitioner Times Transportation Company, Inc. (Times) is a corporation engaged
in the business of land transportation. Prior to its closure in 1997, the Times
Employees Union (TEU) was formed and issued a certificate of union
registration. Times challenged the legitimacy of TEU by filing a petition for the
cancellation of its union registration.
On March 3, 1997, TEU held a strike in response to Times alleged attempt to
form a rival union and its dismissal of the employees identified to be active union
members. Upon petition by Times, then Labor Secretary, and now Associate
Justice of this Court, Leonardo A. Quisumbing, assumed jurisdiction over the
case and referred the matter to the NLRC for compulsory arbitration. The case
was docketed as NLRC NCR CC-000134-97. A return-to-work order was likewise
issued on March 10, 1997.
In a certification election held on July 1, 1997, TEU was certified as the sole and
exclusive collective bargaining agent in Times. Consequently, TEUs president
wrote the management of Times and requested for collective bargaining. Times
refused on the ground that the decision of the Med-Arbiter upholding the validity
of the certification election was not yet final and executory.
TEU filed a Notice of Strike on August 8, 1997. Another conciliation/mediation
proceeding was conducted for the purpose of settling the brewing dispute. In the
meantime, Times management implemented a retrenchment program and
notices of retrenchment dated September 16, 1997 were sent to some of its
employees, including the respondents herein, informing them of their
retrenchment effective 30 days thereafter.
On October 17, 1997, TEU held a strike vote on grounds of unfair labor practice
on the part of Times. For alleged participation in what it deemed was an illegal
strike, Times terminated all the 123 striking employees by virtue of two notices
dated October 26, 1997 and November 24, 1997.[3] On November 17, 1997,
then DOLE Secretary Quisumbing issued the second return-to-work order
certifying the dispute to the NLRC. While the strike was ended, the employees
were no longer admitted back to work.
In the meantime, by December 12, 1997, Mencorp Transport Systems, Inc.
(Mencorp) had acquired ownership over Times Certificates of Public
Convenience and a number of its bus units by virtue of several deeds of sale.[4]
Mencorp is controlled and operated by Mrs. Virginia Mendoza, daughter of
Santiago Rondaris, the majority stockholder of Times.
On May 21, 1998, the NLRC rendered a decision[5] in the cases certified to it by
the DOLE, the dispositive portion of which read:
WHEREFORE, the respondents first strike, conducted from March 3, 1997 to
March 12, 1997, is hereby declared LEGAL; its second strike, which commenced
on October 17, 1997, is hereby declared ILLEGAL. Consequently, those 23
persons who participated in the illegal strike are deemed to have lost their
employment status and were therefore validly dismissed from employment:
The respondents Motion to Implead Mencorp Transport Systems, Inc. and/or
Virginia Mendoza and/or Santiago Rondaris is hereby DENIED for lack of merit.
SO ORDERED.[6]
Times and TEU both appealed the decision of the NLRC, which the Court of
Appeals affirmed on November 17, 2000.[7] Upon denial of its motion for
reconsideration, Times filed a petition for review on certiorari,[8] docketed as
G.R. Nos. 148500-01, now pending with the Third Division of this Court. TEU
likewise appealed but its petition was denied due course.
In 1998, and after the closure of Times, the retrenched employees, including
practically all the respondents herein, filed cases for illegal dismissal, money
claims and unfair labor practices against Times before the Regional Arbitration
Branch in San Fernando City, La Union. Times filed a Motion to Dismiss but on
October 30, 1998, the arbitration branch ordered the archiving of the cases
pending resolution of G.R. Nos. 148500-01.[9]
The dismissed employees did not interpose an appeal from said Order. Instead,
they withdrew their complaints with leave of court and filed a new set of cases
before the National Capital Region Arbitration Branch. This time, they impleaded
Mencorp and the Spouses Reynaldo and Virginia Mendoza. Times sought the
dismissal of these cases on the ground of litis pendencia and forum shopping. On
January 31, 2002, Labor Arbiter Renaldo O. Hernandez rendered a decision
stating:
WHEREFORE, premises considered, judgment is hereby entered FINDING that
the dismissals of complainants, excluding the expunged ones, by respondent
Times Transit (sic) Company, Inc. effected, participated in, authorized or ratified
by respondent Santiago Rondaris constituted the prohibited act of unfair labor
practice under Article 248(a) and (e) of the Labor Code, as amended and hence,
illegal and that the sale of said respondent company to respondents Mencorp
Transport Systems Company (sic), Inc. and/or Virginia Mendoza and Reynaldo
Mendoza was simulated and/or effected in bad faith, ORDERING:
1. respondents Times Transit (sic) Company, Inc. and Santiago Rondaris as the
officer administratively held liable of the unfair labor practice herein to CEASE
AND DESIST therefore (sic);
2. respondents Times Transit (sic) Company, Inc. and/or Santiago Rondaris and
Mencorp Transport Systems Company, Inc. and/or Virginia Mendoza and
Reynaldo Mendoza to cause the reinstatement therein of complainants to their
former positions without loss of seniority rights and benefits and to pay jointly and
severally said complainants full back wages reckoned from their respective dates
of illegal dismissal as above-indicated, until actually reinstated or in lieu of such
reinstatement, at the option of said complainants, payment of their separation
pay of one (1) month pay per year of service, reckoned from their date of hire as
above-indicated, until actual payment and/or finality of this decision;
3. and finally for respondents Times Transit (sic) Company, Inc. and/or Santiago
Rondaris to pay jointly and severally said complainants as moral and exemplary
damages the combined amount of P75,000.00 and 5% of the total award as
attorneys fees.
All other claims of complainants are dismissed for lack of merit.
.
SO ORDERED.[10]
The monetary award amounted to P43,347,341.69. On March 4, 2002, Times,
Mencorp and the Spouses Mendoza submitted their respective memorandum of
appeal to the NLRC with motions to reduce the bond. Mencorp posted a P5
million bond issued by Security Pacific Assurance Corp. (SPAC). On April 30,
2002, the NLRC issued an order disposing of the said motion, thus:
WHEREFORE, premises considered, the Urgent Motion for Reduction of Bond is
denied for lack of merit. Respondents are hereby ordered to complete the bond
equivalent to the monetary award in the Labor Arbiters Decision, within an
unextendible period of ten (10) days from receipt hereof, otherwise, the appeal
shall be dismissed for non-perfection thereof.
SO ORDERED.[11]
On May 18, 2002, Times moved to reconsider said order arguing mainly that it
did not have sufficient funds to put up the required bond. On July 26, 2002,
Mencorp and the Spouses Mendoza posted an additional P10 million appeal
bond. Thus far, the total amount of bond posted was P15 million. On August 7,
2002, the NLRC granted the Motion for Reduction of Bond and approved the P10
million additional appeal bond.[12]
On September 17, 2002, the NLRC rendered its decision, stating:
WHEREFORE, the foregoing premises duly considered, the decision appealed
from is hereby VACATED. The records of these consolidated cases are hereby
ordered REMANDED to the Arbitration Branch of origin for disposition and for the
conduct of appropriate proceedings for a decision to be rendered with dispatch.
SO ORDERED.[13]
Reconsideration thereof was denied by the NLRC on October 30, 2002. Thus,
the respondents appealed to the Court of Appeals by way of a petition for
certiorari, attributing grave abuse of discretion on the NLRC for: (1) not
dismissing the appeals of Times, Mencorp and the Spouses Mendoza despite
their failure to post the required bond; (2) remanding the case for further
proceedings despite the sufficiency of the evidence presented by the parties; (3)
not sustaining the labor arbiters ruling that they were illegally dismissed; (4) not
affirming the labor arbiters ruling that there was no litis pendencia; and (5) not
ruling that Times and Mencorp are one and the same entity.
On January 30, 2004, the Court of Appeals rendered the decision now assailed in
this petition, the decretal portion of which states:
WHEREFORE, based on the foregoing, the instant petition is hereby GRANTED.
The assailed Decision and Resolution of the NLRC are hereby SET ASIDE. The
Decision of the Labor Arbiter dated January 31, 2002 is hereby REINSTATED.
SO ORDERED.[14]
Times, Mencorp and the Spouses Mendoza filed Motions for Reconsideration,
which were denied in a resolution promulgated on May 24, 2004. Hence, this
petition for review based on the following grounds:
I. Petitioner respectfully maintains that the Honorable Court a quo, in not
dismissing the complaints against the petitioner on the ground of lis pendens,
decided the matter in a way not in accord with existing laws and applicable
decisions of this Honorable Court.
II. Petitioner, further, respectfully maintains that the Honorable Court a quo, in
determining that herein petitioners hitherto lost their right to appeal to the NLRC
on account of their purported failure to post an adequate appeal bond, radically
departed from the accepted and usual course of judicial proceedings, not to
mention resolved said issue in a manner and fashion antithetical to existing
jurisprudence.
III. Petitioner, furthermore, respectfully maintains that the Honorable Court a quo,
in applying wholesale the doctrine of piercing the veil of corporate fiction and
finding Times co-petitioners liable for the formers obligations, resolved the matter
in a manner contradictory to existing applicable laws and dispositions of this
Honorable Court, and departed from the accepted and usual course of judicial
proceedings with regard to admitting evidence to sustain the application of such
principle.[15]
The petition lacks merit.
As to the first issue, Times argues that there exists an identity of issues, rights
asserted, relief sought and causes of action between the present case and the
one concerning the legality of the second strike, which is now pending with the
Third Division of this Court. As such, the Court of Appeals erred in not dismissing
the case at bar on the ground of litis pendencia.
Litis pendencia as a ground for dismissal of an action refers to that situation
wherein another action is pending between the same parties for the same cause
of action and the second action becomes unnecessary and vexatious.[16] We
agree with the findings of the Court of Appeals that there is no litis pendencia as
the two cases involve dissimilar causes of action. The first case, now pending with
the Third Division, pertains to the alleged error of the NLRC in not upholding the
dismissal of all the striking employees (not only of the 23 strikers so declared to
have lost their employment) in spite of the latters ruling that the second strike was
illegal. None of the respondents herein were among those deemed terminated by
virtue of the NLRC decision.
In the instant case, the issue is the validity of the retrenchment implemented
by Times prior to the second strike and the subsequent dismissal of the striking
employees. As such, there can be no question that respondents were still
employees of Times when they were retrenched. In short, the outcome of this case
does not hinge on the legality of the second strike or the validity of the dismissal of
the striking employees, which issues are yet to be resolved in G.R. Nos. 148500-
01. Consequently, litis pendencia does not arise.
Anent the issue on whether Times perfected its appeal to the NLRC, the right
to appeal is a statutory right and one who seeks to avail of the right must comply
with the statute or rules. The rules for perfecting an appeal must be strictly followed
as they are considered indispensable interdictions against needless delays and for
orderly discharge of judicial business.[17] Section 3(a), Rule VI of the NLRC Rules
of Procedure outlines the requisites for perfecting an appeal, to wit:
SECTION 3. Requisites for Perfection of Appeal. a) The Appeal shall be filed
within the reglementary period as provided in Section 1 of this Rule and shall be
under oath with proof of payment of the required appeal fee and the posting of a
cash or surety bond as provided in Section 6 of this Rule; shall be accompanied
by memorandum of appeal which shall state the grounds relied upon and the
arguments in support thereof; the relief prayed for and a statement of the date
when the appellant received the appealed decision, order or award and proof of
service on the other party of such appeal.
A mere notice of appeal without complying with the other requisites aforestated
shall not stop the running of the period for perfecting an appeal. (Emphasis
supplied)
Article 223 of the Labor Code provides that in case of a judgment involving a
monetary award, an appeal by the employer may be perfected only upon the
posting of a cash or surety bond issued by a reputable bonding company duly
accredited by the NLRC in the amount equivalent to the monetary award in the
judgment appealed from. The perfection of an appeal in the manner and within
the period prescribed by law is not only mandatory but also jurisdictional, and
failure to perfect an appeal has the effect of making the judgment final and
executory.[18] However, in several cases, we have relaxed the rules regarding
the appeal bond especially where it must necessarily yield to the broader interest
of substantial justice.[19] The Rules of Procedure of the NLRC allows for the
reduction of the appeal bond upon motion of the appellant and on meritorious
grounds.[20] It is required however that such motion is filed within the
reglementary period to appeal.
The records reveal that Times, Mencorp and the Spouses Mendozas motion to
reduce the bond was denied and the NLRC ordered them to post the required
amount within an unextendible period of ten (10) days.[21] However, instead of
complying with the directive, Times filed another motion for reconsideration of the
order of denial. Several weeks later, Mencorp posted an additional bond, which
was still less than the required amount. Three (3) months after the filing of the
motion for reconsideration, the NLRC reversed its previous order and granted the
motion for reduction of bond.
We agree with the Court of Appeals that the foregoing constitutes grave abuse of
discretion on the part of the NLRC. By delaying the resolution of Times motion for
reconsideration, it has unnecessarily prolonged the period of appeal. We have
held that to extend the period of appeal is to prolong the resolution of the case, a
circumstance which would give the employer the opportunity to wear out the
energy and meager resources of the workers to the point that they would be
constrained to give up for less than what they deserve in law.[22] The NLRC is
well to take notice of our pronouncement in Santos v. Velarde:[23]
The Court is aware that the NLRC is not bound by the technical rules of
procedure and is allowed to be liberal in the interpretation of rules in deciding
labor cases. However, such liberality should not be applied in the instant case as
it would render futile the very purpose for which the principle of liberality is
adopted. From the decision of the Labor Arbiter, it took the NLRC four months to
rule on the motion for exemption to pay bond and another four months to decide
the merits of the case. This Court has repeatedly ruled that delay in the
settlement of labor cases cannot be countenanced. Not only does it involve the
survival of an employee and his loved ones who are dependent on him, it also
wears down the meager resources of the workers...[24] (Emphasis supplied)
The NLRCs reversal of its previous order of denial lacks basis. In the first motion,
Mencorp and Spouses Mendoza moved for the reduction of the appeal bond on
the ground that the computation of the monetary award was highly suspicious
and anomalous. In their motion for reconsideration of the NLRCs denial, Mencorp
and the Spouses Mendoza cited financial difficulties in completing the appeal
bond. Neither ground is well-taken.
Times and Mencorp failed to substantiate their allegations of errors in the
computation of the monetary award. They merely asserted inaccuracies without
specifying which aspect of the computation was inaccurate. If Times and
Mencorp truly believed that there were errors in the computation, they could have
presented their own computation for comparison. As to the claim of financial
difficulties, suffice it to say that the law does not require outright payment of the
total monetary award, but only the posting of a bond to ensure that the award will
be eventually paid should the appeal fail. What Times has to pay is a moderate
and reasonable sum for the premium for such bond.[25] The impression thus
created was that Times, Mencorp and the Spouses Mendoza were clearly
circumventing, if not altogether dodging, the rules on the posting of appeal
bonds.
On the propriety of the piercing of the corporate veil, Times claims that to drag
Mencorp, [Spouses] Mendoza and Rondaris into the picture on the purported
ground that a fictitious sale of Times assets in their favor was consummated with
the end in view of frustrating the ends of justice and for purposes of evading
compliance with the judgment is the height of judicial arrogance.[26] The Court of
Appeals believes otherwise and reckons that Times and Mencorp failed to
adduce evidence to refute allegations of collusion between them.
We have held that piercing the corporate veil is warranted only in cases when the
separate legal entity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, such that in the case of two corporations, the law will
regard the corporations as merged into one.[27] It may be allowed only if the
following elements concur: (1) controlnot mere stock control, but complete
dominationnot only of finances, but of policy and business practice in respect to
the transaction attacked; (2) such control must have been used to commit a fraud
or a wrong to perpetuate the violation of a statutory or other positive legal duty, or
a dishonest and an unjust act in contravention of a legal right; and (3) the said
control and breach of duty must have proximately caused the injury or unjust loss
complained of.[28]
The following findings of the Labor Arbiter, which were cited and affirmed by the
Court of Appeals, have not been refuted by Times, to wit:
1. The sale was transferred to a corporation controlled by V. Mendoza, the
daughter of respondent S. Rondaris of [Times] where she is/was also a director,
as proven by the articles of incorporation of [Mencorp];
2. All of the stockholders/incorporators of [Mencorp]: Reynaldo M. Mendoza,
Virginia R. Mendoza, Vernon Gerard R. Mendoza, Vivian Charity R. Mendoza,
Vevey Rosario R. Mendoza are all relatives of respondent S. Rondaris;
3. The timing of the sale evidently was to negate the
employees/complainants/members right to organization as it was effected when
their union (TEU) was just organized/requesting [Times] to bargain;

5. [Mencorp] never obtained a franchise since its supposed incorporation in 10

May 1994 but at present, all the buses of [Times] are already being run/operated
by respondent [Mencorp], the franchise of [Times] having been transferred to
it.[29]
We uphold the findings of the labor arbiter and the Court of Appeals. The sale of
Times franchise as well as most of its bus units to a company owned by Rondaris
daughter and family members, right in the middle of a labor dispute, is highly
suspicious. It is evident that the transaction was made in order to remove Times
remaining assets from the reach of any judgment that may be rendered in the
unfair labor practice cases filed against it.
WHEREFORE, premises considered, the petition is DENIED. The decision
of the Court of Appeals in CA-G.R. SP No. 75291 dated January 30, 2004 and its
resolution dated May 24, 2004, are hereby AFFIRMED in toto.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Carpio, and Azcuna, JJ., concur.
Quisumbing, J., no part, due prior action in DOLE.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 168306 June 19, 2007
WILLIAM C. YAO, SR., LUISA C. YAO, RICHARD C. YAO, WILLIAM C. YAO
JR., and ROGER C. YAO, petitioners,
vs.
THE PEOPLE OF THE PHILIPPINES, PETRON CORPORATION and
PILIPINAS SHELL PETROLEUM CORP., and its Principal, SHELL INT’L
PETROLEUM CO. LTD., respondents.
DECISION
CHICO-NAZARIO, J.:
In this Petition for Review on Certiorari1 under Rule 45 of the Rules of Court,
petitioners William C. Yao, Sr., Luisa C. Yao, Richard C. Yao, William C. Yao, Jr.,
and Roger C. Yao pray for the reversal of the Decision dated 30 September
2004,2 and Resolution dated 1 June 2005, of the Court of Appeals in CA G.R. SP
No. 79256,3 affirming the two Orders, both dated 5 June 2003, of the Regional
Trial Court (RTC), Branch 17, Cavite City, relative to Search Warrants No. 2-
2003 and No. 3-2003.4 In the said Orders, the RTC denied the petitioners’
Motion to Quash Search Warrant5 and Motion for the Return of the Motor
Compressor and Liquified Petroleum Gas (LPG) Refilling Machine.6
The following are the facts:
Petitioners are incorporators and officers of MASAGANA GAS CORPORATION
(MASAGANA), an entity engaged in the refilling, sale and distribution of LPG
products. Private respondents Petron Corporation (Petron) and Pilipinas Shell
Petroleum Corporation (Pilipinas Shell) are two of the largest bulk suppliers and
producers of LPG in the Philippines. Their LPG products are sold under the
marks "GASUL" and "SHELLANE," respectively. Petron is the registered owner
in the Philippines of the trademarks GASUL and GASUL cylinders used for its
LPG products. It is the sole entity in the Philippines authorized to allow refillers
and distributors to refill, use, sell, and distribute GASUL LPG containers,
products and its trademarks. Pilipinas Shell, on the other hand, is the authorized
user in the Philippines of the tradename, trademarks, symbols, or designs of its
principal, Shell International Petroleum Company Limited (Shell International),
including the marks SHELLANE and SHELL device in connection with the
production, sale and distribution of SHELLANE LPGs. It is the only corporation in
the Philippines authorized to allow refillers and distributors to refill, use, sell and
distribute SHELLANE LPG containers and products.7
On 3 April 2003, National Bureau of Investigation (NBI) agent Ritche N. Oblanca
(Oblanca) filed two applications for search warrant with the RTC, Branch 17,
Cavite City, against petitioners and other occupants of the MASAGANA
compound located at Governor’s Drive, Barangay Lapidario, Trece Martires,
Cavite City, for alleged violation of Section 155, in relation to Section 170 of
Republic Act No. 8293, otherwise known as "The Intellectual Property Code of
the Philippines."8 The two applications for search warrant uniformly alleged that
per information, belief, and personal verification of Oblanca, the petitioners are
actually producing, selling, offering for sale and/or distributing LPG products
using steel cylinders owned by, and bearing the tradenames, trademarks, and
devices of Petron and Pilipinas Shell, without authority and in violation of the
rights of the said entities.
In his two separate affidavits9 attached to the two applications for search
warrant, Oblanca alleged:
1. [That] on 11 February 2003, the National Bureau of Investigation ("NBI")
received a letter-complaint from Atty. Bienvenido I. Somera Jr. of Villaraza and
Angangco, on behalf of among others, [Petron Corporation (PETRON)] and
Pilipinas Shell Petroleum Corporation (PSPC), the authorized representative of
Shell International Petroleum Company Limited ("Shell International"), requesting
assistance in the investigation and, if warranted, apprehension and prosecution
of certain persons and/or establishments suspected of violating the intellectual
property rights [of PETRON] and of PSPC and Shell International.
2. [That] on the basis of the letter-complaint, I, together with Agent Angelo
Zarzoso, was assigned as the NBI agent on the case.
3. [That] prior to conducting the investigation on the reported illegal activities, he
reviewed the certificates of trademark registrations issued in favor of [PETRON],
PSPC and Shell International as well as other documents and other evidence
obtained by the investigative agency authorized by [PETRON], PSPC and Shell
International to investigate and cause the investigation of persons and
establishments violating the rights of [PETRON], PSPC and Shell International,
represented by Mr. Bernabe C. Alajar. Certified copies of the foregoing trademark
registrations are attached hereto as Annexes "A" to ":E".
4. [That] among the establishments alleged to be unlawfully refilling and
unlawfully selling and distributing [Gasul LPG and] Shellane products is
Masagana Gas Corporation ("MASAGANA"). Based on Securities and Exchange
Commission Records, MASAGANA has its principal office address at 9775
Kamagong Street, San Antonio Village, Makati, Metro Manila. The incorporators
and directors of MASAGANA are William C. Yao, Sr., Luisa C. Yao, Richard C.
Yao, William C. Yao, Jr., and Roger C. Yao. x x x.
5. I confirmed that MASAGANA is not authorized to use [PETRON and] Shellane
LPG cylinders and its trademarks and tradenames or to be refillers or distributors
of [PETRON and] Shellane LPG’s.
6. I went to MASAGANA’s refilling station located at Governor’s Drive, Barangay
Lapidario, Trece Martires City (sic), Cavite to investigate its activities. I confirmed
that MASAGANA is indeed engaged in the unauthorized refilling, sale and/or
distribution of [Gasul and] Shellane LPG cylinders. I found out that MASAGANA
delivery trucks with Plate Nos. UMN-971, PEZ-612, WTE-527, XAM-970 and
WFC-603 coming in and out of the refilling plant located at the aforementioned
address contained multi-brand LPG cylinders including [Gasul and] Shellane. x x
x.
7. [That] on 13 February 2003, I conducted a test-buy accompanied by Mr.
Bernabe C. Alajar. After asking the purpose of our visit, MASAGANA’s guard
allowed us to enter the MASAGANA refilling plant to purchase GASUL and
SHELLANE LPGs. x x x. We were issued an order slip which we presented to the
cashier’s office located near the refilling station. After paying the amount x x x
covering the cost of the cylinders and their contents, they were issued Cash
Invoice No. 56210 dated February 13, 2003. We were, thereafter, assisted by the
plant attendant in choosing empty GASUL and SHELLANE 11 kg. cylinders, x x x
were brought to the refilling station [and filled in their presence.] I noticed that no
valve seals were placed on the cylinders.
[That] while inside the refilling plant doing the test-buy, I noticed that stockpiles of
multi-branded cylinders including GASUL and SHELLANE cylinders were stored
near the refilling station. I also noticed that the total land area of the refilling plant
is about 7,000 to 10,000 square meters. At the corner right side of the compound
immediately upon entering the gate is a covered area where the maintenance of
the cylinders is taking place. Located at the back right corner of the compound
are two storage tanks while at the left side also at the corner portion is another
storage tank. Several meters and fronting the said storage tank is where the
refilling station and the office are located. It is also in this storage tank where the
elevated blue water tank depicting MASAGANA CORP. is located. About eleven
(11) refilling pumps and stock piles of multi-branded cylinders including Shellane
and GASUL are stored in the refilling station. At the left side of the entrance gate
is the guard house with small door for the pedestrians and at the right is a blue
steel gate used for incoming and outgoing vehicles.
8. [That] on 27 February 2003, I conducted another test-buy accompanied by Mr.
Bernabe C. Alajar. x x x After choosing the cylinders, we were issued an order
slip which we presented to the cashier. Upon payment, Cash Invoice No. 56398
was issued covering the cost of both GASUL and SHELLANE LPG cylinders and
their contents. x x x Both cylinders were refilled in our presence and no valve
seals were placed on the cylinders.
Copies of the photographs of the delivery trucks, LPG cylinders and registration
papers were also attached to the aforementioned affidavits.10
Bernabe C. Alajar (Alajar), owner of Able Research and Consulting Services Inc.,
was hired by Petron and Pilipinas Shell to assist them in carrying out their Brand
Protection Program. Alajar accompanied Oblanca during the surveillance of and
test-buys at the refilling plant of MASAGANA. He also executed two separate
affidavits corroborating the statements of Oblanca. These were annexed to the
two applications for search warrant.11
After conducting the preliminary examination on Oblanca and Alajar, and upon
reviewing their sworn affidavits and other attached documents, Judge Melchor
Q.C. Sadang (Judge Sadang), Presiding Judge of the RTC, Branch 17, Cavite
City, found probable cause and correspondingly issued Search Warrants No. 2-
2003 and No. 3-2003.12 The search warrants commanded any peace officer to
make an immediate search of the MASAGANA compound and to seize the
following items:
Under Search Warrant No. 2-2003:
a. Empty/filled LPG cylinder tanks/containers, bearing the tradename
"SHELLANE", "SHELL" (Device) of Pilipinas Shell Petroleum Corporation and the
trademarks and other devices owned by Shell International Petroleum Company,
Ltd.;
b. Machinery and/or equipment being used or intended to be used for the
purpose of illegally refilling LPG cylinders belonging to Pilipinas Shell Petroleum
Corporation bearing the latter’s tradename as well as the marks belonging to
Shell International Petroleum Company, Ltd., enumerated hereunder:
1. Bulk/Bullet LPG storage tanks;
2. Compressor/s (for pneumatic refilling system);
3. LPG hydraulic pump/s;
4. LPG refilling heads/hoses and appurtenances or LPG filling assembly;
5. LPG pipeline gate valve or ball valve and handles and levers;
6. LPG weighing scales; and
7. Seals simulating the shell trademark.
c. Sales invoices, ledgers, journals, official receipts, purchase orders, and all
other books of accounts, inventories and documents pertaining to the production,
sale and/or distribution of the aforesaid goods/products.
d. Delivery truck bearing Plate Nos. WTE-527, XAM-970 and WFC-603, hauling
trucks, and/or other delivery trucks or vehicles or conveyances being used or
intended to be used for the purpose of selling and/or distributing the above-
mentioned counterfeit products.
Under Search Warrant No. 3-2003:
a. Empty/filled LPG cylinder tanks/containers, bearing Petron Corporation’s
(Petron) tradename and its tradename "GASUL" and other devices owned and/or
used exclusively by Petron;
b. Machinery and/or equipment being used or intended to be used for the
purpose of illegally refilling LPG cylinders belonging to Petron enumerated
hereunder;
1. Bulk/Bullet LPG storage tanks;
2. Compressor/s (for pneumatic filling system);
3. LPG hydraulic pump/s;
4. LPG filling heads/hoses and appurtenances or LPG filling assembly;
5. LPG pipeline gate valve or ball valve and handles levers;
6. LPG weighing scales; and
7. Seals bearing the Petron mark;
c. Sales invoices, ledgers, journals, official receipts, purchase orders, and all
other books of accounts, inventories and documents pertaining to the production,
sale and/or distribution of the aforesaid goods/products; and
d. Delivery trucks bearing Plate Nos. UMN-971, PEZ-612 and WFC-603, hauling
trucks, and/or other delivery trucks or vehicles or conveyances being used for the
purpose of selling and/or distributing the above-mentioned counterfeit products.
Upon the issuance of the said search warrants, Oblanca and several NBI
operatives immediately proceeded to the MASAGANA compound and served the
search warrants on petitioners.13 After searching the premises of MASAGANA,
the following articles described in Search Warrant No. 2-2003 were seized:
a. Thirty-eight (38) filled 11 kg. LPG cylinders, bearing the tradename of Pilipinas
Shell Petroleum Corporation and the trademarks and other devices owned by
Shell International Petroleum Company, Ltd.;
b. Thirty-nine (39) empty 11 kg. LPG cylinders, bearing the tradename of
Pilipinas Shell Petroleum Corporation and the trademarks and other devices
owned by Shell International Petroleum Company, Ltd.;
c. Eight (8) filled 50 kg. LPG cylinders, bearing the tradename of Pilipinas Shell
Petroleum Corporation and the trademarks and other devices owned by Shell
International Petroleum Company, Ltd.;
d. Three (3) empty 50 kg. LPG cylinders, bearing the tradename of Pilipinas Shell
Petroleum Corporation and the trademarks and other devices owned by Shell
International Petroleum Company, Ltd.;
e. One (1) set of motor compressor for filling system.
Pursuant to Search Warrant No. 3-2003, the following articles were also seized:
a. Six (6) filled 11 kg. LPG cylinders without seal, bearing Petron’s tradename
and its trademark "GASUL" and other devices owned and/or used exclusively by
Petron;
b. Sixty-three (63) empty 11 kg. LPG cylinders, bearing Petron’s tradename and
its trademark "GASUL" and other devices owned and/or used exclusively by
Petron;
c. Seven (7) tampered 11 kg. LPG cylinders, bearing Petron’s tradename and its
trademark "GASUL" and other devices owned and/or used exclusively by Petron;
d. Five (5) tampered 50 kg. LPG cylinders, bearing Petron’s tradename and its
trademark "GASUL" and other devices owned and/or used exclusively by Petron
with tampered "GASUL" logo;
e. One (1) set of motor compressor for filling system; and
f. One (1) set of LPG refilling machine.
On 22 April 2003, petitioners filed with the RTC a Motion to Quash Search
Warrants No. 2-2003 and No. 3-200314 on the following grounds:
1. There is no probable cause for the issuance of the search warrant and the
conditions for the issuance of a search warrant were not complied with;
2. Applicant NBI Agent Ritchie N. Oblanca and his witness Bernabe C. Alajar do
not have any authority to apply for a search warrant. Furthermore, they
committed perjury when they alleged in their sworn statements that they
conducted a test-buy on two occasions;
3. The place to be searched was not specified in the Search Warrant as the place
has an area of 10,000 square meters (one hectare) more or less, for which
reason the place to be searched must be indicated with particularity;
4. The search warrant is characterized as a general warrant as the items to be
seized as mentioned in the search warrant are being used in the conduct of the
lawful business of respondents and the same are not being used in refilling
Shellane and Gasul LPGs.
On 30 April 2003, MASAGANA, as third party claimant, filed with the RTC a
Motion for the Return of Motor Compressor and LPG Refilling Machine.15 It
claimed that it is the owner of the said motor compressor and LPG refilling
machine; that these items were used in the operation of its legitimate business;
and that their seizure will jeopardize its business interests.
On 5 June 2003, the RTC issued two Orders, one of which denied the petitioners’
Motion to Quash Search Warrants No. 2-2003 and No. 3-2003, and the other one
also denied the Motion for the Return of Motor Compressor and LPG Refilling
Machine of MASAGANA, for lack of merit.16
With respect to the Order denying the petitioners’ motion to quash Search
Warrants No. 2-2003 and No. 3-2003, the RTC held that based on the
testimonies of Oblanca and Alajar, as well as the documentary evidence
consisting of receipts, photographs, intellectual property and corporate
registration papers, there is probable cause to believe that petitioners are
engaged in the business of refilling or using cylinders which bear the trademarks
or devices of Petron and Pilipinas Shell in the place sought to be searched and
that such activity is probably in violation of Section 155 in relation to Section 170
of Republic Act No. 8293.
It also ruled that Oblanca and Alajar had personal knowledge of the acts
complained of since they were the ones who monitored the activities of and
conducted test-buys on MASAGANA; that the search warrants in question are
not general warrants because the compound searched are solely used and
occupied by MASAGANA, and as such, there was no need to particularize the
areas within the compound that would be searched; and that the items to be
seized in the subject search warrants were sufficiently described with particularity
as the same was limited to cylinder tanks bearing the trademarks GASUL and
SHELLANE.
As regards the Order denying the motion of MASAGANA for the return of its
motor compressor and LPG refilling machine, the RTC resolved that MASAGANA
cannot be considered a third party claimant whose rights were violated as a
result of the seizure since the evidence disclosed that petitioners are
stockholders of MASAGANA and that they conduct their business through the
same juridical entity. It maintained that to rule otherwise would result in the
misapplication and debasement of the veil of corporate fiction. It also stated that
the veil of corporate fiction cannot be used as a refuge from liability.
Further, the RTC ratiocinated that ownership by another person or entity of the
seized items is not a ground to order its return; that in seizures pursuant to a
search warrant, what is important is that the seized items were used or intended
to be used as means of committing the offense complained of; that by its very
nature, the properties sought to be returned in the instant case appear to be
related to and intended for the illegal activity for which the search warrants were
applied for; and that the items seized are instruments of an offense.
Petitioners filed Motions for Reconsideration of the assailed Orders,17 but these
were denied by the RTC in its Order dated 21 July 2003 for lack of compelling
reasons.18
Subsequently, petitioners appealed the two Orders of the RTC to the Court of
Appeals via a special civil action for certiorari under Rule 65 of the Rules of
Court.19 On 30 September 2004, the Court of Appeals promulgated its Decision
affirming the Orders of the RTC.20 It adopted in essence the bases and reasons
of the RTC in its two Orders. The decretal portion thereof reads:
Based on the foregoing, this Court finds no reason to disturb the assailed Orders
of the respondent judge. Grave abuse of discretion has not been proven to exist
in this case.
WHEREFORE, the petition is hereby DISMISSED for lack of merit. The assailed
orders both dated June 5, 2003 are hereby AFFIRMED.
Petitioners filed a Motion for Reconsideration21 of the Decision of the Court of
Appeals, but this was denied in its Resolution dated 1 June 2005 for lack of
merit.22
Petitioners filed the instant petition on the following grounds:
I.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
PRESIDING JUDGE OF RTC CAVITE CITY HAD SUFFICIENT BASIS IN
DECLARING THE EXISTENCE OF PROBABLE CAUSE;
II.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT NBI
AGENT (RITCHIE OBLANCA) CAN APPLY FOR THE SEARCH WARRANTS
NOTHWITHSTANDING HIS LACK OF AUTHORITY;
III.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
REQUIREMENT OF GIVING A PARTICULAR DESCRIPTION OF THE PLACE
TO BE SEARCHED WAS COMPLIED WITH;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
APPLICATIONS AND THE SEARCH WARRANTS THEMSELVES SHOW NO
AMBIGUITY OF THE ITEMS TO BE SEIZED;
V.
THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT THE
COMPLAINT IS DIRECTED AGAINST MASAGANA GAS CORPORATION,
ACTING THROUGH ITS OFFICERS AND DIRECTORS, HENCE MASAGANA
GAS CORPORATION MAY NOT BE CONSIDERED AS THIRD PARTY
CLAIMANT WHOSE RIGHTS WERE VIOLATED AS A RESULT OF THE
SEIZURE.23
Apropos the first issue, petitioners allege that Oblanca and Alajar had no
personal knowledge of the matters on which they testified; that Oblanca and
Alajar lied to Judge Sadang when they stated under oath that they were the ones
who conducted the test-buys on two different occasions; that the truth of the
matter is that Oblanca and Alajar never made the purchases personally; that the
transactions were undertaken by other persons namely, Nikko Javier and G.
Villanueva as shown in the Entry/Exit Slips of MASAGANA; and that even if it
were true that Oblanca and Alajar asked Nikko Javier and G. Villanueva to
conduct the test-buys, the information relayed by the latter two to the former was
mere hearsay.24
Petitioners also contend that if Oblanca and Alajar had indeed used different
names in purchasing the LPG cylinders, they should have mentioned it in their
applications for search warrants and in their testimonies during the preliminary
examination; that it was only after the petitioners had submitted to the RTC the
entry/exit slips showing different personalities who made the purchases that
Oblanca and Alajar explained that they had to use different names in order to
avoid detection; that Alajar is not connected with either of the private
respondents; that Alajar was not in a position to inform the RTC as to the
distinguishing trademarks of SHELLANE and GASUL; that Oblanca was not also
competent to testify on the marks allegedly infringed by petitioners; that Judge
Sadang failed to ask probing questions on the distinguishing marks of
SHELLANE and GASUL; that the findings of the Brand Protection Committee of
Pilipinas Shell were not submitted nor presented to the RTC; that although Judge
Sadang examined Oblanca and Alajar, the former did not ask exhaustive
questions; and that the questions Judge Sadang asked were merely rehash of
the contents of the affidavits of Oblanca and Alajar.25
These contentions are devoid of merit.
Article III, Section 2, of the present Constitution states the requirements before a
search warrant may be validly issued, to wit:
Section 2. The right of the people to be secure in their persons, houses, papers,
and effects against unreasonable searches and seizures of whatever nature and
for any purpose shall be inviolable, and no search warrant or warrant of arrest
shall issue except upon probable cause to be determined personally by the judge
after examination under oath or affirmation of the complainant and the witnesses
he may produce, and particularly describing the place to be searched and the
persons or things to be seized. (emphasis supplied).
Section 4 of Rule 126 of the Revised Rules on Criminal Procedure, provides with
more particularity the requisites in issuing a search warrant, viz:
SEC. 4. Requisites for issuing search warrant. – A search warrant shall not issue
except upon probable cause in connection with one specific offense to be
determined personally by the judge after examination under oath or affirmation of
the complainant and the witnesses he may produce, and particularly describing
the place to be searched and the things to be seized which may be anywhere in
the Philippines.
According to the foregoing provisions, a search warrant can be issued only upon
a finding of probable cause. Probable cause for search warrant means such facts
and circumstances which would lead a reasonably discreet and prudent man to
believe that an offense has been committed and that the objects sought in
connection with the offense are in the place to be searched.26
The facts and circumstances being referred thereto pertain to facts, data or
information personally known to the applicant and the witnesses he may
present.27 The applicant or his witnesses must have personal knowledge of the
circumstances surrounding the commission of the offense being complained of.
"Reliable information" is insufficient. Mere affidavits are not enough, and the
judge must depose in writing the complainant and his witnesses.28
Section 155 of Republic Act No. 8293 identifies the acts constituting trademark
infringement, thus:
SEC. 155. Remedies; Infringement. – Any person who shall, without the consent
of the owner of the registered mark:
155.1. Use in commerce any reproduction, counterfeit, copy, or colorable
imitation of a registered mark or the same container or a dominant feature thereof
in connection with the sale, offering for sale, distribution, advertising of any goods
or services including other preparatory steps necessary to carry out the sale of
any goods or services on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive; or
155.2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a
dominant feature thereof and apply such reproduction, counterfeit, copy or
colorable imitation to labels, signs, prints, packages, wrappers, receptacles or
advertisements intended to be used in commerce upon or in connection with the
sale, offering for sale, distribution, or advertising of goods or services on or in
connection with which such use is likely to cause confusion, or to cause mistake,
or to deceive, shall be liable in a civil action for infringement by the registrant for
the remedies hereinafter set forth: Provided, That the infringement takes place at
the moment any of the acts stated in Subsection 155.1 or this subsection are
committed regardless of whether there is actual sale of goods or services using
the infringing material.
As can be gleaned in Section 155.1, mere unauthorized use of a container
bearing a registered trademark in connection with the sale, distribution or
advertising of goods or services which is likely to cause confusion, mistake or
deception among the buyers/consumers can be considered as trademark
infringement.
In his sworn affidavits,29 Oblanca stated that before conducting an investigation
on the alleged illegal activities of MASAGANA, he reviewed the certificates of
trademark registrations issued by the Philippine Intellectual Property Office in
favor of Petron and Pilipinas Shell; that he confirmed from Petron and Pilipinas
Shell that MASAGANA is not authorized to sell, use, refill or distribute GASUL
and SHELLANE LPG cylinder containers; that he and Alajar monitored the
activities of MASAGANA in its refilling plant station located within its compound at
Governor’s Drive, Barangay Lapidario, Trece Martires, Cavite City; that, using
different names, they conducted two test-buys therein where they purchased
LPG cylinders bearing the trademarks GASUL and SHELLANE; that the said
GASUL and SHELLANE LPG cylinders were refilled in their presence by the
MASAGANA employees; that while they were inside the MASAGANA compound,
he noticed stock piles of multi-branded cylinders including GASUL and
SHELLANE LPG cylinders; and that they observed delivery trucks loaded with
GASUL and SHELLANE LPG cylinders coming in and out of the MASAGANA
compound and making deliveries to various retail outlets. These allegations were
corroborated by Alajar in his separate affidavits.
In support of the foregoing statements, Oblanca also submitted the following
documentary and object evidence:
1. Certified true copy of the Certificate of Registration No. 44046 for "SHELL
(DEVICE)" in the name of Shell International;
2. Certified true copy of the Certificate of Registration No. 41789 for "SHELL
(DEVICE)’ in the name of Shell International;
3. Certified true copy of the Certificate of Registration No. 37525 for "SHELL
(DEVICE) in the name of Shell International;
4. Certified true copy of the Certificate of Registration No. R-2813 for "SHELL" in
the name of Shell International;
5. Certified true copy of the Certificate of Registration No. 31443 for
"SHELLANE" in the name of Shell International;
6. Certified true copy of the Certificate of Registration No. 57945 for the mark
"GASUL" in the name of Petron;
7. Certified true copy of the Certificate of Registration No. C-147 for "GASUL
CYLINDER CONTAINING LIQUEFIED PETROLEUM GAS" in the name of
Petron;
8. Certified true copy of the Certificate of Registration No. 61920 for the mark
"GASUL AND DEVICE" in the name of Petron;
9. Certified true copy of the Articles of Incorporation of Masagana;
10. Certified true copy of the By-laws of Masagana;
11. Certified true copy of the latest General Information Sheet of Masagana on
file with the Securities and Exchange Commission;
12. Pictures of delivery trucks coming in and out of Masagana while it delivered
Gasul and Shellane LPG;
13. Cash Invoice No. 56210 dated 13 February 2003 issued by Masagana for the
Gasul and Shellane LPG purchased by Agent Oblanca and witness Alajar;
14. Pictures of the Shellane and Gasul LPG’’s covered by Cash Invoice No.
56210 purchased from Masagana by Agent Oblanca and witness Alajar;
15. Cash Invoice No. 56398 dated 27 February 2003 issued by Masagana for the
Gasul and Shellane LPG purchased by Agent Oblanca and witness Alajar; and
16. Pictures of the Shellane and Gasul LPG’s covered by Cash Invoice No.
56398 purchased from Masagana by Agent Oblanca and witness Alajar.30
Extant from the foregoing testimonial, documentary and object evidence is that
Oblanca and Alajar have personal knowledge of the fact that petitioners, through
MASAGANA, have been using the LPG cylinders bearing the marks GASUL and
SHELLANE without permission from Petron and Pilipinas Shell, a probable cause
for trademark infringement. Both Oblanca and Alajar were clear and insistent that
they were the very same persons who monitored the activities of MASAGANA;
that they conducted test-buys thereon; and that in order to avoid suspicion, they
used different names during the test-buys. They also personally witnessed the
refilling of LPG cylinders bearing the marks GASUL and SHELLANE inside the
MASAGANA refilling plant station and the deliveries of these refilled containers to
some outlets using mini-trucks.
Indeed, the aforesaid facts and circumstances are sufficient to establish probable
cause. It should be borne in mind that the determination of probable cause does
not call for the application of the rules and standards of proof that a judgment of
conviction requires after trial on the merits. As the term implies, "probable cause"
is concerned with probability, not absolute or even moral certainty. The standards
of judgment are those of a reasonably prudent man, not the exacting calibrations
of a judge after a full blown trial.31
The fact that Oblanca and Alajar used different names in the purchase receipts
do not negate personal knowledge on their part. It is a common practice of the
law enforcers such as NBI agents during covert investigations to use different
names in order to conceal their true identities. This is reasonable and
understandable so as not to endanger the life of the undercover agents and to
facilitate the lawful arrest or apprehension of suspected violators of the law.
Petitioners’ contention that Oblanca and Alajar should have mentioned the fact
that they used different names in their respective affidavits and during the
preliminary examination is puerile. The argument is too vacuous to merit serious
consideration. There is nothing in the provisions of law concerning the issuance
of a search warrant which directly or indirectly mandates that the applicant of the
search warrant or his witnesses should state in their affidavits the fact that they
used different names while conducting undercover investigations, or to divulge
such fact during the preliminary examination. In the light of other more material
facts which needed to be established for a finding of probable cause, it is not
difficult to believe that Oblanca and Alajar failed to mention that they used aliases
in entering the MASAGANA compound due to mere oversight.
It cannot be gainfully said that Oblanca and Alajar are not competent to testify on
the trademarks infringed by the petitioners. As earlier discussed, Oblanca
declared under oath that before conducting an investigation on the alleged illegal
activities of MASAGANA, he reviewed the certificates of trademark registrations
issued by the Philippine Intellectual Property Office in favor of Petron and
Pilipinas Shell. These certifications of trademark registrations were attached by
Oblanca in his applications for the search warrants. Alajar, on the other hand,
works as a private investigator and, in fact, owns a private investigation and
research/consultation firm. His firm was hired and authorized, pursuant to the
Brand Protection Program of Petron and Pilipinas Shell, to verify reports that
MASAGANA is involved in the illegal sale and refill of GASUL and SHELLANE
LPG cylinders.32 As part of the job, he studied and familiarized himself with the
registered trademarks of GASUL and SHELLANE, and the distinct features of the
LPG cylinders bearing the same trademarks before conducting surveillance and
test-buys on MASAGANA.33 He also submitted to Oblanca several copies of the
same registered trademark registrations and accompanied Oblanca during the
surveillance and test-buys.
As to whether the form and manner of questioning made by Judge Sadang
complies with the requirements of law, Section 5 of Rule 126 of the Revised
Rules on Criminal Procedure, prescribes the rules in the examination of the
complainant and his witnesses when applying for search warrant, to wit:
SEC. 5. Examination of complainant; record.- The judge must, before issuing the
warrant, personally examine in the form of searching questions and answers, in
writing under oath, the complainant and the witnesses he may produce on facts
personally known to them and attach to the record their sworn statements,
together with the affidavits submitted.
The searching questions propounded to the applicant and the witnesses depend
largely on the discretion of the judge. Although there is no hard-and–fast rule
governing how a judge should conduct his investigation, it is axiomatic that the
examination must be probing and exhaustive, not merely routinary, general,
peripheral, perfunctory or pro forma. The judge must not simply rehash the
contents of the affidavit but must make his own inquiry on the intent and
justification of the application.34
After perusing the Transcript of Stenographic Notes of the preliminary
examination, we found the questions of Judge Sadang to be sufficiently probing,
not at all superficial and perfunctory.35 The testimonies of Oblanca and Alajar
were consistent with each other and their narration of facts was credible. As
correctly found by the Court of Appeals:
This Court is likewise not convinced that respondent Judge failed to ask probing
questions in his determination of the existence of probable cause. This Court has
thoroughly examined the Transcript of Stenographic Notes taken during the
investigation conducted by the respondent Judge and found that respondent
Judge lengthily inquired into the circumstances of the case. For instance, he
required the NBI agent to confirm the contents of his affidavit, inquired as to
where the "test-buys" were conducted and by whom, verified whether PSPC and
PETRON have registered trademarks or tradenames, required the NBI witness to
explain how the "test-buys" were conducted and to describe the LPG cylinders
purchased from Masagana Gas Corporation, inquired why the applications for
Search Warrant were filed in Cavite City considering that Masagana Gas
Corporation was located in Trece Martires, Cavite, inquired whether the NBI
Agent has a sketch of the place and if there was any distinguishing sign to
identify the place to be searched, and inquired about their alleged tailing and
monitoring of the delivery trucks. x x x.36
Since probable cause is dependent largely on the opinion and findings of the
judge who conducted the examination and who had the opportunity to question
the applicant and his witnesses, the findings of the judge deserves great weight.
The reviewing court can overturn such findings only upon proof that the judge
disregarded the facts before him or ignored the clear dictates of reason.37 We
find no compelling reason to disturb Judge Sadang’s findings herein.
Anent the second issue, petitioners argue that Judge Sadang failed to require
Oblanca to show his authority to apply for search warrants; that Oblanca is a
member of the Anti-Organized Crime and not that of the Intellectual Property
Division of the NBI; that all complaints for infringement should be investigated by
the Intellectual Property Division of the NBI; that it is highly irregular that an agent
not assigned to the Intellectual Property Division would apply for a search
warrant and without authority from the NBI Director; that the alleged letter-
complaint of Atty. Bienvenido Somera, Jr. of Villaraza and Angangco Law Office
was not produced in court; that Judge Sadang did not require Oblanca to
produce the alleged letter-complaint which is material and relevant to the
determination of the existence of probable cause; and that Petron and Pilipinas
Shell, being two different corporations, should have issued a board resolution
authorizing the Villaraza and Angangco Law Office to apply for search warrant in
their behalf.38
We reject these protestations.
The authority of Oblanca to apply for the search warrants in question is clearly
discussed and explained in his affidavit, viz:
[That] on 11 February 2003, the National Bureau of Investigation (NBI) received a
letter-complaint from Atty. Bienvenido I. Somera, Jr. of Villaraza and Angangco,
on behalf of among others, Petron Corporation (PETRON) [and Pilipinas Shell
Petroleum Corporation (PSPC), the authorized representative of Shell
International Petroleum Company Limited (SHELL INTERNATIONAL)] requesting
assistance in the investigation and, if warranted, apprehension and prosecution
of certain persons and/or establishments suspected of violating the intellectual
property rights of PETRON [and of PSPC and Shell International.]
11. [That] on the basis of the letter-complaint, I, together with Agent Angelo
Zarzoso, was assigned as the NBI agent on the case.39
The fact that Oblanca is a member of the Anti-Organized Crime Division and not
that of the Intellectual Property Division does not abrogate his authority to apply
for search warrant. As aptly stated by the RTC and the Court of Appeals, there is
nothing in the provisions on search warrant under Rule 126 of the Revised Rules
on Criminal Procedure, which specifically commands that the applicant law
enforcer must be a member of a division that is assigned or related to the subject
crime or offense before the application for search warrant may be acted upon.
The petitioners did not also cite any law, rule or regulation mandating such
requirement. At most, petitioners may only be referring to the administrative
organization and/or internal rule or practice of the NBI. However, not only did
petitioners failed to establish the existence thereof, but they also did not prove
that such administrative organization and/or internal rule or practice are
inviolable.
Neither is the presentation of the letter-complaint of Atty. Somera and board
resolutions from Petron and Pilipinas Shell required or necessary in determining
probable cause. As heretofore discussed, the affidavits of Oblanca and Alajar,
coupled with the object and documentary evidence they presented, are sufficient
to establish probable cause. It can also be presumed that Oblanca, as an NBI
agent, is a public officer who had regularly performed his official duty.40 He
would not have initiated an investigation on MASAGANA without a proper
complaint. Furthermore, Atty. Somera did not step up to deny his letter-complaint.
Regarding the third issue, petitioners posit that the applications for search
warrants of Oblanca did not specify the particular area to be searched, hence,
giving the raiding team wide latitude in determining what areas they can search.
They aver that the search warrants were general warrants, and are therefore
violative of the Constitution. Petitioners also assert that since the MASAGANA
compound is about 10,000.00 square meters with several structures erected on
the lot, the search warrants should have defined the areas to be searched.
The long standing rule is that a description of the place to be searched is
sufficient if the officer with the warrant can, with reasonable effort, ascertain and
identify the place intended and distinguish it from other places in the community.
Any designation or description known to the locality that points out the place to
the exclusion of all others, and on inquiry leads the officers unerringly to it,
satisfies the constitutional requirement.41
Moreover, in the determination of whether a search warrant describes the
premises to be searched with sufficient particularity, it has been held that the
executing officer’s prior knowledge as to the place intended in the warrant is
relevant. This would seem to be especially true where the executing officer is the
affiant on whose affidavit the warrant had been issued, and when he knows that
the judge who issued the warrant intended the compound described in the
affidavit.42
The search warrants in question commanded any peace officer to make an
immediate search on MASAGANA compound located at Governor’s Drive,
Barangay Lapidario, Trece Martires, Cavite City. It appears that the raiding team
had ascertained and reached MASAGANA compound without difficulty since
MASAGANA does not have any other offices/plants in Trece Martires, Cavite
City. Moreover, Oblanca, who was with the raiding team, was already familiar
with the MASAGANA compound as he and Alajar had monitored and conducted
test-buys thereat.
Even if there are several structures inside the MASAGANA compound, there was
no need to particularize the areas to be searched because, as correctly stated by
Petron and Pilipinas Shell, these structures constitute the essential and
necessary components of the petitioners’ business and cannot be treated
separately as they form part of one entire compound. The compound is owned
and used solely by MASAGANA. What the case law merely requires is that, the
place to be searched can be distinguished in relation to the other places in the
community. Indubitably, this requisite was complied with in the instant case.
As to the fourth issue, petitioners asseverate that the search warrants did not
indicate with particularity the items to be seized since the search warrants merely
described the items to be seized as LPG cylinders bearing the trademarks
GASUL and SHELLANE without specifying their sizes.
A search warrant may be said to particularly describe the things to be seized
when the description therein is as specific as the circumstances will ordinarily
allow; or when the description expresses a conclusion of fact not of law by which
the warrant officer may be guided in making the search and seizure; or when the
things described are limited to those which bear direct relation to the offense for
which the warrant is being issued.43
While it is true that the property to be seized under a warrant must be particularly
described therein and no other property can be taken thereunder, yet the
description is required to be specific only in so far as the circumstances will
ordinarily allow. The law does not require that the things to be seized must be
described in precise and minute details as to leave no room for doubt on the part
of the searching authorities; otherwise it would be virtually impossible for the
applicants to obtain a search warrant as they would not know exactly what kind of
things they are looking for. Once described, however, the articles subject of the
search and seizure need not be so invariant as to require absolute concordance,
in our view, between those seized and those described in the warrant.
Substantial similarity of those articles described as a class or specie would
suffice.44
Measured against this standard, we find that the items to be seized under the
search warrants in question were sufficiently described with particularity. The
articles to be confiscated were restricted to the following: (1) LPG cylinders
bearing the trademarks GASUL and SHELLANE; (2) Machines and equipments
used or intended to be used in the illegal refilling of GASUL and SHELLANE
cylinders. These machines were also specifically enumerated and listed in the
search warrants; (3) Documents which pertain only to the production, sale and
distribution of the GASUL and SHELLANE LPG cylinders; and (4) Delivery trucks
bearing Plate Nos. WTE-527, XAM-970 and WFC-603, hauling trucks, and/or
other delivery trucks or vehicles or conveyances being used or intended to be
used for the purpose of selling and/or distributing GASUL and SHELLANE LPG
cylinders.45
Additionally, since the described items are clearly limited only to those which
bear direct relation to the offense, i.e., violation of section 155 of Republic Act
No. 8293, for which the warrant was issued, the requirement of particularity of
description is satisfied.
Given the foregoing, the indication of the accurate sizes of the GASUL and
SHELLANE LPG cylinders or tanks would be unnecessary.
Finally, petitioners claim that MASAGANA has the right to intervene and to move
for the return of the seized items; that the items seized by the raiding team were
being used in the legitimate business of MASAGANA; that the raiding team had
no right to seize them under the guise that the same were being used in refilling
GASUL and SHELLANE LPG cylinders; and that there being no action for
infringement filed against them and/or MASAGANA from the seizure of the items
up to the present, it is only fair that the seized articles be returned to the lawful
owner in accordance with Section 20 of A.M. No. 02-1-06-SC.
It is an elementary and fundamental principle of corporation law that a
corporation is an entity separate and distinct from its stockholders, directors or
officers. However, when the notion of legal entity is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons, or in the case of two corporations
merge them into one.46 In other words, the law will not recognize the separate
corporate existence if the corporation is being used pursuant to the foregoing
unlawful objectives. This non-recognition is sometimes referred to as the doctrine
of piercing the veil of corporate entity or disregarding the fiction of corporate
entity. Where the separate corporate entity is disregarded, the corporation will be
treated merely as an association of persons and the stockholders or members
will be considered as the corporation, that is, liability will attach personally or
directly to the officers and stockholders.47
As we now find, the petitioners, as directors/officers of MASAGANA, are utilizing
the latter in violating the intellectual property rights of Petron and Pilipinas Shell.
Thus, petitioners collectively and MASAGANA should be considered as one and
the same person for liability purposes. Consequently, MASAGANA’s third party
claim serves no refuge for petitioners.
Even if we were to sustain the separate personality of MASAGANA from that of
the petitioners, the effect will be the same. The law does not require that the
property to be seized should be owned by the person against whom the search
warrants is directed. Ownership, therefore, is of no consequence, and it is
sufficient that the person against whom the warrant is directed has control or
possession of the property sought to be seized.48 Hence, even if, as petitioners
claimed, the properties seized belong to MASAGANA as a separate entity, their
seizure pursuant to the search warrants is still valid.
Further, it is apparent that the motor compressor, LPG refilling machine and the
GASUL and SHELL LPG cylinders seized were the corpus delicti, the body or
substance of the crime, or the evidence of the commission of trademark
infringement. These were the very instruments used or intended to be used by
the petitioners in trademark infringement. It is possible that, if returned to
MASAGANA, these items will be used again in violating the intellectual property
rights of Petron and Pilipinas Shell.49 Thus, the RTC was justified in denying the
petitioners’ motion for their return so as to prevent the petitioners and/or
MASAGANA from using them again in trademark infringement.
Petitioners’ reliance on Section 20 of A.M. No. 02-1-06-SC,50 is not tenable. As
correctly observed by the Solicitor General, A.M. 02-1-06-SC is not applicable in
the present case because it governs only searches and seizures in civil actions
for infringement of intellectual property rights.51 The offense complained of
herein is for criminal violation of Section 155 in relation to Section 17052 of
Republic Act No. 8293.
WHEREFORE, the petition is DENIED. The Decision and Resolution of the Court
of Appeals in CA-G.R. SP No. 79256, dated 30 September 2004 and 1 June
2005, respectively, are hereby AFFIRMED. Costs against petitioners.
SO ORDERED.

Foundation

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-2598 June 29, 1950
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED BROWN, EMMA B
capacity as receiver of the Far Eastern Lumber and Commercial Co., Inc., respondents.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No. 381 of the Court of First Instanc
from further acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and the respondents F
and Ceferino S. Abella, signed and acknowledged in Leyte, the article of incorporation of the Fa
organized to engage in a general lumber business to carry on as general contractors, operators and
affidavit of the treasurer stating that 23,428 shares of stock had been subscribed and fully paid with c
described in a list appended thereto.
(2) Immediately after the execution of said articles of incorporation, the corporation proceeded to do
election of its officers.
(3) On December 2, 1947, the said articles of incorporation were filed in the office of the Securities a
of the corresponding certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of incorporation by the aforesaid governmen
Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the Court of First Instance of Ley
Brown et al. vs. Arnold C. Hall et al.", alleging among other things that the Far Eastern Lumb
partnership; that they wished to have it dissolved because of bitter dissension among the members
and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a motion to dism
sufficiently of the cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of the company; a
properties thereof, upon the filing of a P20,000 bond.
(7) The defendants therein (petitioners herein) offered to file a counter-bond for the discharge of the
accept the offer and to discharge the receiver. Whereupon, the present special civil action was ins
propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of the company, beca
thereof may only be ordered in a quo warranto proceeding instituted in accordance with section 19
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the article of incorporation
Discussion: The second proposition may at once be dismissed. All the parties are informed that the
so far, issued the corresponding certificate of incorporation. All of them know, or sought to know,
exist only from the moment such certificate is issued — not before (sec. 11, Corporation Law). The
to the others that they were incorporated any more than the latter had made similar representation
anything to his prejudice and damage, the principle of estoppel does not apply. Obviously this is
contracts with the corporation through the rule of estoppel.
The first proposition above stated is premised on the theory that, inasmuch as the Far Eastern
corporation, section 19 of the Corporation Law applies, and therefore the court had not jurisdiction
381. Section 19 reads as follows:
. . . The due incorporation of any corporations claiming in good faith to be a corporation under this
shall not be inquired into collaterally in any private suit to which the corporation may be a party, b
Insular Government on information of the Attorney-General.
There are least two reasons why this section does not govern the situation. Not having obtained t
Lumber and Commercial Co. — even its stockholders — may not probably claim "in good faith" to b
Under our statue it is to be noted (Corporation Law, sec. 11) that it is the issuance of a certificate o
Commerce and Industry which calls a corporation into being. The immunity if collateral attack is gra
be a corporation under this act." Such a claim is compatible with the existence of errors and irregulari
of the law. Unless there has been an evident attempt to comply with the law the claim to be a corp
good faith." (Fisher on the Philippine Law of Stock Corporations, p. 75. See also Humphreys vs. Dre
Second, this is not a suit in which the corporation is a party. This is a litigation between stockholder
obtaining its dissolution. Even the existence of a de jure corporation may be terminated in a privat
without the intervention of the state.
There might be room for argument on the right of minority stockholders to sue for dissolution;1
jurisdiction, and is a matter for decision by the judge, subject to review on appeal. Whkch brings us
not prosper, namely: the petitioners have their remedy by appealing the order of dissolution at the p
There is a secondary issue in connection with the appointment of a receiver. But it must be admitte
dissolution of a company or corporation, and it was no error to reject the counter-bond, the court hav
of the bond to be demanded of the receiver, much depends upon the discretion of the trial court, wh
clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs. The preliminary injunction heretofo
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.

SECOND DIVISION

SEVENTH DAY ADVENTIST G.R. No. 150416

CONFERENCE CHURCH OF
GUTIERREZ,
- v e r s u s -,

NORTHEASTERN MINDANAO
MISSION OF SEVENTH DAY
ADVENTIST, INC., and/or
represented by JOSUE A. LAYON,

x------------------------------------------x

DECISION

CORONA, J.:

This petition for review on certiorari assails the Court of Appeals (CA) decision[if
!supportFootnotes][1][endif] and resolution[if !supportFootnotes][2][endif] in CA-
G.R. CV No. 41966 affirming, with modification, the decision of the Regional Trial
Court (RTC) of Bayugan, Agusan del Sur, Branch 7 in Civil Case No. 63.
This case involves a 1,069 sq. m. lot covered by Transfer Certificate of Title (TCT)
No. 4468 in Bayugan, Agusan del Sur originally owned by Felix Cosio and his wife,
Felisa Cuysona.

On April 21, 1959, the spouses Cosio donated the land to the South
Philippine Union Mission of Seventh Day Adventist Church of Bayugan Esperanza,
Agusan (SPUM-SDA Bayugan).[if !supportFootnotes][3][endif] Part of the deed of
donation read:

KNOW ALL MEN BY THESE PRESENTS:

That we Felix Cosio[,] 49 years of age[,] and Felisa Cuysona[,] 40 years of age,
[h]usband and wife, both are citizen[s] of the Philippines, and resident[s]
with post office address in the Barrio of Bayugan, Municipality of
Esperanza, Province of Agusan, Philippines, do hereby grant, convey and
forever quit claim by way of Donation or gift unto the South Philippine
[Union] Mission of Seventh Day Adventist Church of Bayugan,
Esperanza, Agusan, all the rights, title, interest, claim and demand both
at law and as well in possession as in expectancy of in and to all the place
of land and portion situated in the Barrio of Bayugan, Municipality of
Esperanza, Province of Agusan, Philippines, more particularly and
bounded as follows, to wit:

[if !supportLists]1. [endif]a parcel of land for Church Site purposes only.
[if !supportLists]2. [endif]situated [in Barrio Bayugan, Esperanza].
[if !supportLists]3. [endif]Area: 30 meters wide and 30 meters length or 900
square meters.
[if !supportLists]4. [endif]Lot No. 822-Pls-225. Homestead Application No. V-
36704, Title No. P-285.
[if !supportLists]5. [endif]Bounded Areas
North by National High Way; East by Bricio Gerona; South by Serapio Abijaron
and West by Feliz Cosio xxx. [if !supportFootnotes][4][endif]

The donation was allegedly accepted by one Liberato Rayos, an elder of the
Seventh Day Adventist Church, on behalf of the donee.

Twenty-one years later, however, on February 28, 1980, the same parcel
of land was sold by the spouses Cosio to the Seventh Day Adventist Church of
Northeastern Mindanao Mission (SDA-NEMM).[if !supportFootnotes][5][endif] TCT
No. 4468 was thereafter issued in the name of SDA-NEMM.[if
!supportFootnotes][6][endif]
Claiming to be the alleged donees successors-in-interest, petitioners asserted
ownership over the property. This was opposed by respondents who argued that
at the time of the donation, SPUM-SDA Bayugan could not legally be a donee
because, not having been incorporated yet, it had no juridical personality. Neither
were petitioners members of the local church then, hence, the donation could not
have been made particularly to them.

On September 28, 1987, petitioners filed a case, docketed as Civil Case No. 63 (a
suit for cancellation of title, quieting of ownership and possession, declaratory relief
and reconveyance with prayer for preliminary injunction and damages), in the RTC
of Bayugan, Agusan del Sur. After trial, the trial court rendered a decision[if
!supportFootnotes][7][endif] on November 20, 1992 upholding the sale in favor of
respondents.

On appeal, the CA affirmed the RTC decision but deleted the award of
moral damages and attorneys fees.[if !supportFootnotes][8][endif] Petitioners
motion for reconsideration was likewise denied. Thus, this petition.

The issue in this petition is simple: should SDA-NEMMs ownership of the

lot covered by TCT No. 4468 be upheld?[if !supportFootnotes][9][endif] We answer
in the affirmative.

The controversy between petitioners and respondents involves two

supposed transfers of the lot previously owned by the spouses Cosio: (1) a
donation to petitioners alleged predecessors-in-interest in 1959 and (2) a sale to
respondents in 1980.

Donation is undeniably one of the modes of acquiring ownership of real property.

Likewise, ownership of a property may be transferred by tradition as a
consequence of a sale.

Petitioners contend that the appellate court should not have ruled on the
validity of the donation since it was not among the issues raised on appeal. This is
not correct because an appeal generally opens the entire case for review.

We agree with the appellate court that the alleged donation to petitioners was void.

Donation is an act of liberality whereby a person disposes gratuitously of a thing

or right in favor of another person who accepts it. The donation could not have
been made in favor of an entity yet inexistent at the time it was made. Nor could it
have been accepted as there was yet no one to accept it.

The deed of donation was not in favor of any informal group of SDA
members but a supposed SPUM-SDA Bayugan (the local church) which, at the
time, had neither juridical personality nor capacity to accept such gift.

Declaring themselves a de facto corporation, petitioners allege that they

should benefit from the donation.
 But there are stringent requirements before one can qualify as a de facto
corporation:

[if !supportLists](a) [endif]the existence of a valid law under which it may

be incorporated;
[if !supportLists](b) [endif]an attempt in good faith to incorporate; and
[if !supportLists](c) [endif]assumption of corporate powers.[if
!supportFootnotes][10][endif]
While there existed the old Corporation Law (Act 1459),[if
!supportFootnotes][11][endif] a law under which SPUM-SDA Bayugan could have
been organized, there is no proof that there was an attempt to incorporate at that
time.

The filing of articles of incorporation and the issuance of the certificate of

incorporation are essential for the existence of a de facto corporation.[if
!supportFootnotes][12][endif] We have held that an organization not registered with
the Securities and Exchange Commission (SEC) cannot be considered a
corporation in any concept, not even as a corporation de facto.[if
!supportFootnotes][13][endif] Petitioners themselves admitted that at the time of
the donation, they were not registered with the SEC, nor did they even attempt to
organize[if !supportFootnotes][14][endif] to comply with legal requirements.

Corporate existence begins only from the moment a certificate of

incorporation is issued. No such certificate was ever issued to petitioners or their
supposed predecessor-in-interest at the time of the donation. Petitioners obviously
could not have claimed succession to an entity that never came to exist. Neither
could the principle of separate juridical personality apply since there was never any
corporation to speak of. And, as already stated, some of the representatives of
petitioner Seventh Day Adventist Conference Church of Southern Philippines, Inc.
were not even members of the local church then, thus, they could not even claim
that the donation was particularly for them.

The de facto doctrine thus effects a compromise between two conflicting public
interest[s]the one opposed to an unauthorized assumption of corporate
privileges; the other in favor of doing justice to the parties and of
establishing a general assurance of security in business dealing with
corporations.

Generally, the doctrine exists to protect the public dealing with

supposed corporate entities, not to favor the defective or non-existent
corporation.

In view of the foregoing, petitioners arguments anchored on their

 supposed de facto status hold no water. We are convinced that there was
no donation to petitioners or their supposed predecessor-in-interest.

On the other hand, there is sufficient basis to affirm the title of SDA-
NEMM. The factual findings of the trial court in this regard were not convincingly
disputed. This Court is not a trier of facts. Only questions of law are the proper
subject of a petition for review on certiorari.
Sustaining the validity of respondents title as well as their right of
ownership over the property, the trial court stated:

[W]hen Felix Cosio was shown the Absolute Deed of Sale during the hearing xxx
he acknowledged that the same was his xxx but that it was not his
intention to sell the controverted property because he had previously
donated the same lot to the South Philippine Union Mission of SDA
Church of Bayugan-Esperanza. Cosio avouched that had it been his
intendment to sell, he would not have disposed of it for a mere P2,000.00
in two installments but for P50,000.00 or P60,000.00. According to him,
the P2,000.00 was not a consideration of the sale but only a form of help
extended.

A thorough analysis and perusal, nonetheless, of the Deed of Absolute Sale

disclosed that it has the essential requisites of contracts pursuant to xxx
Article 1318 of the Civil Code, except that the consideration of P2,000.00 is
somewhat insufficient for a [1,069-square meter] land. Would then this
inadequacy of the consideration render the contract invalid?

Article 1355 of the Civil Code provides:

Except in cases specified by law, lesion or inadequacy of cause shall not invalidate
a contract, unless there has been fraud, mistake or
undue influence.
No evidence [of fraud, mistake or undue influence] was adduced by
[petitioners].

xxx

Well-entrenched is the rule that a Certificate of Title is generally a conclusive

evidence of [ownership] of the land. There is that strong and solid
presumption that titles were legally issued and that they are valid. It is
irrevocable and indefeasible and the duty of the Court is to see to it that
the title is maintained and respected unless challenged in a direct
proceeding. xxx The title shall be received as evidence in all the Courts
and shall be conclusive as to all matters contained therein.

[This action was instituted almost seven years after the certificate of title in
respondents name was issued in 1980.]

According to Art. 1477 of the Civil Code, the ownership of the thing sold shall be
transferred to the vendee upon the actual or constructive delivery thereof.
On this, the noted author Arturo Tolentino had this to say:

The execution of [a] public instrument xxx transfers the

ownership from the vendor to the vendee who may thereafter exercise
the rights of an owner over the same.

Here, transfer of ownership from the spouses Cosio to SDA-NEMM was

made upon constructive delivery of the property on February 28, 1980 when the
sale was made through a public instrument. TCT No. 4468 was thereafter issued
and it remains in the name of SDA-NEMM.

WHEREFORE, the petition is hereby DENIED.

Costs against petitioners.

SO ORDERED.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to borrow
money to pursue a business and to divide the profits or losses that may arise
therefrom, even if it is shown that they have not contributed any capital of their
own to a "common fund." Their contribution may be in the form of credit or
industry, not necessarily cash or fixed assets. Being partner, they are all liable for
debts incurred by or on behalf of the partnership. The liability for a contract
entered into on behalf of an unincorporated association or ostensible corporation
may lie in a person who may not have directly transacted on its behalf, but
reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the
November 26, 1998 Decision of the Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the
same is hereby affirmed. 2
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which
was affirmed by the CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this
Court on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject
to the modifications as hereinafter made by reason of the special and unique
facts and circumstances and the proceedings that transpired during the trial of
this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets
covered by the Agreement plus P68,000.00 representing the unpaid price of the
floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiff's invoices and computed
on their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated
February 9, 1990;
ii. Accrued interest for P27,904.02 on Invoice No. 14413 for P146,868.00 dated
February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing P500.00
per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the
nets counted from September 20, 1990 (date of attachment) to September 12,
1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the
unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount P600,045.00, this Court noted that these
items were attached to guarantee any judgment that may be rendered in favor of
the plaintiff but, upon agreement of the parties, and, to avoid further deterioration
of the nets during the pendency of this case, it was ordered sold at public auction
for not less than P900,000.00 for which the plaintiff was the sole and winning
bidder. The proceeds of the sale paid for by plaintiff was deposited in court. In
effect, the amount of P900,000.00 replaced the attached property as a guaranty
for any judgment that plaintiff may be able to secure in this case with the
ownership and possession of the nets and floats awarded and delivered by the
sheriff to plaintiff as the highest bidder in the public auction sale. It has also been
noted that ownership of the nets [was] retained by the plaintiff until full payment
[was] made as stipulated in the invoices; hence, in effect, the plaintiff attached its
own properties. It [was] for this reason also that this Court earlier ordered the
attachment bond filed by plaintiff to guaranty damages to defendants to be
cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to serve
as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the plaintiff
may be entitled to in this case will have to be satisfied from the amount of
P900,000.00 as this amount replaced the attached nets and floats. Considering,
however, that the total judgment obligation as computed above would amount to
only P840,216.92, it would be inequitable, unfair and unjust to award the excess
to the defendants who are not entitled to damages and who did not put up a
single centavo to raise the amount of P900,000.00 aside from the fact that they
are not the owners of the nets and floats. For this reason, the defendants are
hereby relieved from any and all liabilities arising from the monetary judgment
obligation enumerated above and for plaintiff to retain possession and ownership
of the nets and floats and for the reimbursement of the P900,000.00 deposited by
it with the Clerk of Court.
SO ORDERED. 3
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao
entered into a Contract dated February 7, 1990, for the purchase of fishing nets of
various sizes from the Philippine Fishing Gear Industries, Inc. (herein respondent).
They claimed that they were engaged in a business venture with Petitioner Lim
Tong Lim, who however was not a signatory to the agreement. The total price of
the nets amounted to P532,045. Four hundred pieces of floats worth P68,000 were
also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence, private
respondents filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim
with a prayer for a writ of preliminary attachment. The suit was brought against the
three in their capacities as general partners, on the allegation that "Ocean Quest
Fishing Corporation" was a nonexistent corporation as shown by a Certification
from the Securities and Exchange Commission. 5 On September 20, 1990, the
lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by
attaching the fishing nets on board F/B Lourdes which was then docked at the
Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his
liability and requesting a reasonable time within which to pay. He also turned over
to respondent some of the nets which were in his possession. Peter Yao filed an
Answer, after which he was deemed to have waived his right to cross-examine
witnesses and to present evidence on his behalf, because of his failure to appear
in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with
Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment.
6 The trial court maintained the Writ, and upon motion of private respondent,
ordered the sale of the fishing nets at a public auction. Philippine Fishing Gear
Industries won the bidding and deposited with the said court the sales proceeds of
P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine
Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao
and Lim, as general partners, were jointly liable to pay respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao existed based
(1) on the testimonies of the witnesses presented and (2) on a Compromise
Agreement executed by the three 9 in Civil Case No. 1492-MN which Chua and
Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a
declaration of nullity of commercial documents; (b) a reformation of contracts; (c)
a declaration of ownership of fishing boats; (d) an injunction and (e) damages. 10
The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold
in the amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall
be applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation
and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than
P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim;
1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever
the deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim
Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. 11
The trial court noted that the Compromise Agreement was silent as to the nature
of their obligations, but that joint liability could be presumed from the equal
distribution of the profit and loss. 21
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the
RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and
Yao in a fishing business and may thus be held liable as a such for the fishing
nets and floats purchased by and for the use of the partnership. The appellate
court ruled:
The evidence establishes that all the defendants including herein appellant Lim
Tong Lim undertook a partnership for a specific undertaking, that is for
commercial fishing . . . . Oviously, the ultimate undertaking of the defendants was
to divide the profits among themselves which is what a partnership essentially is .
. . . By a contract of partnership, two or more persons bind themselves to
contribute money, property or industry to a common fund with the intention of
dividing the profits among themselves (Article 1767, New Civil Code). 13
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed
Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE
AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A
SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG
THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING
FOR OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS
FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED
IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND
ATTACHMENT OF PETITIONER LIM'S GOODS.
In determining whether petitioner may be held liable for the fishing nets and floats
from respondent, the Court must resolve this key issue: whether by their acts, Lim,
Chua and Yao could be deemed to have entered into a partnership.
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership
and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from
respondent, petitioner controverts the CA finding that a partnership existed
between him, Peter Yao and Antonio Chua. He asserts that the CA based its
finding on the Compromise Agreement alone. Furthermore, he disclaims any
direct participation in the purchase of the nets, alleging that the negotiations were
conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he was
a lessor, not a partner, of Chua and Yao, for the "Contract of Lease " dated
February 1, 1990, showed that he had merely leased to the two the main asset of
the purported partnership — the fishing boat F/B Lourdes. The lease was for six
months, with a monthly rental of P37,500 plus 25 percent of the gross catch of
the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the
two lower courts clearly showed that there existed a partnership among Chua,
Yao and him, pursuant to Article 1767 of the Civil Code which provides:
Art. 1767 — By the contract of partnership, two or more persons bind themselves
to contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed
based on the following factual findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
commercial fishing to join him, while Antonio Chua was already Yao's partner;
(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed to
acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of
P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim
Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a
Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to
serve as security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing,
dry docking and other expenses for the boats would be shouldered by Chua and
Yao;
(6) That because of the "unavailability of funds," Jesus Lim again extended a
loan to the partnership in the amount of P1 million secured by a check, because
of which, Yao and Chua entrusted the ownership papers of two other boats,
Chua's FB Lady Anne Mel and Yao's FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua
bought nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest
Fishing Corporation," their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC,
Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a)
declaration of nullity of commercial documents; (b) reformation of contracts; (c)
declaration of ownership of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement
executed between the parties-litigants the terms of which are already
enumerated above.
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 who was
petitioner's brother. 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.
Moreover, it is clear that the partnership extended not only to the purchase of the
boat, but also to that of the nets and the floats. The fishing nets and the floats,
both essential to fishing, were obviously acquired in furtherance of their business.
It would have been inconceivable for Lim to involve himself so much in buying the
boat but not in the acquisition of the aforesaid equipment, without which the
business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and
Yao, a partnership engaged in the fishing business. They purchased the boats,
which constituted the main assets of the partnership, and they agreed that the
proceeds from the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should
involve only questions of law. Thus, the foregoing factual findings of the RTC and
the CA are binding on this Court, absent any cogent proof that the present action
is embraced by one of the exceptions to the rule. 16 In assailing the factual
findings of the two lower courts, petitioner effectively goes beyond the bounds of
a petition for review under Rule 45.
Compromise Agreement
Not the Sole Basis of Partnership
Petitioner argues that the appellate court's sole basis for assuming the existence
of a partnership was the Compromise Agreement. He also claims that the
settlement was entered into only to end the dispute among them, but not to
adjudicate their preexisting rights and obligations. His arguments are baseless.
The Agreement was but an embodiment of the relationship extant among the
parties prior to its execution.
A proper adjudication of claimants' rights mandates that courts must review and
thoroughly appraise all relevant facts. Both lower courts have done so and have
found, correctly, a preexisting partnership among the parties. In implying that the
lower courts have decided on the basis of one piece of document alone,
petitioner fails to appreciate that the CA and the RTC delved into the history of
the document and explored all the possible consequential combinations in
harmony with law, logic and fairness. Verily, the two lower courts' factual findings
mentioned above nullified petitioner's argument that the existence of a
partnership was based only on the Compromise Agreement.
Petitioner Was a Partner,
Not a Lessor
We are not convinced by petitioner's argument that he was merely the lessor of
the boats to Chua and Yao, not a partner in the fishing venture. His argument
allegedly finds support in the Contract of Lease and the registration papers
showing that he was the owner of the boats, including F/B Lourdes where the
nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he
consented to the sale of his own boats to pay a debt of Chua and Yao, with the
excess of the proceeds to be divided among the three of them. No lessor would
do what petitioner did. Indeed, his consent to the sale proved that there was a
preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement
with Chua and Yao, in which debts were undertaken in order to finance the
acquisition and the upgrading of the vessels which would be used in their fishing
business. The sale of the boats, as well as the division among the three of the
balance remaining after the payment of their loans, proves beyond cavil that F/B
Lourdes, though registered in his name, was not his own property but an asset of
the partnership. It is not uncommon to register the properties acquired from a
loan in the name of the person the lender trusts, who in this case is the petitioner
himself. After all, he is the brother of the creditor, Jesus Lim.
We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell his
property to pay a debt he did not incur, if the relationship among the three of
them was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be
imputed only to Chua and Yao, and not to him. Again, we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. — All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as general
partners for all debts, liabilities and damages incurred or arising as a result thereof:
Provided however, That when any such ostensible corporation is sued on any
transaction entered by it as a corporation or on any tort committed by it as such, it
shall not be allowed to use as a defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a
party may be estopped from denying its corporate existence. "The reason behind
this doctrine is obvious — an unincorporated association has no personality and
would be incompetent to act and appropriate for itself the power and attributes of
a corporation as provided by law; it cannot create agents or confer authority on
another to act in its behalf; thus, those who act or purport to act as its
representatives or agents do so without authority and at their own risk. And as it is
an elementary principle of law that a person who acts as an agent without authority
or without a principal is himself regarded as the principal, possessed of all the right
and subject to all the liabilities of a principal, a person acting or purporting to act
on behalf of a corporation which has no valid existence assumes such privileges
and obligations and becomes personally liable for contracts entered into or for
other acts performed as such agent. 17
The doctrine of corporation by estoppel may apply to the alleged corporation and
to a third party. In the first instance, an unincorporated association, which
represented itself to be a corporation, will be estopped from denying its corporate
capacity in a suit against it by a third person who relied in good faith on such
representation. It cannot allege lack of personality to be sued to evade its
responsibility for a contract it entered into and by virtue of which it received
advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated,
nonetheless treated it as a corporation and received benefits from it, may be barred
from denying its corporate existence in a suit brought against the alleged
corporation. In such case, all those who benefited from the transaction made by
the ostensible corporation, despite knowledge of its legal defects, may be held
liable for contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is
entitled to be paid for the nets it sold. The only question here is whether petitioner
should be held jointly 18 liable with Chua and Yao. Petitioner contests such liability,
insisting that only those who dealt in the name of the ostensible corporation should
be held liable. Since his name does not appear on any of the contracts and since
he never directly transacted with the respondent corporation, ergo, he cannot be
held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B
Lourdes, the boat which has earlier been proven to be an asset of the partnership.
He in fact questions the attachment of the nets, because the Writ has effectively
stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that 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.
Technically, it is true that petitioner did not directly act on behalf of the corporation.
However, having reaped the benefits of the contract entered into by persons with
whom he previously had an existing relationship, he is deemed to be part of said
association and is covered by the scope of the doctrine of corporation by estoppel.
We reiterate the ruling of the Court in Alonso v. Villamor: 19
A litigation is not a game of technicalities in which one, more deeply schooled and
skilled in the subtle art of movement and position, entraps and destroys the other.
It is, rather, a contest in which each contending party fully and fairly lays before the
court the facts in issue and then, brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that justice be done
upon the merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust.
Technicality, when it deserts its proper office as an aid to justice and becomes its
great hindrance and chief enemy, deserves scant consideration from courts. There
should be no vested rights in technicalities.
Third Issue:
Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly issued
against the nets. We agree with the Court of Appeals that this issue is now moot
and academic. As previously discussed, F/B Lourdes was an asset of the
partnership and that it was placed in the name of petitioner, only to assure
payment of the debt he and his partners owed. The nets and the floats were
specifically manufactured and tailor-made according to their own design, and
were bought and used in the fishing venture they agreed upon. Hence, the
issuance of the Writ to assure the payment of the price stipulated in the invoices
is proper. Besides, by specific agreement, ownership of the nets remained with
Respondent Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED.
Costs against petitioner.
SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
Vitug, J., pls. see concurring opinion.
Separate Opinions
VITUG, J., concurring opinion;
I share the views expressed in the ponencia of an esteemed colleague, Mr.
Justice Artemio V. Panganiban, particularly the finding that Antonio Chua, Peter
Yao and petitioner Lim Tong Lim have incurred the liabilities of general partners. I
merely would wish to elucidate a bit, albeit briefly, the liability of partners in a
general partnership.
When a person by his act or deed represents himself as a partner in an existing
partnership or with one or more persons not actual partners, he is deemed an
agent of such persons consenting to such representation and in the same
manner, if he were a partner, with respect to persons who rely upon the
representation. 1 The association formed by Chua, Yao and Lim, should be, as it
has been deemed, a de facto partnership with all the consequent obligations for
the purpose of enforcing the rights of third persons. The liability of general
partners (in a general partnership as so opposed to a limited partnership) is laid
down in Article 1816 2 which posits that all partners shall be liable pro rata
beyond the partnership assets for all the contracts which may have been entered
into in its name, under its signature, and by a person authorized to act for the
partnership. This rule is to be construed along with other provisions of the Civil
Code which postulate that the partners can be held solidarily liable with the
partnership specifically in these instances — (1) where, by any wrongful act or
omission of any partner acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, loss or injury is caused to any
person, not being a partner in the partnership, or any penalty is incurred, the
partnership is liable therefor to the same extent as the partner so acting or
omitting to act; (2) where one partner acting within the scope of his apparent
authority receives money or property of a third person and misapplies it; and (3)
where the partnership in the course of its business receives money or property of
a third person and the money or property so received is misapplied by any
partner while it is in the custody of the partnership 3 — consistently with the rules
on the nature of civil liability in delicts and quasi-delicts.

FIRST DIVISION
[G.R. No. 119002. October 19, 2000]
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner,
vs. HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL
FEDERATION, respondents.
DECISION
KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel and Tour Services, Inc.,
through its managing director, wrote a letter to the Philippine Football Federation
(Federation), through its president private respondent Henri Kahn, wherein the
former offered its services as a travel agency to the latter.[if
!supportFootnotes][1][endif] The offer was accepted.
Petitioner secured the airline tickets for the trips of the athletes and officials of the
Federation to the South East Asian Games in Kuala Lumpur as well as various
other trips to the People's Republic of China and Brisbane. The total cost of the
tickets amounted to P449,654.83. For the tickets received, the Federation made
two partial payments, both in September of 1989, in the total amount of
P176,467.50.[if !supportFootnotes][2][endif]
On 4 October 1989, petitioner wrote the Federation, through the private
respondent a demand letter requesting for the amount of P265,894.33.[if
!supportFootnotes][3][endif] On 30 October 1989, the Federation, through the
Project Gintong Alay, paid the amount of P31,603.00.[if
!supportFootnotes][4][endif]
On 27 December 1989, Henri Kahn issued a personal check in the amount of
P50,000 as partial payment for the outstanding balance of the Federation.[if
!supportFootnotes][5][endif] Thereafter, no further payments were made despite
repeated demands.
This prompted petitioner to file a civil case before the Regional Trial Court of
Manila. Petitioner sued Henri Kahn in his personal capacity and as President of
the Federation and impleaded the Federation as an alternative defendant.
Petitioner sought to hold Henri Kahn liable for the unpaid balance for the tickets
purchased by the Federation on the ground that Henri Kahn allegedly guaranteed
the said obligation.[if !supportFootnotes][6][endif]
Henri Kahn filed his answer with counterclaim. While not denying the allegation
that the Federation owed the amount P207,524.20, representing the unpaid
balance for the plane tickets, he averred that the petitioner has no cause of
action against him either in his personal capacity or in his official capacity as
president of the Federation. He maintained that he did not guarantee payment
but merely acted as an agent of the Federation which has a separate and distinct
juridical personality.[if !supportFootnotes][7][endif]
On the other hand, the Federation failed to file its answer, hence, was declared in
default by the trial court.[if !supportFootnotes][8][endif]
In due course, the trial court rendered judgment and ruled in favor of the
petitioner and declared Henri Kahn personally liable for the unpaid obligation of
the Federation. In arriving at the said ruling, the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions had it been
duly established that defendant Federation is a corporation. The trouble,
however, is that neither the plaintiff nor the defendant Henri Kahn has adduced
any evidence proving the corporate existence of the defendant Federation. In
paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine Football
Federation is a sports association xxx." This has not been denied by defendant
Henri Kahn in his Answer. Being the President of defendant Federation, its
corporate existence is within the personal knowledge of defendant Henri Kahn.
He could have easily denied specifically the assertion of the plaintiff that it is a
mere sports association, if it were a domestic corporation. But he did not.
xxx
A voluntary unincorporated association, like defendant Federation has no power
to enter into, or to ratify, a contract. The contract entered into by its officers or
agents on behalf of such association is not binding on, or enforceable against it.
The officers or agents are themselves personally liable.
x x x[if !supportFootnotes][9][endif]
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the
plaintiff the principal sum of P207,524.20, plus the interest thereon at the legal
rate computed from July 5, 1990, the date the complaint was filed, until the
principal obligation is fully liquidated; and another sum of P15,000.00 for
attorney's fees.
The complaint of the plaintiff against the Philippine Football Federation and the
counterclaims of the defendant Henri Kahn are hereby dismissed.
With the costs against defendant Henri Kahn.[if !supportFootnotes][10][endif]
Only Henri Kahn elevated the above decision to the Court of Appeals. On 21
December 1994, the respondent court rendered a decision reversing the trial
court, the decretal portion of said decision reads:
WHEREFORE, premises considered, the judgment appealed from is hereby
REVERSED and SET ASIDE and another one is rendered dismissing the
complaint against defendant Henri S. Kahn.[if !supportFootnotes][11][endif]
In finding for Henri Kahn, the Court of Appeals recognized the juridical existence
of the Federation. It rationalized that since petitioner failed to prove that Henri
Kahn guaranteed the obligation of the Federation, he should not be held liable for
the same as said entity has a separate and distinct personality from its officers.
Petitioner filed a motion for reconsideration and as an alternative prayer pleaded
that the Federation be held liable for the unpaid obligation. The same was denied
by the appellate court in its resolution of 8 February 1995, where it stated that:
As to the alternative prayer for the Modification of the Decision by expressly
declaring in the dispositive portion thereof the Philippine Football Federation
(PFF) as liable for the unpaid obligation, it should be remembered that the trial
court dismissed the complaint against the Philippine Football Federation, and the
plaintiff did not appeal from this decision. Hence, the Philippine Football
Federation is not a party to this appeal and consequently, no judgment may be
pronounced by this Court against the PFF without violating the due process
clause, let alone the fact that the judgment dismissing the complaint against it,
had already become final by virtue of the plaintiff's failure to appeal therefrom.
The alternative prayer is therefore similarly DENIED.[if
!supportFootnotes][12][endif]
Petitioner now seeks recourse to this Court and alleges that the respondent court
committed the following assigned errors:[if !supportFootnotes][13][endif]
A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION
(PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE
RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF
AS HAVING A CORPORATE PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING
PRIVATE RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE
OBLIGATION OF THE UNINCORPORATED PFF, HAVING NEGOTIATED WITH
PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF OF THE
PFF, MADE A PARTIAL PAYMENT AND ASSURED PETITIONER OF FULLY
SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT
PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN
NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY
LIABLE FOR THE OBLIGATION.
The resolution of the case at bar hinges on the determination of the existence of
the Philippine Football Federation as a juridical person. In the assailed decision,
the appellate court recognized the existence of the Federation. In support of this,
the CA cited Republic Act 3135, otherwise known as the Revised Charter of the
Philippine Amateur Athletic Federation, and Presidential Decree No. 604 as the
laws from which said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604
recognized the juridical existence of national sports associations. This may be
gleaned from the powers and functions granted to these associations. Section 14
of R.A. 3135 provides:
SEC. 14. Functions, powers and duties of Associations. - The National Sports'
Association shall have the following functions, powers and duties:
1. To adopt a constitution and by-laws for their internal organization and
government;
2. To raise funds by donations, benefits, and other means for their purposes.
3. To purchase, sell, lease or otherwise encumber property both real and
personal, for the accomplishment of their purpose;
4. To affiliate with international or regional sports' Associations after due
consultation with the executive committee;
xxx
13. To perform such other acts as may be necessary for the proper
accomplishment of their purposes and not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to these sports associations:
SEC. 8. Functions, Powers, and Duties of National Sports Association. - The
National sports associations shall have the following functions, powers, and
duties:
1. Adopt a Constitution and By-Laws for their internal organization and
government which shall be submitted to the Department and any amendment
thereto shall take effect upon approval by the Department: Provided, however,
That no team, school, club, organization, or entity shall be admitted as a voting
member of an association unless 60 per cent of the athletes composing said
team, school, club, organization, or entity are Filipino citizens;
2. Raise funds by donations, benefits, and other means for their purpose subject
to the approval of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both real and personal,
for the accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other than the Olympic
and Asian Games, for the promotion of their sport;
5. Affiliate with international or regional sports associations after due consultation
with the Department;
xxx
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports associations clearly
indicate that these entities may acquire a juridical personality. The power to
purchase, sell, lease and encumber property are acts which may only be done by
persons, whether natural or artificial, with juridical capacity. However, while we
agree with the appellate court that national sports associations may be accorded
corporate status, such does not automatically take place by the mere passage of
these laws.
It is a basic postulate that before a corporation may acquire juridical personality,
the State must give its consent either in the form of a special law or a general
enabling act. We cannot agree with the view of the appellate court and the
private respondent that the Philippine Football Federation came into existence
upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D.
604 any provision creating the Philippine Football Federation. These laws merely
recognized the existence of national sports associations and provided the
manner by which these entities may acquire juridical personality. Section 11 of
R.A. 3135 provides:
SEC. 11. National Sports' Association; organization and recognition. - A National
Association shall be organized for each individual sports in the Philippines in the
manner hereinafter provided to constitute the Philippine Amateur Athletic
Federation. Applications for recognition as a National Sports' Association shall be
filed with the executive committee together with, among others, a copy of the
constitution and by-laws and a list of the members of the proposed association,
and a filing fee of ten pesos.
The Executive Committee shall give the recognition applied for if it is satisfied
that said association will promote the purposes of this Act and particularly section
three thereof. No application shall be held pending for more than three months
after the filing thereof without any action having been taken thereon by the
executive committee. Should the application be rejected, the reasons for such
rejection shall be clearly stated in a written communication to the applicant.
Failure to specify the reasons for the rejection shall not affect the application
which shall be considered as unacted upon: Provided, however, That until the
executive committee herein provided shall have been formed, applications for
recognition shall be passed upon by the duly elected members of the present
executive committee of the Philippine Amateur Athletic Federation. The said
executive committee shall be dissolved upon the organization of the executive
committee herein provided: Provided, further, That the functioning executive
committee is charged with the responsibility of seeing to it that the National
Sports' Associations are formed and organized within six months from and after
the passage of this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7. National Sports Associations. - Application for accreditation or
recognition as a national sports association for each individual sport in the
Philippines shall be filed with the Department together with, among others, a
copy of the Constitution and By-Laws and a list of the members of the proposed
association.
The Department shall give the recognition applied for if it is satisfied that the
national sports association to be organized will promote the objectives of this
Decree and has substantially complied with the rules and regulations of the
Department: Provided, That the Department may withdraw accreditation or
recognition for violation of this Decree and such rules and regulations formulated
by it.
The Department shall supervise the national sports association: Provided, That
the latter shall have exclusive technical control over the development and
promotion of the particular sport for which they are organized.
Clearly the above cited provisions require that before an entity may be
considered as a national sports association, such entity must be recognized by
the accrediting organization, the Philippine Amateur Athletic Federation under
R.A. 3135, and the Department of Youth and Sports Development under P.D.
604. This fact of recognition, however, Henri Kahn failed to substantiate. In
attempting to prove the juridical existence of the Federation, Henri Kahn attached
to his motion for reconsideration before the trial court a copy of the constitution
and by-laws of the Philippine Football Federation. Unfortunately, the same does
not prove that said Federation has indeed been recognized and accredited by
either the Philippine Amateur Athletic Federation or the Department of Youth and
Sports Development. Accordingly, we rule that the Philippine Football Federation
is not a national sports association within the purview of the aforementioned laws
and does not have corporate existence of its own.
Thus being said, it follows that private respondent Henry Kahn should be held
liable for the unpaid obligations of the unincorporated Philippine Football
Federation. It is a settled principal in corporation law that 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.[if !supportFootnotes][14][endif] As
president of the Federation, Henri Kahn is presumed to have known about the
corporate existence or non-existence of the Federation. We cannot subscribe to
the position taken by the appellate court that even assuming that the Federation
was defectively incorporated, the petitioner cannot deny the corporate existence
of the Federation because it had contracted and dealt with the Federation in such
a manner as to recognize and in effect admit its existence.[if
!supportFootnotes][15][endif] The doctrine of corporation by estoppel is
mistakenly applied by the respondent court to the petitioner. The application of
the doctrine 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.[if !supportFootnotes][16][endif] In the case at bar, the petitioner is
not trying to escape liability from the contract but rather is the one claiming from
the contract.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE.
The decision of the Regional Trial Court of Manila, Branch 35, in Civil Case No.
90-53595 is hereby REINSTATED.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.
FIRST DIVISION
[G.R. No. 141994. January 17, 2005]
FILIPINAS BROADCASTING NETWORK, INC., petitioner, vs. AGO MEDICAL
AND EDUCATIONAL CENTER-BICOL CHRISTIAN COLLEGE OF MEDICINE,
(AMEC-BCCM) and ANGELITA F. AGO, respondents.
DECISION
CARPIO, J.:
The Case
This petition for review[1] assails the 4 January 1999 Decision[2] and 26 January
2000 Resolution of the Court of Appeals in CA-G.R. CV No. 40151. The Court of
Appeals affirmed with modification the 14 December 1992 Decision[3] of the
Regional Trial Court of Legazpi City, Branch 10, in Civil Case No. 8236. The
Court of Appeals held Filipinas Broadcasting Network, Inc. and its broadcasters
Hermogenes Alegre and Carmelo Rima liable for libel and ordered them to
solidarily pay Ago Medical and Educational Center-Bicol Christian College of
Medicine moral damages, attorneys fees and costs of suit.
The Antecedents
Expos is a radio documentary[4] program hosted by Carmelo Mel Rima (Rima)
and Hermogenes Jun Alegre (Alegre).[5] Expos is aired every morning over
DZRC-AM which is owned by Filipinas Broadcasting Network, Inc. (FBNI). Expos
is heard over Legazpi City, the Albay municipalities and other Bicol areas.[6]
In the morning of 14 and 15 December 1989, Rima and Alegre exposed various
alleged complaints from students, teachers and parents against Ago Medical and
Educational Center-Bicol Christian College of Medicine (AMEC) and its
administrators. Claiming that the broadcasts were defamatory, AMEC and
Angelita Ago (Ago), as Dean of AMECs College of Medicine, filed a complaint for
damages[7] against FBNI, Rima and Alegre on 27 February 1990. Quoted are
portions of the allegedly libelous broadcasts:
JUN ALEGRE:
Let us begin with the less burdensome: if you have children taking medical
course at AMEC-BCCM, advise them to pass all subjects because if they
fail in any subject they will repeat their year level, taking up all subjects
including those they have passed already. Several students had approached
me stating that they had consulted with the DECS which told them that there is
no such regulation. If [there] is no such regulation why is AMEC doing the same?
xxx
Second: Earlier AMEC students in Physical Therapy had complained that
the course is not recognized by DECS. xxx
Third: Students are required to take and pay for the subject even if the
subject does not have an instructor - such greed for money on the part of
AMECs administration. Take the subject Anatomy: students would pay for the
subject upon enrolment because it is offered by the school. However there would
be no instructor for such subject. Students would be informed that course would
be moved to a later date because the school is still searching for the appropriate
instructor.
xxx
It is a public knowledge that the Ago Medical and Educational Center has
survived and has been surviving for the past few years since its inception
because of funds support from foreign foundations. If you will take a look at the
AMEC premises youll find out that the names of the buildings there are foreign
soundings. There is a McDonald Hall. Why not Jose Rizal or Bonifacio Hall? That
is a very concrete and undeniable evidence that the support of foreign
foundations for AMEC is substantial, isnt it? With the report which is the basis of
the expose in DZRC today, it would be very easy for detractors and enemies of
the Ago family to stop the flow of support of foreign foundations who assist the
medical school on the basis of the latters purpose. But if the purpose of the
institution (AMEC) is to deceive students at cross purpose with its reason for
being it is possible for these foreign foundations to lift or suspend their donations
temporarily.[8]
xxx
On the other hand, the administrators of AMEC-BCCM, AMEC Science High
School and the AMEC-Institute of Mass Communication in their effort to
minimize expenses in terms of salary are absorbing or continues to accept
rejects. For example how many teachers in AMEC are former teachers of
Aquinas University but were removed because of immorality? Does it mean that
the present administration of AMEC have the total definite moral foundation from
catholic administrator of Aquinas University. I will prove to you my friends, that
AMEC is a dumping ground, garbage, not merely of moral and physical
misfits. Probably they only qualify in terms of intellect. The Dean of Student
Affairs of AMEC is Justita Lola, as the family name implies. She is too old to
work, being an old woman. Is the AMEC administration exploiting the very
[e]nterprising or compromising and undemanding Lola? Could it be that AMEC is
just patiently making use of Dean Justita Lola were if she is very old. As in
atmospheric situation zero visibility the plane cannot land, meaning she is very
old, low pay follows. By the way, Dean Justita Lola is also the chairman of the
committee on scholarship in AMEC. She had retired from Bicol University a long
time ago but AMEC has patiently made use of her.
xxx
MEL RIMA:
xxx My friends based on the expose, AMEC is a dumping ground for moral and
physically misfit people. What does this mean? Immoral and physically misfits as
teachers.
May I say Im sorry to Dean Justita Lola. But this is the truth. The truth is this, that
your are no longer fit to teach. You are too old. As an aviation, your case is zero
visibility. Dont insist.
xxx Why did AMEC still absorb her as a teacher, a dean, and chairman of the
scholarship committee at that. The reason is practical cost saving in salaries,
because an old person is not fastidious, so long as she has money to buy the
ingredient of beetle juice. The elderly can get by thats why she (Lola) was taken
in as Dean.
xxx
xxx On our end our task is to attend to the interests of students. It is likely that the
students would be influenced by evil. When they become members of society
outside of campus will be liabilities rather than assets. What do you expect
from a doctor who while studying at AMEC is so much burdened with
unreasonable imposition? What do you expect from a student who aside from
peculiar problems because not all students are rich in their struggle to improve
their social status are even more burdened with false regulations. xxx[9]
(Emphasis supplied)
The complaint further alleged that AMEC is a reputable learning institution. With
the supposed exposs, FBNI, Rima and Alegre transmitted malicious imputations,
and as such, destroyed plaintiffs (AMEC and Ago) reputation. AMEC and Ago
included FBNI as defendant for allegedly failing to exercise due diligence in the
selection and supervision of its employees, particularly Rima and Alegre.
On 18 June 1990, FBNI, Rima and Alegre, through Atty. Rozil Lozares, filed an
Answer[10] alleging that the broadcasts against AMEC were fair and true. FBNI,
Rima and Alegre claimed that they were plainly impelled by a sense of public
duty to report the goings-on in AMEC, [which is] an institution imbued with public
interest.
Thereafter, trial ensued. During the presentation of the evidence for the defense,
Atty. Edmundo Cea, collaborating counsel of Atty. Lozares, filed a Motion to
Dismiss[11] on FBNIs behalf. The trial court denied the motion to dismiss.
Consequently, FBNI filed a separate Answer claiming that it exercised due
diligence in the selection and supervision of Rima and Alegre. FBNI claimed that
before hiring a broadcaster, the broadcaster should (1) file an application; (2) be
interviewed; and (3) undergo an apprenticeship and training program after
passing the interview. FBNI likewise claimed that it always reminds its
broadcasters to observe truth, fairness and objectivity in their broadcasts and to
refrain from using libelous and indecent language. Moreover, FBNI requires all
broadcasters to pass the Kapisanan ng mga Brodkaster sa Pilipinas (KBP)
accreditation test and to secure a KBP permit.
On 14 December 1992, the trial court rendered a Decision[12] finding FBNI and
Alegre liable for libel except Rima. The trial court held that the broadcasts are
libelous per se. The trial court rejected the broadcasters claim that their
utterances were the result of straight reporting because it had no factual basis.
The broadcasters did not even verify their reports before airing them to show
good faith. In holding FBNI liable for libel, the trial court found that FBNI failed to
exercise diligence in the selection and supervision of its employees.
In absolving Rima from the charge, the trial court ruled that Rimas only
participation was when he agreed with Alegres expos. The trial court found
Rimas statement within the bounds of freedom of speech, expression, and of the
press. The dispositive portion of the decision reads:
WHEREFORE, premises considered, this court finds for the plaintiff.
Considering the degree of damages caused by the controversial
utterances, which are not found by this court to be really very serious and
damaging, and there being no showing that indeed the enrollment of
plaintiff school dropped, defendants Hermogenes Jun Alegre, Jr. and Filipinas
Broadcasting Network (owner of the radio station DZRC), are hereby jointly and
severally ordered to pay plaintiff Ago Medical and Educational Center-Bicol
Christian College of Medicine (AMEC-BCCM) the amount of P300,000.00 moral
damages, plus P30,000.00 reimbursement of attorneys fees, and to pay the costs
of suit.
SO ORDERED. [13] (Emphasis supplied)
Both parties, namely, FBNI, Rima and Alegre, on one hand, and AMEC and Ago,
on the other, appealed the decision to the Court of Appeals. The Court of
Appeals affirmed the trial courts judgment with modification. The appellate court
made Rima solidarily liable with FBNI and Alegre. The appellate court denied
Agos claim for damages and attorneys fees because the broadcasts were
directed against AMEC, and not against her. The dispositive portion of the Court
of Appeals decision reads:
WHEREFORE, the decision appealed from is hereby AFFIRMED, subject to the
modification that broadcaster Mel Rima is SOLIDARILY ADJUDGED liable with
FBN[I] and Hermo[g]enes Alegre.
SO ORDERED.[14]
FBNI, Rima and Alegre filed a motion for reconsideration which the Court of
Appeals denied in its 26 January 2000 Resolution.
Hence, FBNI filed this petition.[15]
The Ruling of the Court of Appeals
The Court of Appeals upheld the trial courts ruling that the questioned broadcasts
are libelous per se and that FBNI, Rima and Alegre failed to overcome the legal
presumption of malice. The Court of Appeals found Rima and Alegres claim that
they were actuated by their moral and social duty to inform the public of the
students gripes as insufficient to justify the utterance of the defamatory remarks.
Finding no factual basis for the imputations against AMECs administrators, the
Court of Appeals ruled that the broadcasts were made with reckless disregard as
to whether they were true or false. The appellate court pointed out that FBNI,
Rima and Alegre failed to present in court any of the students who allegedly
complained against AMEC. Rima and Alegre merely gave a single name when
asked to identify the students. According to the Court of Appeals, these
circumstances cast doubt on the veracity of the broadcasters claim that they
were impelled by their moral and social duty to inform the public about the
students gripes.
The Court of Appeals found Rima also liable for libel since he remarked that (1)
AMEC-BCCM is a dumping ground for morally and physically misfit teachers; (2)
AMEC obtained the services of Dean Justita Lola to minimize expenses on its
employees salaries; and (3) AMEC burdened the students with unreasonable
imposition and false regulations.[16]
The Court of Appeals held that FBNI failed to exercise due diligence in the
selection and supervision of its employees for allowing Rima and Alegre to make
the radio broadcasts without the proper KBP accreditation. The Court of Appeals
denied Agos claim for damages and attorneys fees because the libelous remarks
were directed against AMEC, and not against her. The Court of Appeals
adjudged FBNI, Rima and Alegre solidarily liable to pay AMEC moral damages,
attorneys fees and costs of suit.
Issues
FBNI raises the following issues for resolution:
I. WHETHER THE BROADCASTS ARE LIBELOUS;
II. WHETHER AMEC IS ENTITLED TO MORAL DAMAGES;
III. WHETHER THE AWARD OF ATTORNEYS FEES IS PROPER; and
IV. WHETHER FBNI IS SOLIDARILY LIABLE WITH RIMA AND ALEGRE FOR
PAYMENT OF MORAL DAMAGES, ATTORNEYS FEES AND COSTS OF SUIT.
The Courts Ruling
We deny the petition.
This is a civil action for damages as a result of the allegedly defamatory remarks
of Rima and Alegre against AMEC.[17] While AMEC did not point out clearly the
legal basis for its complaint, a reading of the complaint reveals that AMECs
cause of action is based on Articles 30 and 33 of the Civil Code. Article 30[18]
authorizes a separate civil action to recover civil liability arising from a criminal
offense. On the other hand, Article 33[19] particularly provides that the injured
party may bring a separate civil action for damages in cases of defamation, fraud,
and physical injuries. AMEC also invokes Article 19[20] of the Civil Code to justify
its claim for damages. AMEC cites Articles 2176[21] and 2180[22] of the Civil
Code to hold FBNI solidarily liable with Rima and Alegre.
I.
Whether the broadcasts are libelous
A libel[23] is a public and malicious imputation of a crime, or of a vice or defect,
real or imaginary, or any act or omission, condition, status, or circumstance
tending to cause the dishonor, discredit, or contempt of a natural or juridical
person, or to blacken the memory of one who is dead.[24]
There is no question that the broadcasts were made public and imputed to AMEC
defects or circumstances tending to cause it dishonor, discredit and contempt.
Rima and Alegres remarks such as greed for money on the part of AMECs
administrators; AMEC is a dumping ground, garbage of xxx moral and physical
misfits; and AMEC students who graduate will be liabilities rather than assets of
the society are libelous per se. Taken as a whole, the broadcasts suggest that
AMEC is a money-making institution where physically and morally unfit teachers
abound.
However, FBNI contends that the broadcasts are not malicious. FBNI claims that
Rima and Alegre were plainly impelled by their civic duty to air the students
gripes. FBNI alleges that there is no evidence that ill will or spite motivated Rima
and Alegre in making the broadcasts. FBNI further points out that Rima and
Alegre exerted efforts to obtain AMECs side and gave Ago the opportunity to
defend AMEC and its administrators. FBNI concludes that since there is no
malice, there is no libel.
FBNIs contentions are untenable.
Every defamatory imputation is presumed malicious.[25] Rima and Alegre failed
to show adequately their good intention and justifiable motive in airing the
supposed gripes of the students. As hosts of a documentary or public affairs
program, Rima and Alegre should have presented the public issues free from
inaccurate and misleading information.[26] Hearing the students alleged
complaints a month before the expos,[27] they had sufficient time to verify their
sources and information. However, Rima and Alegre hardly made a thorough
investigation of the students alleged gripes. Neither did they inquire about nor
confirm the purported irregularities in AMEC from the Department of Education,
Culture and Sports. Alegre testified that he merely went to AMEC to verify his
report from an alleged AMEC official who refused to disclose any information.
Alegre simply relied on the words of the students because they were many and
not because there is proof that what they are saying is true.[28] This plainly
shows Rima and Alegres reckless disregard of whether their report was true or
not.
Contrary to FBNIs claim, the broadcasts were not the result of straight reporting.
Significantly, some courts in the United States apply the privilege of neutral
reportage in libel cases involving matters of public interest or public figures.
Under this privilege, a republisher who accurately and disinterestedly reports
certain defamatory statements made against public figures is shielded from
liability, regardless of the republishers subjective awareness of the truth or falsity
of the accusation.[29] Rima and Alegre cannot invoke the privilege of neutral
reportage because unfounded comments abound in the broadcasts. Moreover,
there is no existing controversy involving AMEC when the broadcasts were
made. The privilege of neutral reportage applies where the defamed person is a
public figure who is involved in an existing controversy, and a party to that
controversy makes the defamatory statement.[30]
However, FBNI argues vigorously that malice in law does not apply to this case.
Citing Borjal v. Court of Appeals,[31] FBNI contends that the broadcasts fall
within the coverage of qualifiedly privileged communications for being
commentaries on matters of public interest. Such being the case, AMEC should
prove malice in fact or actual malice. Since AMEC allegedly failed to prove actual
malice, there is no libel.
FBNIs reliance on Borjal is misplaced. In Borjal, the Court elucidated on the
doctrine of fair comment, thus:
[F]air commentaries on matters of public interest are privileged and constitute a
valid defense in an action for libel or slander. The doctrine of fair comment
means that while in general every discreditable imputation publicly made is
deemed false, because every man is presumed innocent until his guilt is judicially
proved, and every false imputation is deemed malicious, nevertheless, when the
discreditable imputation is directed against a public person in his public capacity,
it is not necessarily actionable. In order that such discreditable imputation to
a public official may be actionable, it must either be a false allegation of
fact or a comment based on a false supposition. If the comment is an
expression of opinion, based on established facts, then it is immaterial that
the opinion happens to be mistaken, as long as it might reasonably be inferred
from the facts.[32] (Emphasis supplied)
True, AMEC is a private learning institution whose business of educating
students is genuinely imbued with public interest. The welfare of the youth in
general and AMECs students in particular is a matter which the public has the
right to know. Thus, similar to the newspaper articles in Borjal, the subject
broadcasts dealt with matters of public interest. However, unlike in Borjal, the
questioned broadcasts are not based on established facts. The record supports
the following findings of the trial court:
xxx Although defendants claim that they were motivated by consistent reports of
students and parents against plaintiff, yet, defendants have not presented in
court, nor even gave name of a single student who made the complaint to them,
much less present written complaint or petition to that effect. To accept this
defense of defendants is too dangerous because it could easily give license to
the media to malign people and establishments based on flimsy excuses that
there were reports to them although they could not satisfactorily establish it. Such
laxity would encourage careless and irresponsible broadcasting which is inimical
to public interests.
Secondly, there is reason to believe that defendant radio broadcasters, contrary
to the mandates of their duties, did not verify and analyze the truth of the reports
before they aired it, in order to prove that they are in good faith.
Alegre contended that plaintiff school had no permit and is not accredited to offer
Physical Therapy courses. Yet, plaintiff produced a certificate coming from DECS
that as of Sept. 22, 1987 or more than 2 years before the controversial
broadcast, accreditation to offer Physical Therapy course had already been given
the plaintiff, which certificate is signed by no less than the Secretary of Education
and Culture herself, Lourdes R. Quisumbing (Exh. C-rebuttal). Defendants could
have easily known this were they careful enough to verify. And yet, defendants
were very categorical and sounded too positive when they made the erroneous
report that plaintiff had no permit to offer Physical Therapy courses which they
were offering.
The allegation that plaintiff was getting tremendous aids from foreign foundations
like Mcdonald Foundation prove not to be true also. The truth is there is no
Mcdonald Foundation existing. Although a big building of plaintiff school was
given the name Mcdonald building, that was only in order to honor the first
missionary in Bicol of plaintiffs religion, as explained by Dr. Lita Ago. Contrary to
the claim of defendants over the air, not a single centavo appears to be received
by plaintiff school from the aforementioned McDonald Foundation which does not
exist.
Defendants did not even also bother to prove their claim, though denied by Dra.
Ago, that when medical students fail in one subject, they are made to repeat all
the other subject[s], even those they have already passed, nor their claim that the
school charges laboratory fees even if there are no laboratories in the school. No
evidence was presented to prove the bases for these claims, at least in order to
give semblance of good faith.
As for the allegation that plaintiff is the dumping ground for misfits, and immoral
teachers, defendant[s] singled out Dean Justita Lola who is said to be so old, with
zero visibility already. Dean Lola testified in court last Jan. 21, 1991, and was
found to be 75 years old. xxx Even older people prove to be effective teachers
like Supreme Court Justices who are still very much in demand as law professors
in their late years. Counsel for defendants is past 75 but is found by this court to
be still very sharp and effective. So is plaintiffs counsel.
Dr. Lola was observed by this court not to be physically decrepit yet, nor mentally
infirmed, but is still alert and docile.
The contention that plaintiffs graduates become liabilities rather than assets of
our society is a mere conclusion. Being from the place himself, this court is aware
that majority of the medical graduates of plaintiffs pass the board examination
easily and become prosperous and responsible professionals.[33]
Had the comments been an expression of opinion based on established facts, it
is immaterial that the opinion happens to be mistaken, as long as it might
reasonably be inferred from the facts.[34] However, the comments of Rima and
Alegre were not backed up by facts. Therefore, the broadcasts are not privileged
and remain libelous per se.
The broadcasts also violate the Radio Code[35] of the Kapisanan ng mga
Brodkaster sa Pilipinas, Ink. (Radio Code). Item I(B) of the Radio Code provides:
B. PUBLIC AFFAIRS, PUBLIC ISSUES AND COMMENTARIES
1. x x x
4. Public affairs program shall present public issues free from personal bias,
prejudice and inaccurate and misleading information. x x x Furthermore, the
station shall strive to present balanced discussion of issues. x x x.
xxx
7. The station shall be responsible at all times in the supervision of public affairs,
public issues and commentary programs so that they conform to the provisions
and standards of this code.
8. It shall be the responsibility of the newscaster, commentator, host and
announcer to protect public interest, general welfare and good order in the
presentation of public affairs and public issues.[36] (Emphasis supplied)
The broadcasts fail to meet the standards prescribed in the Radio Code, which
lays down the code of ethical conduct governing practitioners in the radio
broadcast industry. The Radio Code is a voluntary code of conduct imposed by
the radio broadcast industry on its own members. The Radio Code is a public
warranty by the radio broadcast industry that radio broadcast practitioners are
subject to a code by which their conduct are measured for lapses, liability and
sanctions.
The public has a right to expect and demand that radio broadcast practitioners
live up to the code of conduct of their profession, just like other professionals. A
professional code of conduct provides the standards for determining whether a
person has acted justly, honestly and with good faith in the exercise of his rights
and performance of his duties as required by Article 19[37] of the Civil Code. A
professional code of conduct also provides the standards for determining whether
a person who willfully causes loss or injury to another has acted in a manner
contrary to morals or good customs under Article 21[38] of the Civil Code.
II.
Whether AMEC is entitled to moral damages
FBNI contends that AMEC is not entitled to moral damages because it is a
corporation.[39]
A juridical person is generally not entitled to moral damages because, unlike a
natural person, it cannot experience physical suffering or such sentiments as
wounded feelings, serious anxiety, mental anguish or moral shock.[40] The Court
of Appeals cites Mambulao Lumber Co. v. PNB, et al.[41] to justify the award of
moral damages. However, the Courts statement in Mambulao that a corporation
may have a good reputation which, if besmirched, may also be a ground for the
award of moral damages is an obiter dictum.[42]
Nevertheless, AMECs claim for moral damages falls under item 7 of Article
2219[43] of the Civil Code. This provision expressly authorizes the recovery of
moral damages in cases of libel, slander or any other form of defamation. Article
2219(7) does not qualify whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as a corporation can validly complain for libel
or any other form of defamation and claim for moral damages.[44]
Moreover, where the broadcast is libelous per se, the law implies damages.[45]
In such a case, evidence of an honest mistake or the want of character or
reputation of the party libeled goes only in mitigation of damages.[46] Neither in
such a case is the plaintiff required to introduce evidence of actual damages as a
condition precedent to the recovery of some damages.[47] In this case, the
broadcasts are libelous per se. Thus, AMEC is entitled to moral damages.
However, we find the award of P300,000 moral damages unreasonable. The
record shows that even though the broadcasts were libelous per se, AMEC has
not suffered any substantial or material damage to its reputation. Therefore, we
reduce the award of moral damages from P300,000 to P150,000.
III.
Whether the award of attorneys fees is proper
FBNI contends that since AMEC is not entitled to moral damages, there is no
basis for the award of attorneys fees. FBNI adds that the instant case does not
fall under the enumeration in Article 2208[48] of the Civil Code.
The award of attorneys fees is not proper because AMEC failed to justify
satisfactorily its claim for attorneys fees. AMEC did not adduce evidence to
warrant the award of attorneys fees. Moreover, both the trial and appellate courts
failed to explicitly state in their respective decisions the rationale for the award of
attorneys fees.[49] In Inter-Asia Investment Industries, Inc. v. Court of
Appeals,[50] we held that:
[I]t is an accepted doctrine that the award thereof as an item of damages is the
exception rather than the rule, and counsels fees are not to be awarded every
time a party wins a suit. The power of the court to award attorneys fees under
Article 2208 of the Civil Code demands factual, legal and equitable
justification, without which the award is a conclusion without a premise, its
basis being improperly left to speculation and conjecture. In all events, the
court must explicitly state in the text of the decision, and not only in the decretal
portion thereof, the legal reason for the award of attorneys fees.[51] (Emphasis
supplied)
While it mentioned about the award of attorneys fees by stating that it lies within
the discretion of the court and depends upon the circumstances of each case, the
Court of Appeals failed to point out any circumstance to justify the award.
IV.
Whether FBNI is solidarily liable with Rima and Alegre
for moral damages, attorneys fees
and costs of suit
FBNI contends that it is not solidarily liable with Rima and Alegre for the payment
of damages and attorneys fees because it exercised due diligence in the
selection and supervision of its employees, particularly Rima and Alegre. FBNI
maintains that its broadcasters, including Rima and Alegre, undergo a very
regimented process before they are allowed to go on air. Those who apply for
broadcaster are subjected to interviews, examinations and an apprenticeship
program.
FBNI further argues that Alegres age and lack of training are irrelevant to his
competence as a broadcaster. FBNI points out that the minor deficiencies in the
KBP accreditation of Rima and Alegre do not in any way prove that FBNI did not
exercise the diligence of a good father of a family in selecting and supervising
them. Rimas accreditation lapsed due to his non-payment of the KBP annual fees
while Alegres accreditation card was delayed allegedly for reasons attributable to
the KBP Manila Office. FBNI claims that membership in the KBP is merely
voluntary and not required by any law or government regulation.
FBNIs arguments do not persuade us.
The basis of the present action is a tort. Joint tort feasors are jointly and severally
liable for the tort which they commit.[52] Joint tort feasors are all the persons who
command, instigate, promote, encourage, advise, countenance, cooperate in, aid
or abet the commission of a tort, or who approve of it after it is done, if done for
their benefit.[53] Thus, AMEC correctly anchored its cause of action against FBNI
on Articles 2176 and 2180 of the Civil Code.
As operator of DZRC-AM and employer of Rima and Alegre, FBNI is solidarily
liable to pay for damages arising from the libelous broadcasts. As stated by the
Court of Appeals, recovery for defamatory statements published by radio or
television may be had from the owner of the station, a licensee, the operator
of the station, or a person who procures, or participates in, the making of the
defamatory statements.[54] An employer and employee are solidarily liable for a
defamatory statement by the employee within the course and scope of his or her
employment, at least when the employer authorizes or ratifies the
defamation.[55] In this case, Rima and Alegre were clearly performing their
official duties as hosts of FBNIs radio program Expos when they aired the
broadcasts. FBNI neither alleged nor proved that Rima and Alegre went beyond
the scope of their work at that time. There was likewise no showing that FBNI did
not authorize and ratify the defamatory broadcasts.
Moreover, there is insufficient evidence on record that FBNI exercised due
diligence in the selection and supervision of its employees, particularly Rima
and Alegre. FBNI merely showed that it exercised diligence in the selection of its
broadcasters without introducing any evidence to prove that it observed the same
diligence in the supervision of Rima and Alegre. FBNI did not show how it
exercised diligence in supervising its broadcasters. FBNIs alleged constant
reminder to its broadcasters to observe truth, fairness and objectivity and to
refrain from using libelous and indecent language is not enough to prove due
diligence in the supervision of its broadcasters. Adequate training of the
broadcasters on the industrys code of conduct, sufficient information on libel
laws, and continuous evaluation of the broadcasters performance are but a few
of the many ways of showing diligence in the supervision of broadcasters.
FBNI claims that it has taken all the precaution in the selection of Rima and
Alegre as broadcasters, bearing in mind their qualifications. However, no clear
and convincing evidence shows that Rima and Alegre underwent FBNIs
regimented process of application. Furthermore, FBNI admits that Rima and
Alegre had deficiencies in their KBP accreditation,[56] which is one of FBNIs
requirements before it hires a broadcaster. Significantly, membership in the KBP,
while voluntary, indicates the broadcasters strong commitment to observe the
broadcast industrys rules and regulations. Clearly, these circumstances show
FBNIs lack of diligence in selecting and supervising Rima and Alegre. Hence,
FBNI is solidarily liable to pay damages together with Rima and Alegre.
WHEREFORE, we DENY the instant petition. We AFFIRM the Decision of 4
January 1999 and Resolution of 26 January 2000 of the Court of Appeals in CA-
G.R. CV No. 40151 with the MODIFICATION that the award of moral damages is
reduced from P300,000 to P150,000 and the award of attorneys fees is deleted.
Costs against petitioner.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ.,
concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 118692 July 28, 2006
COASTAL PACIFIC TRADING, INC., petitioner,
vs.
SOUTHERN ROLLING MILLS, CO., INC. (now known as Visayan Integrated
Steel Corporation), FAR EAST BANK & TRUST COMPANY, PHILIPPINE
COMMERCIAL INDUSTRIAL1 BANK, EQUITABLE BANKING
CORPORATION, PRUDENTIAL BANK, BOARD OF TRUSTEES-
CONSORTIUM OF BANKS-VISCO, UNITED COCONUT PLANTERS BANK,
CITYTRUST BANKING CORPORATION, ASSOCIATED BANK, INSULAR
BANK OF ASIA AND AMERICA, INTERNATIONAL CORPORATE BANK,
COMMER-CIAL BANK OF MANILA, BANK OF THE PHILIPPINE ISLANDS,
NATIONAL STEEL CORPORA-TION, THE PROVINCIAL SHERIFF OF
BOHOL, and DEPUTY SHERIFF JOVITO DIGAL,2 respondents.
DECISION
PANGANIBAN, C.J.:
Directors owe loyalty and fidelity to the corporation they serve and to its creditors.
When these directors sit on the board as representatives of shareholders who
are also major creditors, they cannot be allowed to use their offices to secure
undue advantage for those shareholders, in fraud of other creditors who do not
have a similar representation in the board of directors.
The Case
Before us is a Petition for Review3 under Rule 45 of the Rules of Court, assailing
the September 27, 1994 Decision4 and the January 5, 1995 Resolution5 of the
Court of Appeals (CA) in CA-GR CV No. 39385. The challenged Decision
disposed as follows:
"WHEREFORE, the decision of the Regional Trial Court is hereby AFFIRMED in
toto."6
The challenged Resolution denied reconsideration.
The Facts
Respondent Southern Rolling Mills Co., Inc. was organized in 1959 for the
purpose of engaging in a steel processing business. It was later renamed
Visayan Integrated Steel Corporation (VISCO).7
On December 11, 1961, VISCO obtained a loan from the Development Bank of
the Philippines (DBP) in the amount of P836,000. This loan was secured by a
duly recorded Real Estate Mortgage over VISCO's three (3) parcels of land,
including all the machineries and equipment found there.8
On August 15, 1963, VISCO entered into a Loan Agreement9 with respondent
banks (later referred to as "Consortium"10) for the amount of US$5,776,186.71
or P21,745,707.36 (at the then prevailing exchange rate) to finance its
importation of various raw materials. To secure the full and faithful performance
of its obligation, VISCO executed on August 3, 1965, a second mortgage11 over
the same land, machineries and equipment in favor of respondent banks. This
second mortgage remained unrecorded.12
VISCO eventually defaulted in the performance of its obligation to respondent
banks. This prompted the Consortium to file on January 26, 1966, Civil Case No.
1841, which was a Petition for Foreclosure of Mortgage with Petition for
Receivership.13 This case was eventually dismissed for failure to prosecute.14
Afterwards, negotiations were conducted between VISCO and respondent banks
for the conversion of the unpaid loan into equity in the corporation.15 Vicente
Garcia, vice-president of VISCO and of Far East Bank and Trust Company
(FEBTC),16 testified that sometime in 1966, the creditor banks were given
management of and control over VISCO.17 In time,18 in order to reorganize it, its
principal creditors agreed to group themselves into a creditors' consortium.19 As
a result of the reorganized corporate structure of VISCO, respondent banks
acquired more than 90 percent of its equity. Notwithstanding this conversion, it
remained indebted to the Consortium in the amount of P16,123,918.02.20
Meanwhile from 1964 to 1965, VISCO also entered into a processing agreement
with Petitioner Coastal Pacific Trading, Inc. ("Coastal"). Pursuant to that
agreement, petitioner delivered 3,000 metric tons of hot rolled steel coils to
VISCO for processing into block iron sheets. Contrary to their agreement, the
latter was able to process and deliver to petitioner only 1,600 metric tons of those
sheets. Hence, a total of 1,400 metric tons of hot rolled steel coils remained
unaccounted for.21 The fact that petitioner was among the major creditors of
VISCO was recognized by the latter's vice-president, Vicente Garcia.22 Indeed,
on October 9, 1970, it forwarded to petitioner a proposal for a Compromise
Agreement.23 Subsequent developments indicate, however, that the parties did
not arrive at a compromise.
Two years later, on October 20, 1972, Garcia wrote Arturo P. Samonte,
representative of FEBTC24 and director of VISCO,25 a letter that reads as
follows:
"In the light of recent development on IISMI and Elirol which were taken over by
the government, I suggest that we take certain precautionary measures to protect
the interests of the Consortium of Banks. One such step may be to insure the
safety of the unexpended funds of VISCO from any contingencies in the future.
As of now VISCO's account with the Far East Bank is in the name of BOARD OF
TRUSTEES VISCO CONSORTIUM OF BANKS. It may be better to eliminate the
term VISCO and just call the account BOARD OF TRUSTEES CONSORTIUM
OF BANKS."26
According to a notation on this letter, an FEBTC assistant cashier named Silverio
duly complied with the above request.27 Indeed, events would later reveal that
the bank held a deposit account in the name of the "Board of Trustees-
Consortium of Banks."28
On September 20, 1974, respondent banks held a luncheon meeting29 in the
FEBTC Boardroom to discuss how they would address the insistent demands of
the DBP for VISCO to settle its obligations. Jose B. Fernandez, Jr., VISCO's then
chairman and concurrent FEBTC President,30 expressed his apprehension that
either the DBP or the government would soon pursue extra-judicial foreclosure
against VISCO.
In this regard, Fernandez informed the members of the Consortium that he had
received letter-offers from two corporations that were interested in purchasing
VISCO's generator sets.31 After deliberating on the matter, the members
decided to approve the sale of these two generator sets to Filmag (Phil.), Inc. It
was also agreed that the proceeds of the sale would be used to pay VISCO's
indebtedness to DBP and to secure the release of the first mortgage.32 The
Consortium agreed with Filmag on the following payment procedure:
"The payment procedure will be as follows: Filmag pays to VISCO; VISCO pays
the Consortium; and then the Consortium pays the DBP with the arrangement
that the Consortium subrogates to the rights of the DBP as first mortgagee to the
VISCO plant. The Consortium further agreed to call a meeting of the VISCO
board of directors for the purpose of considering and formally approving the
proposed sale of the 2 generators to Filmag."33
Accordingly, on October 4, 1974, the VISCO board of directors had a meeting in
the FEBTC Boardroom.34 The board was asked to decide how VISCO would
settle its debt to DBP: whether by asking the Consortium to put up the necessary
amount or by accepting Filmag's offer to purchase VISCO's generator sets.35
The latter option was unanimously chosen36 in a Resolution worded as follows:
"RESOLVED, That the offer of Filmag (Philippines) Inc. in their letters of
December 14, 1973 and March 19, 1974 to purchase two (2) units of generator
sets, including standard accessories, of VISCO is hereby accepted under the
following terms and conditions:
xxx xxx xxx
"2. The price for the two (2) generator sets is PESOS: ONE MILLION FIVE
HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY TWO ONLY
(P1,550,572) x x x and shall be payable upon signing of a letter-agreement and
which shall be later formalized into a Deed of Sale. The amount, however, shall
be held by the depositary bank of VISCO, Far East Bank and Trust Company, in
escrow and shall be at VISCO's disposal upon the signing of Filmag of the
receipt/s of delivery of the said two (2) generator sets.
xxx xxx xxx
"FURTHER RESOLVED, That the sales proceeds of PESOS: ONE MILLION
FIVE HUNDRED FIFTY THOUSAND FIVE HUNDRED SEVENTY TWO ONLY
(P1,550,572) shall be utilized to pay the liability of VISCO with the Development
Bank of the Philippines."37
The sale of the generator sets to Filmag took place and, according to the
testimony of Garcia, the proceeds were deposited with FEBTC in a special
account held in trust for the Consortium.38
A year after, on May 22, 1975, petitioner filed with the Pasig Regional Trial Court
(RTC) a Complaint39 for Recovery of Property and Damages with Preliminary
Injunction and Attachment.40 Petitioner's allegation was that VISCO had
fraudulently misapplied or converted the finished steel sheets entrusted to it.41
On June 3, 1975, Judge Pedro A. Revilla issued a Writ of Preliminary Attachment
over its properties that were not exempt from execution.42
In compliance with the Writ, Sheriff Andres R. Bonifacio attempted to garnish the
account of VISCO in FEBTC,43 which denied holding that account. Instead, the
bank admitted that what it had was a deposit account in the name of the Board of
Trustees-Consortium of Banks, particularly Account No. 2479-1.44 FEBTC
reported to Sheriff Bonifacio that it had instructed its accounting department to
hold the account, "subject to the prior liens or rights in favor of [FEBTC] and other
entities."45
While petitioner's case was pending, VISCO's vice-president (Garcia) and
director (Arturo Samonte) requested from FEBTC a cash advance of
P1,342,656.88 for the full settlement of VISCO's account with DBP.46 On June
29, 1976, FEBTC complied by issuing Check No. FE239249 for P1,342,656.88,
payable to "[DBP] for [the] account of VISCO."47 On even date, DBP executed a
Deed of Assignment of Mortgage Rights Interest and Participation48 in favor of
Respondent Consortium of Banks. The deed stated that, in consideration of the
payment made, all of DBP's rights under the mortgage agreement with VISCO
were being transferred and conveyed to the Consortium.49 Thus did the latter
obtain DBP's recorded primary lien over the real and chattel properties of VISCO.
On September 23, 1980, the Consortium filed a Petition for Extra-Judicial
Foreclosure with the Office of the Provincial Sheriff of Bohol.50 The Notice of
Extrajudicial Foreclosure of Mortgage, published in the Bohol Newsweek on
October 10, 1980, announced that the auction sale was scheduled for November
11, 1980.51
On November 3, 1980, Southern Industrial Projects, Inc. (SIP), which was a
judgment creditor52 of VISCO, filed Civil Case No. 3383. It was a Complaint53
for Declaration of Nullity of the Mortgage and Injunction to Restrain the
Consortium from Proceeding with the Auction Sale. SIP argued that DBP had
actually been paid by VISCO with the proceeds from the sale of the generator
sets. Hence, the mortgage in favor of that bank had been extinguished by the
payment and could not have been assigned to the Consortium.54 A temporary
restraining order against the latter was thus successfully obtained; the provincial
sheriff could not proceed with the auction sale of the mortgaged assets.55 But
SIP's victory was short-lived. On March 2, 1984, Civil Case No. 3383 was
decided in favor of the Consortium.56 Judge Andrew S. Namocatcat ruled thus:
"The evidence of the plaintiff is only anchored on the fact that the deed of
assignment executed by the DBP in favor of the defendant banks is an act which
would defraud creditors. It is the thinking of the court that the payment of
defendant banks to DBP of VISCO's loan and the execution of the DBP of the
deed of assignment of credit and rights to the defendant banks is in accordance
with Article 1302 and 1303 of the New Civil Code, and said transaction is not to
defraud creditors because the defendant banks are also creditors of VISCO."57
On June 14, 1985, this Decision was affirmed by the Intermediate Appellate
Court in CA-GR No. 03719. 58
The auction sale of VISCO's mortgaged properties took place on March 19, 1985
and the Consortium emerged as the highest bidder.59 The Certificate of Sale60
in its favor was registered on May 22, 1985.61
On June 27, 1985, VISCO executed through Vicente Garcia, a Deed of
Assignment of Right of Redemption62 in favor of the National Steel Corporation
(NSC), in consideration of P100,000. 63 On the same day, the Consortium sold
the foreclosed real and personal properties of VISCO to the NSC.64
On August 16, 1985, petitioner filed against respondents Civil Case No. 3929,
which was a Complaint for Annulment or Rescission of Sale, Damages with
Preliminary Injunction.65 Coastal alleged that, despite the Writ of Attachment
issued in its favor in the still pending Civil Case No. 21272, the Consortium had
sold the properties to NSC. Further, despite the attachment of the properties, the
Consortium was allegedly able to sell and place them beyond the reach of
VISCO's other creditors.66 Thus imputing bad faith to respondent banks' actions,
petitioner said that the sale was intended to defraud VISCO's other creditors.
Petitioner further contended that the assignment in favor of the Consortium was
fraudulent, because DBP had been paid with the proceeds from the sale of the
generator sets owned by VISCO, and not with the Consortium's own funds.67
Petitioner offered as proof the minutes of the meeting68 in which the transaction
was decided. Respondent Consortium countered that the minutes would in fact
readily disclose that the intention of its members was to apply the proceeds to a
partial payment to DBP.69 Respondent insisted that it used its own funds to pay
the bank.70
On August 20, 1985, a temporary restraining order (TRO)71 was issued by
Judge Mercedes Gozo-Dadole against VISCO, enjoining it from proceeding with
the removal or disposal of its properties; the execution and/or consummation of
the foreclosure sale; and the sale of the foreclosed properties to NSC. On
September 6, 1985, the trial court issued an Order requiring the Consortium to
post a bond of P25 million in favor of Coastal for damages that petitioner may
suffer from the lifting of the TRO. The bond filed was then approved by the RTC
in its Order of September 13, 1985.72
On December 15, 1986, Civil Case No. 21272 was finally decided by Judge
Nicolas P. Lapena, Jr., in favor of Coastal.73 VISCO was ordered to pay
petitioner the sum of P851,316.19 with interest at the legal rate, plus attorney's
fees of P50,000.00 and costs.74 Coastal filed a Motion for Execution,75 but the
judgment has remained unsatisfied to date.
On January 5, 1992, a Decision76 on Civil Case No. 3929 was rendered as
follows:
"WHEREFORE, this Court hereby renders judgment in favor of the defendants
and against the plaintiff Coastal Pacific Trading, Inc. BY WAY OF THE MAIN
COMPLAINT, to wit:
"1. Declaring the extrajudicial foreclosure sale conducted by the sheriff and the
corresponding certificate of sale executed by the defendant sheriffs on March 15,
1985 relative to the real properties of the defendant SRM/VISCO of Cortes,
Bohol, Philippines, which were registered in the Register of Deeds of Bohol, on
May 22, 1985 and the Transfer of Assignment to the defendant National Steel
Corporation of any or part of the foreclosed properties arising from the
extrajudicial foreclosure sale as valid and legal;
"2. Ordering the plaintiff Coastal Pacific Trading Inc. to pay the defendant
Consortium of Banks[,] Southern Rolling Mills, Co., Inc., Far East Bank & Trust
Company, Philippine Commercial Industrial Bank, Equitable Banking
Corporation, Prudential Bank, Board of Trustees-Consortium of Banks- [VISCO],
United Coconut Planters Bank, City Trust Banking Corporation, Associated Bank,
Insular Bank of Asia and America, International Corporate Bank, Commercial
Bank of Manila, Bank of the Philippine Islands and the National Steel Corporation
in the instant case the amount of FIVE HUNDRED THOUSAND PESOS
(P500,000.00) representing damages;
"3. Ordering the plaintiff The (sic) Coastal Pacific Trading Inc. to pay the
defendants the amount of FIFTEEN THOUSAND PESOS (P15,000.00)
representing attorney's fees;
"4. Dismissing the Amended Complaint of the plaintiff;
"5. Ordering the plaintiff to pay the cost; AND
"BY WAY OF CROSS CLAIM INTERPOSED
"BY THE DEFENDANT National Steel Corporation against the Consortium of
Banks and SRM/VISCO, the same is dismissed for lack of merit, without
pronouncement as to cost."77
Insisting that the trial court erred in holding that it had failed to prove its case by
preponderance of evidence, Coastal filed an appeal with the CA. Allegedly, the
purported insufficiency of proof was based on the sole ground that petitioner did
not file an objection when the properties were sold on execution. It contended
that the court a quo had arrived at this erroneous conclusion by relying on
inapplicable jurisprudence.78
Additionally, Coastal argued that the trial court had erred in not annulling the
foreclosure proceedings and sale for being fictitious and done to defraud
petitioner as VISCO's creditor. Supposedly, the DBP mortgage had already been
extinguished by payment; thus, the bank could not have assigned the contract to
the Consortium.79
Petitioner also prayed for the annulment of the sale in favor of NSC on the
ground that the latter was a party to the fraudulent foreclosure and, hence, not a
buyer in good faith.80
Ruling of the Court of Appeals
At the outset, the CA stressed that the validity of the Consortium's mortgage,
foreclosure, and assignments had already been upheld in CA-GR CV No. 03719,
entitled Southern Industrial Projects v. United Coconut Planters Bank81 Citing
Valencia v. RTC of Quezon City, Br. 9082 and Vda. de Cruzo v. Carriaga,83 the
CA explained that the absolute identity of parties was not necessary for the
application of res judicata. All that was required was a shared identity of interests,
as shown by the identity of reliefs sought by one person in a prior case and by
another in a subsequent case.
While Coastal was not a party to Southern Industrial Projects, it should
nevertheless be bound by that Decision, because it had raised substantially the
same claim and cause of action as SIP, according to the appellate court. The CA
held that the basic reliefs sought by Coastal and SIP were substantially the
same: the nullification of the Deed of Assignment in favor of the Consortium, the
foreclosure sale, and the subsequent sale to NSC. Because this identity of reliefs
sought showed an identity of interests, the CA concluded that it need not rule on
those issues.84
As to the issue that the DBP mortgage had been extinguished by payment, the
CA quoted its earlier Decision in Southern Industrial Projects:
"The evidence shows that the proceeds of the sale of the two generating sets
were applied by defendants-appellees in the payment of the outstanding
obligation of VISCO. It appears that said proceeds were deposited in the bank
account of the consortium of creditors to avoid it being garnished by the creditors
notwithstanding the set-off, VISCO was still indebted to the defendants-
appellees.
"The evidence x x x shows that upon VISCO's request for [cash] advance, the
Far East Banks (sic) and Trust Co., the manager of the consortium of creditors,
issued FEBTC check No. 239249 on June 29, 1976 in the amount of
P1,342,656.68 payable to the DBP to pay off its loan to the latter.
xxx xxx xxx
"x x x. A public document celebrated with all the legal formalities under the
safeguard of notarial certificate is evidence against a party, and a high degree
[of] proof is necessary to overcome the legal presumption that the recital is true.
The biased and interested testimony of one of the parties to such instrument who
attempts to vary or repudiate what it purports to be, cannot overcome the
evidentiary force of what is recited in the document."85
The appellate court also rejected petitioner's contention that the Consortium's
Petition for Extrajudicial Foreclosure was already barred by the earlier resort to a
judicial foreclosure. The CA clarified that in filing a Petition for Judicial
Foreclosure, the Consortium had pursued its right as junior encumbrancer. On
the other hand, the Consortium filed a Petition for Extrajudicial Foreclosure as a
first encumbrancer by virtue of DBP's assignment in its favor.86
The CA also rejected petitioner's theory of extinguishment of obligation by
merger. It observed that the merger could not have possibly taken place,
because respondent banks and VISCO were not creditors and debtors in their
own right.87
Petitioner's Motion for Reconsideration,88 which was received by the CA on
November 15, 1994,89 was denied for lack of merit.
Hence, this Petition.90
Issues
Petitioner raises the following issues for our consideration:
"I
"Respondent Court of Appeals, seemingly to avoid the irrefutable evidence of
fraud and collusion practised by [respondents] against [Petitioner] Coastal,
erroneously sustained the trial court's holding that the present case is barred by
res judicata because of the previous decision in the case of Southern Industrial
Projects, Inc., vs. United Coconut Planters Bank, CA-G.R. No. 03719,
considering that the elements that call for the application of this rule are not
present in the case at bar, and the exceptions allowed by this Honorable
Supreme Court are not applicable here for variance or distinction in facts and
issues, x x x:"91
"II
"Respondent Court of Appeals further erred in not annulling the Deed of
Assignment of the DBP mortgage x x x, the extrajudicial foreclosure proceedings
of the two mortgages x x x, and the separate sale of the land and machineries as
real and personal properties by the foreclosing banks to NSC, as well as the
assignment or waiver of SRM/Visco's legal right of redemption over the
foreclosed properties, for being fraudulently executed through collusion among
the [respondents] and in fraud of SRM/Visco's creditor, [Petitioner] Coastal, x x
x;"92
Stripped of nonessentials, the two issues may be restated as follows:
1. Whether the present action is barred by res judicata
2. Whether respondents disposed of VISCO's assets in fraud of the creditors
The Court's Ruling
The Petition is meritorious.
First Issue:
Res judicata
The CA cited Valencia v. RTC of Quezon City93 to support the finding that SIP
and Coastal were substantially the same parties. We distinguish.
In Valencia, the plaintiff-intervenor in the first case, Cariño, claimed Lot 4 based
on an alleged purchase of Valencia's "squatter's rights" over the property. The
trial court dismissed the claim and held that no such purchase ever took place.94
It also held that, on the assumption that a sale had taken place, the sale was null
and void for being contrary to the pertinent housing law. It also found that all
current occupants of Lot 4 were illegal squatters; thus, it ordered their ejectment.
When this first case attained finality, Carino's daughter, Catbagan, filed another
suit against Valencia. Catbagan challenged the applicability of the ejectment
Order issued to her; as an occupant of the lot, she was allegedly not a party to
the first case. Her Petition was denied for lack of merit.95
The execution of the Decision in the first case was again forestalled when Llanes,
Cariño's sister-in-law who was another occupant of Lot 4, filed another suit
against the same respondent. Like Cariño, Llanes insisted on having purchased
the subject lot from Valencia.96 This Court ruled that the suit was barred by res
judicata. There was a substantial identity of parties, because the right claimed by
both Cariño and Llanes were based on each one's alleged purchase of
Valencia's "squatter's rights."97
In the first case, sales of "squatter's rights" were already categorically declared
null and void for being contrary to law. Thus, Llanes' admission that she had
purchased Valencia's "squatter's rights" placed her in the same category as
Cariño. The purchase could not be treated differently, because the final and
executory Decision held that all purchases of "squatter's rights" (regardless of
who the purchasers were) were null and void.98
Further, the earlier ruling held that "the present occupants are illegal squatters."
That ruling included Llanes, who was admittedly one of the occupants.99 Simply
put, she and Valencia were considered identical parties for purposes of res
judicata, because they were obviously litigating under the same void title and
 capacity as vendees of "squatter's rights" and as occupants of Lot 4.
Moreover, we held in Valencia that Llanes' suit was merely a clear attempt to
prevent or delay the execution of the judgment in the first case, which had
become final by reason of the three affirmances by this Court. The pattern to
obstruct the execution of the first judgment was obvious: after Cariño lost the first
case, her daughter filed a second one. When the daughter lost the second, the
daughter-in-law filed a third case. It may be observed that the three successive
plaintiffs were all occupants of the same property and belonged to the same
family; this fact was also indicative of their privity.
Given this background, it becomes clear that the finding of a substantial identity
of parties in Valencia was based on its peculiar factual circumstances, which are
different from those in the present case.
Unlike Llanes, Coastal is not asserting a right that has been categorically
declared null and void in a prior case. In fact, its right based on the processing
agreement was upheld in Civil Case No. 21272. Clearly, Coastal cannot be
treated in the same manner as Llanes.
The CA erred in applying Southern Industrial Projects v. United Coconut Planters
Bank100 as a bar by res judicata with respect to the present case. For this
principle to apply, the following elements must concur: a) the former judgment
was final; b) the court that rendered it had jurisdiction over the subject matter and
the parties; c) the judgment was based on the merits; and, d) between the first
and the second actions, there is an identity of parties, subject matters, and
causes of action.101
It is axiomatic that res judicata does not require an absolute, but only a
substantial, identity of parties. There is a substantial identity when there is privity
between the two parties or they are successors-in-interest by title subsequent to
the commencement of the action, litigating for the same thing, under the same
title, and in the same capacity.102 Petitioner was not acting in the same capacity
as SIP when it filed Civil Case No. 3383, which eventually became AC-GR CV
No. 03719. It brought this latter action as a creditor under a processing
agreement with VISCO; on the other hand, the latter was sued by SIP, based on
an alleged breach of their management contract. Very clearly, their rights were
entirely distinct and separate from each other. In no manner were these two
creditors privies of each other.
The causes of action in the two Complaints were also different. Causes of action
arise from violations of rights. A single right may be violated by several acts or
omissions, in which case the plaintiff has only one cause of action. Likewise, a
single act or omission may violate several rights at the same time, as when the
act constitutes a violation of separate and distinct legal obligations.103 The
violation of each of these separate rights is a separate cause of action in
itself.104 Hence, although these causes of action arise from the same state of
facts, they are distinct and independent and may be litigated separately; recovery
on one is not a bar to subsequent actions on the others.105
In the present case, the right of SIP (arising from its management contract with
VISCO) is totally distinct and separate from the right of Coastal (arising from its
processing contract with VISCO). SIP and Coastal are asserting distinct rights
arising from different legal obligations of the debtor corporation. Thus, VISCO's
violation of those separate rights has given rise to separate causes of action.
The confusion in the resolution of the issue of identity of parties occurred,
because the two creditors were assailing the same transactions of VISCO on the
 same grounds. Since the two cases they filed presented similar legal issues, the
appellate court held that its ruling in AC-GR CV No. 03719 was also applicable to
the instant case.
Common but palpable is this misconception of the doctrine of res judicata.
Persons do not become privies by the mere fact that they are interested in the
same question or in proving the same set of facts, or that one person is
interested in the result of a litigation involving the other. Hence, several creditors
of one debtor cannot be considered as identical parties for the purpose of
assailing the acts of the debtor. They have distinct credits, rights, and interests,
such that the failure of one to recover should not preclude the other creditors
from also pursuing their legal remedies.
Further, petitioner, which was not a party to Southern Industrial Projects (their
causes of action being separate and distinct), did not have the opportunity to be
heard in that case, much less to present its own evidence. Thus, to bind
petitioner to the Decision in that case would clearly violate its rights to due
process. As a separate party, it has the right to have its arguments and evidence
evaluated on their own merits.
Second Issue:
Fraud of Creditors
We now come to the heart of the Petition. Coastal alleges that the assignment of
mortgage, the extrajudicial foreclosure proceedings, and the sale of the
properties of VISCO should all be rescinded on the ground that they were done
to defraud the latter's creditors.
The CA found no merit in petitioner's arguments. It ruled that the assignment
conformed to the requirements of law; that the consideration for the assignment
had allegedly been given by FEBTC; and that, hence, the Consortium had a right
to foreclose on the mortgaged properties.
By focusing on the innate validity of these Contracts, the CA totally overlooked
the issue of fraud as a ground for rescission. Elementary is the principle that the
validity of a contract does not preclude its rescission. Under Articles 1380 and
1381 (3) of the Civil Code, contracts that are otherwise valid between the
contracting parties may nonetheless be subsequently rescinded by reason of
injury to third persons, like creditors.106 In fact, rescission implies that there is a
contract that, while initially valid, produces a lesion or pecuniary damage to
someone.107 Thus, when the CA confined itself to the issue of the validity of
these contracts, it did not at all address the heart of petitioner's cause of action:
whether these transactions had been undertaken by the Consortium to defraud
VISCO's other creditors.
There is more than a preponderance of evidence showing the Consortium's
deliberate plan to defraud VISCO's other creditors.
Consortium Banks as Directors
It will be recalled that Respondent Consortium took over management and control
of VISCO by acquiring 90 percent of the latter's equity. Thus, 9 out of the 10
directors of the corporation were all officials of the Consortium,108 which may thus
be said to have effectively occupied and/or controlled the board. Significantly,
nowhere in the records can we find any denial by respondent of this allegation by
petitioner.109
As directors of VISCO, the officials of the Consortium were in a position of trust;
thus, they owed it a duty of loyalty. This trust relationship sprang from the fact that
they had control and guidance over its corporate affairs and property.110 Their
duty was more stringent when it became insolvent or without sufficient assets to
meet its outstanding obligations that arose. Because they were deemed trustees
of the creditors in those instances, they should have managed the corporation's
assets with strict regard for the creditors' interests. When these directors became
corporate creditors in their own right, they should not have permitted themselves
to secure any undue advantage over other creditors.111 In the instant case, the
Consortium miserably failed to observe its duty of fidelity towards VISCO and its
creditors.
Duty of the Consortium Banks 
to VISCO's Creditors
Recall that as early as 1966, the Consortium, through its directors on the board of
VISCO, had already assumed management and control over the latter. Hence,
when VISCO recognized its outstanding liability to petitioner in 1970 and offered a
Compromise Agreement,112 respondent banks were already at the helm of the
debtor corporation. The members of the Consortium, therefore, cannot deny that
they were aware of those claims against the corporation. Nonetheless, they did not
adopt any measure to protect petitioner's credit.
Quite the opposite, they even took steps to hide VISCO's unexpended funds.
Garcia's 1972 letter to Samonte unmistakably reveals that they kept those funds
in an account named "Board of Trustees VISCO Consortium of Banks." This fact
alone shows an effort to hide, with the evident intent to keep, those funds for
themselves. The letter even says that, for the protection of the Consortium, the
name "VISCO" should be eliminated entirely, so that the account name would read
"Board of Trustees Consortium of Banks." Clearly, this particular move was found
to be necessary to avoid a takeover by the government, which was also a creditor
of VISCO.113 This express intent of the latter, under the direction and for the
benefit of the Consortium, corroborated petitioner's contention that respondent
banks had defrauded VISCO's creditors.
Assignment of Mortgage 
in Favor of the Consortium Banks
The assignment of mortgage in favor of the Consortium also bears the earmarks
of fraud. Initially, respondent banks had agreed that VISCO should sell two of its
generator sets, so that the proceeds could be utilized to pay DBP. This plan was
direct, simple, and would extinguish the encumbrance in favor of the bank.
Then, quite surprisingly, the Consortium set down the following payment
procedure: Filmag would pay VISCO; the latter would pay the Consortium, which
would pay DBP; and the Consortium would then subrogate DBP to the latter's
rights as first mortgagee. One is then led to ask: if the intention was to pay DBP;
from the sales proceeds of the generator sets, why did the money have to pass
through the Consortium?
The answer lies in the nature of respondent's mortgage. It will be recalled that this
mortgage remained unrecorded and not legally binding on the other creditors.114
Thus, if DBP had been directly paid by VISCO, the latter could have freed up its
properties to the satisfaction of all its other creditors. This procedure would have
been fair to all, but it was not followed by the Consortium.
Instead, the proceeds from the sale of the generator sets were first paid to
respondent banks, which used the money to pay DBP. The last step in the payment
procedure explains the reason for this preferred though roundabout manner of
payment. This final step entitled the Consortium to obtain DBP's primary lien
through an assignment by allowing it to pay VISCO's loan to the bank, without
incurring additional expenses.
In the end, by collecting the money from VISCO, respondent banks recovered what
they had ostensibly remitted to DBP. Moreover, the primary lien that respondent
banks acquired allowed them, as unsecured creditors of VISCO, to foreclose on
the assets of the corporation without regard to its inferior claims. It was a clever
ruse that would have worked, were it not done by creditors who were duty-bound,
as directors, not to take clever advantage of other creditors.
To be sure, there was undue advantage. The payment scheme devised by the
Consortium continued the efficacy of the primary lien, this time in its favor, to the
detriment of the other creditors. When one considers its knowledge that VISCO's
assets might not be enough to meet its obligations to several creditors,115 the
intention to defraud the other creditors is even more striking. Fraud is present when
the debtor knows that its actions would cause injury.116
The assignment in favor of the Consortium was a rescissible contract for having
been undertaken in fraud of creditors.117 Article 1385 of the Civil Code provides
for the effect of rescission, as follows:
"Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it
can be carried out only when he who demands rescission can return whatever he
may be obliged to restore.
"Neither shall rescission take place when the things which are the object of the
contract are legally in the possession of third persons who did not act in bad faith.
"In this case, indemnity for damages may be demanded from the person causing
the loss."
Indeed, mutual restitution is required in all cases involving rescission. But when it
is no longer possible to return the object of the contract, an indemnity for damages
operates as restitution. The important consideration is that the indemnity for
damages should restore to the injured party what was lost.
In the case at bar, it is no longer possible to order the return of VISCO's properties.
They have already been sold to the NSC, which has not been shown to have acted
in bad faith. The party alleging bad faith must establish it by competent proof. Sans
that proof, purchasers are deemed to be in good faith, and their interest in the
subject property must not be disturbed. Purchasers in good faith are those who
buy the property of another without notice that some other person has a right to or
interest in the property; and who pay the full and fair price for it at the time of the
purchase, or before they get notice of some other persons' claim of interest in the
property.118
In the present case, petitioner failed to discharge its burden of proving bad faith on
the part of NSC. There is insufficient evidence on record that the latter participated
in the design to defraud VISCO's creditors. To NSC, petitioner imputes fraud from
the sole fact that the former was allegedly aware that its vendor, the Consortium,
had taken control over VISCO including the corporation's assets.119 We cannot
appreciate how knowledge of the takeover would necessarily implicate anyone in
the Consortium's fraudulent designs. Besides, NSC was not shown to be privy to
the information that VISCO had no other assets to satisfy other creditors'
respective claims.
The right of an innocent purchaser for value must be respected and protected,
even if its vendors obtained their title through fraud.120 Pursuant to this principle,
the remedy of the defrauded creditor is to sue for damages against those who
caused or employed the fraud. Hence, petitioner is entitled to damages from the
Consortium.
Award of Damages
It is essential that for damages to be awarded, a claimant must satisfactorily prove
during the trial that they have a factual basis, and that the defendant's acts have a
causal connection to them.121 Thus, the question of damages should normally call
for a remand of the case to the lower court for further proceedings. Considering,
however, the length of time that petitioner's just claim has been thwarted, we find
it in the best interest of substantial justice to decide the issue of damages now on
the basis of the available records. A remand for further proceedings would only
result in a needless delay.
Going over the records of the case, we find that petitioner has a final and executory
judgment in its favor in Civil Case No. 21272. The judgment in that case reads as
follows:
"WHEREFORE, judgment is hereby rendered in favor of the plaintiffs ordering
defendant VISCO/SRM to pay the plaintiffs the sum of P851,316.19 with interest
thereon at the legal rate from the filing of this complaint, plus attorney's fees of
P50,000.00 and to pay the costs."122
The foregoing is the judgment credit that petitioner cannot enforce against VISCO
because of Respondent Consortium's fraudulent disposition of the corporation's
assets. In other words, the above amounts define the extent of the actual damage
suffered by Coastal and the amount that respondent has to restore pursuant to
Article 1385.
On the basis of the finding of fraud, the award of exemplary damages is in order,
to serve as a warning to other creditors not to abuse their rights. Under Article 2229
of the Civil Code, exemplary or corrective damages are imposed by way of
example or correction for the public good. By their nature, exemplary damages
should be imposed in an amount sufficient and effective to deter possible future
similar acts by respondent banks. The court finds the amount of P250,000
sufficient in the instant case.
As a rule, a corporation is not entitled to moral damages because, not being a
natural person, it cannot experience physical suffering or sentiments like wounded
feelings, serious anxiety, mental anguish and moral shock.123 The only exception
to this rule is when the corporation has a good reputation that is debased, resulting
in its humiliation in the business realm.124 In the present case, the records do not
show any evidence that the name or reputation of petitioner has been sullied as a
result of the Consortium's fraudulent acts. Accordingly, moral damages are not
warranted.
WHEREFORE, the Petition is GRANTED. The assailed Decision of the Court of
Appeals dated September 27, 1994, and its Resolution dated January 5, 1995, are
hereby REVERSED and SET ASIDE. Respondent Consortium of Banks is ordered
to PAY Petitioner Coastal Pacific Trading, Inc., the sum adjudged by the Regional
Trial Court of Pasig, Branch 167, in Civil Case No. 21272 entitled Coastal Pacific
Trading, Felix de la Costa, and Aurora del Banco v. Visayan Integrated
Corporation, to wit: "x x x the sum of P851,316.19 with interest thereon at the legal
rate from the filing of [the] [C]omplaint, plus attorney's fees of P50,000 and x x x
the costs." Respondent Consortium of Banks is further ordered to pay petitioner
exemplary damages in the amount of P250,000.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Callejo, Sr., Chico-Nazario, J.J., concur.

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