1

IV. DOCTRINE OF CORPORATE ENTITY subject matter of litigation and that they have a legal interest in
the success of the suit with respect to SUBIC.
A. Doctrine/Effects:
On July 26, 1979, the court denied the motion for intervention,
G.R. No. 58168 December 19, 1989 and ruled that petitioners have no legal interest whatsoever in
CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAY- the matter in litigation and their being alleged assignees or
CABRERA, LUISA MAGSAYSAY-CORPUZ, assisted be her husband, Dr. transferees of certain shares in SUBIC cannot legally entitle them
Jose Corpuz, FELICIDAD P. MAGSAYSAY, and MERCEDES MAGSAYSAY-
to intervene because SUBIC has a personality separate and
DIAZ, petitioners,
distinct from its stockholders.
vs.
THE COURT OF APPEALS and ADELAIDA RODRIGUEZ-MAGSAYSAY, On appeal, respondent Court of Appeals found no factual or legal
Special Administratrix of the Estate of the late Genaro F.
justification to disturb the findings of the lower court. The
Magsaysay respondents.
appellate court further stated that whatever claims the
petitioners have against the late Senator or against SUBIC for that
FERNAN, C.J.:
matter can be ventilated in a separate proceeding, such that with
In this petition for review on certiorari, petitioners seek to the denial of the motion for intervention, they are not left
reverse and set aside [1] the decision of the Court of Appeals without any remedy or judicial relief under existing law.
dated July l3, 1981, 1 affirming that of the Court of First Instance
Petitioners' motion for reconsideration was denied. Hence, the
of Zambales and Olongapo City which denied petitioners' motion
instant recourse.
to intervene in an annulment suit filed by herein private
respondent, and [2] its resolution dated September 7, 1981, Petitioners anchor their right to intervene on the purported
denying their motion for reconsideration. assignment made by the late Senator of a certain portion of his
shareholdings to them as evidenced by a Deed of Sale dated June
Petitioners are raising a purely legal question; whether or not
20, 1978. 2 Such transfer, petitioners posit, clothes them with an
respondent Court of Appeals correctly denied their motion for
interest, protected by law, in the matter of litigation.
intervention.
Invoking the principle enunciated in the case of PNB v. Phil. Veg.
The facts are not controverted.
Oil Co., 49 Phil. 857,862 & 853 (1927), 3petitioners strongly argue
On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and that their ownership of 41.66% of the entire outstanding capital
special administratix of the estate of the late Senator Genaro stock of SUBIC entitles them to a significant vote in the corporate
Magsaysay, brought before the then Court of First Instance of affairs; that they are affected by the action of the widow of their
Olongapo an action against Artemio Panganiban, Subic Land late brother for it concerns the only tangible asset of the
Corporation (SUBIC), Filipinas Manufacturer's Bank corporation and that it appears that they are more vitally
(FILMANBANK) and the Register of Deeds of Zambales. In her interested in the outcome of the case than SUBIC.
complaint, she alleged that in 1958, she and her husband
Viewed in the light of Section 2, Rule 12 of the Revised Rules of
acquired, thru conjugal funds, a parcel of land with
Court, this Court affirms the respondent court's holding that
improvements, known as "Pequena Island", covered by TCT No.
petitioners herein have no legal interest in the subject matter in
3258; that after the death of her husband, she discovered [a] an
litigation so as to entitle them to intervene in the proceedings
annotation at the back of TCT No. 3258 that "the land was
below. In the case of Batama Farmers' Cooperative Marketing
acquired by her husband from his separate capital;" [b] the
Association, Inc. v. Rosal, 4 we held: "As clearly stated in Section
registration of a Deed of Assignment dated June 25, 1976
2 of Rule 12 of the Rules of Court, to be permitted to intervene in
purportedly executed by the late Senator in favor of SUBIC, as a
a pending action, the party must have a legal interest in the
result of which TCT No. 3258 was cancelled and TCT No. 22431
matter in litigation, or in the success of either of the parties or an
issued in the name of SUBIC; and [c] the registration of Deed of
interest against both, or he must be so situated as to be
Mortgage dated April 28, 1977 in the amount of P 2,700,000.00
adversely affected by a distribution or other disposition of the
executed by SUBIC in favor of FILMANBANK; that the foregoing
property in the custody of the court or an officer thereof ."
acts were void and done in an attempt to defraud the conjugal
partnership considering that the land is conjugal, her marital To allow intervention, [a] it must be shown that the movant has
consent to the annotation on TCT No. 3258 was not obtained, the legal interest in the matter in litigation, or otherwise qualified;
change made by the Register of Deeds of the titleholders was and [b] consideration must be given as to whether the
effected without the approval of the Commissioner of Land adjudication of the rights of the original parties may be delayed
Registration and that the late Senator did not execute the or prejudiced, or whether the intervenor's rights may be
purported Deed of Assignment or his consent thereto, if protected in a separate proceeding or not. Both requirements
obtained, was secured by mistake, violence and intimidation. She must concur as the first is not more important than the second. 5
further alleged that the assignment in favor of SUBIC was
without consideration and consequently null and void. She The interest which entitles a person to intervene in a suit
prayed that the Deed of Assignment and the Deed of Mortgage between other parties must be in the matter in litigation and of
be annulled and that the Register of Deeds be ordered to cancel such direct and immediate character that the intervenor will
TCT No. 22431 and to issue a new title in her favor. either gain or lose by the direct legal operation and effect of the
judgment. Otherwise, if persons not parties of the action could
On March 7, 1979, herein petitioners, sisters of the late senator, be allowed to intervene, proceedings will become unnecessarily
filed a motion for intervention on the ground that on June 20, complicated, expensive and interminable. And this is not the
1978, their brother conveyed to them one-half (1/2 ) of his policy of the law. 6
shareholdings in SUBIC or a total of 416,566.6 shares and as
assignees of around 41 % of the total outstanding shares of such The words "an interest in the subject" mean a direct interest in
stocks of SUBIC, they have a substantial and legal interest in the the cause of action as pleaded, and which would put the
 2
intervenor in a legal position to litigate a fact alleged in the third parties. The transfer must be registered in the books of the
complaint, without the establishment of which plaintiff could not corporation to affect third persons. The law on corporations is
recover. 7 explicit. Section 63 of the Corporation Code provides, thus: "No
transfer, however, shall be valid, except as between the parties,
Here, the interest, if it exists at all, of petitioners-movants is until the transfer is recorded in the books of the corporation
indirect, contingent, remote, conjectural, consequential and
showing the names of the parties to the transaction, the date of
collateral. At the very least, their interest is purely inchoate, or in the transfer, the number of the certificate or certificates and the
sheer expectancy of a right in the management of the
number of shares transferred."
corporation and to share in the profits thereof and in the
properties and assets thereof on dissolution, after payment of And even assuming arguendo that there was a valid transfer,
the corporate debts and obligations. petitioners are nonetheless barred from intervening inasmuch as
their rights can be ventilated and amply protected in another
While a share of stock represents a proportionate or aliquot
proceeding.
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, WHEREFORE, the instant petition is hereby DENIED. Costs against
his interest in the corporate property being equitable or petitioners. SO ORDERED.
beneficial in nature. Shareholders are in no legal sense the
owners of corporate property, which is owned by the corporation EN BANC
G.R. No. L-18216 October 30, 1962
as a distinct legal person. 8
STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-
Petitioners further contend that the availability of other appellants,
remedies, as declared by the Court of appeals, is totally vs.
REGISTER OF DEEDS OF MANILA, respondent-appellee.
immaterial to the availability of the remedy of intervention.
Ramon C. Fernando for petitioners-appellants.
We cannot give credit to such averment. As earlier stated, that Office of the Solicitor General for respondent-appellee.
the movant's interest may be protected in a separate proceeding BAUTISTA ANGELO, J.:
is a factor to be considered in allowing or disallowing a motion
On September 19, 1960, the five stockholders of the F. Guanzon
for intervention. It is significant to note at this juncture that as
and Sons, Inc. executed a certificate of liquidation of the assets of
per records, there are four pending cases involving the parties
the corporation reciting, among other things, that by virtue of a
herein, enumerated as follows: [1] Special Proceedings No.
resolution of the stockholders adopted on September 17, 1960,
122122 before the CFI of Manila, Branch XXII, entitled
dissolving the corporation, they have distributed among
"Concepcion Magsaysay-Labrador, et al. v. Subic Land Corp., et
themselves in proportion to their shareholdings, as liquidating
al.", involving the validity of the transfer by the late Genaro
dividends, the assets of said corporation, including real
Magsaysay of one-half of his shareholdings in Subic Land
properties located in Manila.
Corporation; [2] Civil Case No. 2577-0 before the CFI of
Zambales, Branch III, "Adelaida Rodriguez-Magsaysay v. The certificate of liquidation, when presented to the Register of
Panganiban, etc.; Concepcion Labrador, et al. Intervenors", Deeds of Manila, was denied registration on seven grounds, of
seeking to annul the purported Deed of Assignment in favor of which the following were disputed by the stockholders:
SUBIC and its annotation at the back of TCT No. 3258 in the name
3. The number of parcels not certified to in the acknowledgment;
of respondent's deceased husband; [3] SEC Case No. 001770,
filed by respondent praying, among other things that she be 5. P430.50 Reg. fees need be paid;
declared in her capacity as the surviving spouse and
administratrix of the estate of Genaro Magsaysay as the sole 6. P940.45 documentary stamps need be attached to the
subscriber and stockholder of SUBIC. There, petitioners, by document;
motion, sought to intervene. Their motion to reconsider the
7. The judgment of the Court approving the dissolution and
denial of their motion to intervene was granted; [4] SP No. Q-
directing the disposition of the assets of the corporation need be
26739 before the CFI of Rizal, Branch IV, petitioners herein filing a
presented (Rules of Court, Rule 104, Sec. 3).
contingent claim pursuant to Section 5, Rule 86, Revised Rules of
Court. 9 Petitioners' interests are no doubt amply protected in Deciding the consulta elevated by the stockholders, the
these cases. Commissioner of Land Registration overruled ground No. 7 and
sustained requirements Nos. 3, 5 and 6.
Neither do we lend credence to petitioners' argument that they
are more interested in the outcome of the case than the The stockholders interposed the present appeal.
corporation-assignee, owing to the fact that the latter is willing to
compromise with widow-respondent and since a compromise As correctly stated by the Commissioner of Land Registration, the
involves the giving of reciprocal concessions, the only propriety or impropriety of the three grounds on which the
conceivable concession the corporation may give is a total or denial of the registration of the certificate of liquidation was
partial relinquishment of the corporate assets. 10 predicated hinges on whether or not that certificate merely
involves a distribution of the corporation's assets or should be
Such claim all the more bolsters the contingent nature of considered a transfer or conveyance.
petitioners' interest in the subject of litigation.
Appellants contend that the certificate of liquidation is not a
The factual findings of the trial court are clear on this point. The conveyance or transfer but merely a distribution of the assets of
petitioners cannot claim the right to intervene on the strength of the corporation which has ceased to exist for having been
the transfer of shares allegedly executed by the late Senator. The dissolved. This is apparent in the minutes for dissolution attached
corporation did not keep books and records. 11 Perforce, no to the document. Not being a conveyance the certificate need
transfer was ever recorded, much less effected as to prejudice not contain a statement of the number of parcel of land involved
 3
in the distribution in the acknowledgment appearing therein. On 09 April 1984, Melchor de la Cuesta, doing business under the
Hence the amount of documentary stamps to be affixed thereon name and style of "Farmers Machineries," sold to Tramat
should only be P0.30 and not P940.45, as required by the register Mercantile, Inc. ("Tramat"), one (1) unit HINOMOTO TRACTOR
of deeds. Neither is it correct to require appellants to pay the Model MB 1100D powered by a 13 H.P. diesel engine. In
amount of P430.50 as registration fee. payment, David Ong, Tramat's president and manager, issued a
check for P33,500.00 (apparently replacing an earlier postdated
The Commissioner of Land Registration, however, entertained a check for P33,080.00). Tramat, in turn, sold the tractor, together
different opinion. He concurred in the view expressed by the
with an attached lawn mower fabricated by it, to the
register of deed to the effect that the certificate of liquidation in Metropolitan Waterworks and Sewerage System ("NAWASA") for
question, though it involves a distribution of the corporation's
P67,000.00. David Ong caused a "stop payment" of the check
assets, in the last analysis represents a transfer of said assets when NAWASA refused to pay the tractor and lawn mower after
from the corporation to the stockholders. Hence, in substance it
discovering that, aside from some stated defects of the attached
is a transfer or conveyance. lawn mower, the engine (sold by de la Cuesta) was a
We agree with the opinion of these two officials. A corporation is reconditioned unit.
a juridical person distinct from the members composing it. On 28 May 1985, de la Cuesta filed an action for the recovery of
Properties registered in the name of the corporation are owned
P33,500.00, as well as attorney's fees of P10,000.00, and the
by it as an entity separate and distinct from its members. While costs of suit. Ong, in his answer, averred, among other things,
shares of stock constitute personal property they do not
that de la Cuesta had no cause of action; that the questioned
represent property of the corporation. The corporation has transaction was between plaintiff and Tramat Mercantile, Inc.,
property of its own which consists chiefly of real estate (Nelson v.
and not with Ong in his personal capacity; and that the payment
Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 of the check was stopped because the subject tractor had been
N.W. 743). A share of stock only typifies an aliquot part of the
priced as a brand new, not as a reconditioned unit.
corporation's property, or the right to share in its proceeds to
that extent when distributed according to law and equity (Hall & On 02 November 1989, after the reception of evidence, the trial
Faley v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its court rendered a decision, the dispositive portions of which read:
holder is not the owner of any part of the capital of the
WHEREFORE, in view of the foregoing consideration, judgment is
corporation (Bradley v. Bauder 36 Ohio St., 28). Nor is he entitled
hereby rendered:
to the possession of any definite portion of its property or assets
(Gottfried v. Miller, 104 U.S., 521; Jones v. Davis, 35 Ohio St., 1. Ordering the defendants, jointly and severally, to pay the
474). The stockholder is not a co-owner or tenant in common of plaintiff the sum of P33,500.00 with legal interest thereon at the
the corporate property (Halton v. Hohnston, 166 Ala 317, 51 So rate of 12% per annum from July 7, 1984 until fully paid; and
992).
2. Ordering the defendants, jointly and severally, to pay the
On the basis of the foregoing authorities, it is clear that the act of plaintiff the sum of P10,000.00 as attorney's fees, and the costs
liquidation made by the stockholders of the F. Guanzon and Sons, of this suit.
Inc. of the latter's assets is not and cannot be considered a
partition of community property, but rather a transfer or SO ORDERED. 1
conveyance of the title of its assets to the individual
An appeal was timely interposed by the defendants. On 04 March
stockholders. Indeed, since the purpose of the liquidation, as
1993, the Court of Appeals affirmed in toto the decision of the
well as the distribution of the assets of the corporation, is to
trial court. Defendant-appellants' motion for reconsideration was
transfer their title from the corporation to the stockholders in
denied.
proportion to their shareholdings, — and this is in effect the
purpose which they seek to obtain from the Register of Deeds of Hence, the instant petition.
Manila, — that transfer cannot be effected without the
corresponding deed of conveyance from the corporation to the We could find no reason to reverse the factual findings of both
the trial court and the appellate court, particularly in holding that
stockholders. It is, therefore, fair and logical to consider the
the contract between de la Cuesta and TRAMAT was one of
certificate of liquidation as one in the nature of a transfer or
conveyance. absolute, not conditional, sale of the tractor and that de la
Cuesta did not violate any warranty on the sale of the tractor to
WHEREFORE, we affirm the resolution appealed from, with costs TRAMAT. The appellate court, in its decision, adequately
against appellants. explained:

THIRD DIVISION If the perfection of the sale was dependent upon acceptance by
G.R. No. 111008 November 7, 1994 the MWSS of the subject tractor why did the appellants issue a
TRAMAT MERCANTILE, INC. AND DAVID ONG, petitioners, check in payment of the item to the appellee? And long after
vs. MWSS had complained about the defective tractor engine, and
HON. COURT OF APPEALS AND MELCHOR DE LA CUESTA, respondents. after the appellee had failed to remedy the defect, why did the
Emilio G. Abrogena for petitioners. appellants still draw and deliver a replacement check to the
Constante B. Albano for private respondent. appellee for the increased amount of P33,500.00?

VITUG, J.: These payments argue against the claim now made by the
defendants that the sale was conditional.
This petition for review on certiorari challenges the 04th March
1993 decision of the Court of Appeals and its resolution of 01 According to the appellee, the additional amount covered the
July 1993 denying the motion for reconsideration. cost of replacing the oil gasket of the tractor engine when it was
repaired in Soledad Cac's gasoline station in Quezon City. The
 4
appellants, on the other hand, claims the amount represented brand new, one. It malfunctioned because it was made to do
the freight charges for transporting the tractor from Cauayan, what it simply could not.2
Isabela to Metro Manila.
It was, nevertheless, an error to hold David Ong jointly and
The appellants should have explained why they failed to include severally liable with TRAMAT to de la Cuesta under the
the freight charges in the first check. The tractor was transported questioned transaction. Ong had there so acted, not in his
from Isabela to Metro Manila as early as April 1984, and the first personal capacity, but as an officer of a corporation, TRAMAT,
check was drawn at about the same time. The freight charges with a distinct and separate personality. As such, it should only
cannot be said to have been incurred when the tractor engine be the corporation, not the person acting for and on its behalf,
was delivered back to the supplier for repairs. The appellants that properly could be made liable thereon.3
admitted that the engine was not brought back to Isabela. The
repairs were done at Soledad Cac's gasoline station in Quezon Personal liability of a corporate director, trustee or officer along
(although not necessarily) with the corporation may so validly
City.
attach, as a rule, only when —
Anent the first assigned error, We sustain the trial court's finding
1. He assents (a) to a patently unlawful act of the corporation, or
that at the time of the purchase, the appellants did not reveal to
the appellee the true purpose for which the tractor would be (b) for bad faith, or gross negligence in directing its affairs, or (c)
for conflict of interest, resulting in damages to the corporation,
used. Granting that the appellants informed the appellee that
they would be reselling the unit to the MWSS, an entity its stockholders or other persons;4
admittedly not engaged in farming, and that they ordered the 2. He consents to the issuance of watered stocks or who, having
tractor without the power tiller, an indispensable accessory if the knowledge thereof, does not forthwith file with the corporate
tractor would be used in farming, these in themselves would not secretary his written objection thereto;5
constitute the required implied notice to the appellee as seller.
3. He agrees to hold himself personally and solidarily liable with
xxx xxx xxx the corporation;6 or
In regard to the second assigned error, We do not agree that the 4. He is made, by a specific provision of law, to personally answer
appellee should have been held liable for the tractor's alleged for his corporate action.7
hidden defects. . . .
In the case at bench, there is no indication that petitioner David
It has to be noted in this regard that, to satisfy the requirements Ong could be held personally accountable under any of the
of the MWSS, the appellants borrowed a lawn mower from the abovementioned cases.
MWSS so they could fabricate one such mower. The appellants'
witness stated that the kind of mid-mounted lawn mower was WHEREFORE, the petition is given DUE COURSE and the decision
being manufactured by their competitor, Alpha Machinery, which of the trial court, affirmed by the appellate court, is MODIFIED
had by then stopped supplying the same (tsn, insofar as it holds petitioner David Ong jointly and severally liable
Nov. 29, 1988, pp. 73-74). There is no showing that the with Tramat Mercantile, Inc., which portion of the questioned
appellants had had any previous experience in the fabrication of judgment is SET ASIDE. In all other respects, the decision
this lawn mower. In fact, as aforesaid, they had to borrow one appealed from is AFFIRMED. No costs. SO ORDERED.
from the MWSS which they could copy. But although they made
FIRST DIVISION
a copy with the same specifications and design, there was no
G.R. No. L-56076 September 21, 1983
assurance that the copy would function as well as with the PALAY, INC. and ALBERT ONSTOTT, petitioner,
model. vs.
JACOBO C. CLAVE, Presidential Executive Assistant NATIONAL HOUSING
xxx xxx xxx
AUTHORITY and NAZARIO DUMPIT respondents.
Although the trial court discussed it in a different light, We view Santos, Calcetas-Santos & Geronimo Law Office for petitioner.
Wilfredo E. Dizon for private respondent.
the matter in the same way the trial court did — that the lawn
mower as fabricated by the appellants was the root of the
parties' problems. MELENCIO-HERRERA, J.:
Having had no previous experience in the manufacture of lawn The Resolution, dated May 2, 1980, issued by Presidential
mowers of the same type as that in litigation, and in a possibly Executive Assistant Jacobo Clave in O.P. Case No. 1459, directing
patent-infringing effort to undercut their competition, the petitioners Palay, Inc. and Alberto Onstott jointly and severally, to
appellants gathered enough daring to do the fabrication refund to private respondent, Nazario Dumpit, the amount of
themselves. But the product might have proved too much for the P13,722.50 with 12% interest per annum, as resolved by the
subject tractor to power, and the tractor's engine was strained National Housing Authority in its Resolution of July 10, 1979 in
beyond its limits, causing it to overheat and damage its gaskets. Case No. 2167, as well as the Resolution of October 28, 1980
No wonder, then, it was a gasket Soledad Cac had to replace, at a denying petitioners' Motion for Reconsideration of said
cost chargeable to the appellants. No wonder, furthermore, the Resolution of May 2, 1980, are being assailed in this petition.
appellants' witness declared that even after the replacement of On March 28, 1965, petitioner Palay, Inc., through its President,
that one gasket, the engine still leaked oil after being torture- Albert Onstott executed in favor of private respondent, Nazario
tested. The integrity of the other engine gaskets might have been Dumpit, a Contract to Sell a parcel of Land (Lot No. 8, Block IV) of
impaired, too. Such was the burden placed on the engine. The the Crestview Heights Subdivision in Antipolo, Rizal, with an area
engine malfunctioned not necessarily because the engine, as of 1,165 square meters, - covered by TCT No. 90454, and owned
alleged by the appellants, had been a reconditioned, and not a by said corporation. The sale price was P23,300.00 with 9%
interest per annum, payable with a downpayment of P4,660.00

and monthly installments of P246.42 until fully paid. Paragraph 6
of the contract provided for automatic extrajudicial rescission
upon default in payment of any monthly installment after the
lapse of 90 days from the expiration of the grace period of one
month, without need of notice and with forfeiture of all
installments paid.
Respondent Dumpit paid the downpayment and several
installments amounting to P13,722.50. The last payment was
made on December 5, 1967 for installments up to September
1967.
On May 10, 1973, or almost six (6) years later, private respondent
wrote petitioner offering to update all his overdue accounts with
interest, and seeking its written consent to the assignment of his
rights to a certain Lourdes Dizon. He followed this up with
another letter dated June 20, 1973 reiterating the same request.
Replying petitioners informed respondent that his Contract to
Sell had long been rescinded pursuant to paragraph 6 of the
contract, and that the lot had already been resold.
Questioning the validity of the rescission of the contract,
respondent filed a letter complaint with the National Housing
Authority (NHA) for reconveyance with an altenative prayer for
refund (Case No. 2167). In a Resolution, dated July 10, 1979, the
NHA, finding the rescission void in the absence of either judicial
or notarial demand, ordered Palay, Inc. and Alberto Onstott in his
capacity as President of the corporation, jointly and severally, to
refund immediately to Nazario Dumpit the amount of P13,722.50
with 12% interest from the filing of the complaint on November
8, 1974. Petitioners' Motion for Reconsideration of said
Resolution was denied by the NHA in its Order dated October 23,
1979. 1
5
On the first issue, petitioners maintain that it was justified in
cancelling the contract to sell without prior notice or demand
upon respondent in view of paragraph 6 thereof which provides-
6. That in case the BUYER falls to satisfy any monthly installment
or any other payments herein agreed upon, the BUYER shall be
granted a month of grace within which to make the payment of
the t in arrears together with the one corresponding to the said
month of grace. -It shall be understood, however, that should the
month of grace herein granted to the BUYER expire, without the
payment & corresponding to both months having been satisfied,
an interest of ten (10%) per cent per annum shall be charged on
the amounts the BUYER should have paid; it is understood
further, that should a period of NINETY (90) DAYS elapse to begin
from the expiration of the month of grace hereinbefore
mentioned, and the BUYER shall not have paid all the amounts
that the BUYER should have paid with the corresponding interest
up to the date, the SELLER shall have the right to declare this
contract cancelled and of no effect without notice, and as a
consequence thereof, the SELLER may dispose of the lot/lots
covered by this Contract in favor of other persons, as if this
contract had never been entered into. In case of such
cancellation of this Contract, all the amounts which may have
been paid by the BUYER in accordance with the agreement,
together with all the improvements made on the premises, shall
be considered as rents paid for the use and occupation of the
above mentioned premises and for liquidated damages suffered
by virtue of the failure of the BUYER to fulfill his part of this
agreement : and the BUYER hereby renounces his right to
demand or reclaim the return of the same and further obligates
peacefully to vacate the premises and deliver the same to the
SELLER.

On appeal to the Office of the President, upon the allegation that Well settled is the rule, as held in previous jurisprudence, 2 that
the NHA Resolution was contrary to law (O.P. Case No. 1459), judicial action for the rescission of a contract is not necessary
respondent Presidential Executive Assistant, on May 2, 1980, where the contract provides that it may be revoked and
affirmed the Resolution of the NHA. Reconsideration sought by cancelled for violation of any of its terms and conditions.
petitioners was denied for lack of merit. Thus, the present However, even in the cited cases, there was at least a written
petition wherein the following issues are raised: notice sent to the defaulter informing him of the rescission. As
stressed in University of the Philippines vs. Walfrido de los
I Angeles 3 the act of a party in treating a contract as cancelled
Whether notice or demand is not mandatory under the should be made known to the other. We quote the pertinent
circumstances and, therefore, may be dispensed with by excerpt:
stipulation in a contract to sell.
II Of course, it must be understood that the act of a party in
Whether petitioners may be held liable for the refund of the treating a contract as cancelled or resolved in account of
installment payments made by respondent Nazario M. Dumpit. infractions by the other contracting party must be made known
III to the other and is always provisional being ever subject to
Whether the doctrine of piercing the veil of corporate fiction has scrutiny and review by the proper court. If the other party denies
application to the case at bar. that rescission is justified it is free to resort to judicial action in its
IV own behalf, and bring the matter to court.Then, should the court,
Whether respondent Presidential Executive Assistant committed after due hearing, decide that the resolution of the contract was
grave abuse of discretion in upholding the decision of respondent not warranted, the responsible party will be sentenced to
NHA holding petitioners solidarily liable for the refund of the damages; in the contrary case, the resolution will be affirmed,
installment payments made by respondent Nazario M. Dumpit and the consequent indemnity awarded to the party prejudiced.
thereby denying substantial justice to the petitioners, particularly In other words, the party who deems the contract violated may
petitioner Onstott
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only
We issued a Temporary Restraining Order on Feb 11, 1981
the final judgment of the corresponding court that will
enjoining the enforcement of the questioned Resolutions and of conclusively and finally settle whether the action taken was or
the Writ of Execution that had been issued on December 2, 1980.
was not correct in law. But the law definitely does not require
On October 28, 1981, we dismissed the petition but upon that the contracting party who believes itself injured must first
petitioners' motion, reconsidered the dismissal and gave due
file suit and wait for a judgment before taking extrajudicial steps
course to the petition on March 15, 1982. to protect its interest. Otherwise, the party injured by the other's
breach will have to passively sit and watch its damages
 6
accumulate during the pendency of the suit until the final Payments." which took effect on September 14, 1972, when it
judgment of rescission is rendered when the law itself requires specifically provided:
that he should exercise due diligence to minimize its own
Sec. 3(b) ... the actual cancellation of the contract shall take place
damages (Civil Code, Article 2203).
after thirty days from receipt by the buyer of the notice of
We see no conflict between this ruling and the previous cancellation or the demand for rescission of the contract by a
jurisprudence of this Court invoked by respondent declaring that notarial act and upon full payment of the cash surrender value to
judicial action is necessary for the resolution of a reciprocal the buyer. (Emphasis supplied).
obligation (Ocejo Perez & Co., vs. International Banking Corp., 37
Phil. 631; Republic vs. Hospital de San Juan De Dios, et al., 84 Phil The contention that private respondent had waived his right to
be notified under paragraph 6 of the contract is neither
820) since in every case where the extrajudicial resolution is
contested only the final award of the court of competent meritorious because it was a contract of adhesion, a standard
form of petitioner corporation, and private respondent had no
jurisdiction can conclusively settle whether the resolution was
proper or not. It is in this sense that judicial action win be freedom to stipulate. A waiver must be certain and unequivocal,
and intelligently made; such waiver follows only where liberty of
necessary, as without it, the extrajudicial resolution will remain
contestable and subject to judicial invalidation unless attack choice has been fully accorded. 9 Moreover, it is a matter of
public policy to protect buyers of real estate on installment
thereon should become barred by acquiescense, estoppel or
payments against onerous and oppressive conditions. Waiver of
prescription.
notice is one such onerous and oppressive condition to buyers of
Fears have been expressed that a stipulation providing for a real estate on installment payments.
unilateral rescission in case of breach of contract may render
Regarding the second issue on refund of the installment
nugatory the general rule requiring judicial action (v. Footnote,
Padilla Civil Law, Civil Code Anno., 1967 ed. Vol. IV, page 140) but, payments made by private respondent. Article 1385 of the Civil
Code provides:
as already observed, in case of abuse or error by the rescinder
the other party is not barred from questioning in court such ART. 1385. Rescission creates the obligation to return the things
abuse or error, the practical effect of the stipulation being merely which were the object of the contract, together with their fruits,
to transfer to the defaulter the initiative of instituting suit, and the price with its interest; consequently, it can be carried out
instead of the rescinder (Emphasis supplied). only when he who demands rescission can return whatever he
may be obliged to restore.
Of similar import is the ruling in Nera vs. Vacante 4 , reading:
Neither sham rescission take place when the things which are the
A stipulation entitling one party to take possession of the land
object of the contract are legally in the possession of third
and building if the other party violates the contract does not ex
persons who did not act in bad faith.
propio vigore confer upon the former the right to take possession
thereof if objected to without judicial intervention and In this case, indemnity for damages may be demanded from the
determination. person causing the loss.
This was reiterated in Zulueta vs. Mariano 5 where we held that As a consequence of the resolution by petitioners, rights to the
extrajudicial rescission has legal effect where the other party lot should be restored to private respondent or the same should
does not oppose it.6 Where it is objected to, a judicial be replaced by another acceptable lot. However, considering that
determination of the issue is still necessary. the property had already been sold to a third person and there is
no evidence on record that other lots are still available, private
In other words, resolution of reciprocal contracts may be made
respondent is entitled to the refund of installments paid plus
extrajudicially unless successfully impugned in Court. If the
interest at the legal rate of 12% computed from the date of the
debtor impugns the declaration, it shall be subject to judicial
institution of the action. 10 It would be most inequitable if
determination. 7
petitioners were to be allowed to retain private respondent's
In this case, private respondent has denied that rescission is payments and at the same time appropriate the proceeds of the
justified and has resorted to judicial action. It is now for the second sale to another.
Court to determine whether resolution of the contract by
We come now to the third and fourth issues regarding the
petitioners was warranted.
personal liability of petitioner Onstott who was made jointly and
We hold that resolution by petitioners of the contract was severally liable with petitioner corporation for refund to private
ineffective and inoperative against private respondent for lack of respondent of the total amount the latter had paid to petitioner
notice of resolution, as held in the U.P. vs. Angeles case, supra company. It is basic that a corporation is invested by law with a
personality separate and distinct from those of the persons
Petitioner relies on Torralba vs. De los Angeles 8 where it was composing it as wen as from that of any other legal entity to
held that "there was no contract to rescind in court because from
which it may be related. 11 As a general rule, a corporation may
the moment the petitioner defaulted in the timely payment of not be made to answer for acts or liabilities of its stockholders or
the installments, the contract between the parties was
those of the legal entities to which it may be connected and vice
deemed ipso facto rescinded." However, it should be noted that versa. However, the veil of corporate fiction may be pierced
even in that case notice in writing was made to the vendee of the
when it is used as a shield to further an end subversive of
cancellation and annulment of the contract although the contract justice 12 ; or for purposes that could not have been intended by
entitled the seller to immediate repossessing of the land upon
the law that created it 13 ; or to defeat public convenience,
default by the buyer. justify wrong, protect fraud, or defend crime. 14 ; or to
The indispensability of notice of cancellation to the buyer was to perpetuate fraud or confuse legitimate issues 15 ; or to
be later underscored in Republic Act No. 6551 entitled "An Act to circumvent the law or perpetuate deception 16; or as an alter
Provide Protection to Buyers of Real Estate on Installment
 7
ego, adjunct or business conduit for the sole benefit of the On November 25, 1986, NIDC transferred all its rights, title and
stockholders. 17 interest in PHILSECO to the Philippine National Bank (PNB). Such
interests were subsequently transferred to the National
We find no badges of fraud on petitioners' part. They had literally
Government pursuant to Administrative Order No. 14. On
relied, albeit mistakenly, on paragraph 6 (supra) of its contract December 8, 1986, President Corazon C. Aquino issued
with private respondent when it rescinded the contract to sell
Proclamation No. 50 establishing the Committee on Privatization
extrajudicially and had sold it to a third person. (COP) and the Asset Privatization Trust (APT) to take title to, and
In this case, petitioner Onstott was made liable because he was possession of, conserve, manage and dispose of non-performing
then the President of the corporation and he a to be the assets of the National Government. Thereafter, on February 27,
controlling stockholder. No sufficient proof exists on record that 1987, a trust agreement was entered into between the National
said petitioner used the corporation to defraud private Government and the APT wherein the latter was named the
respondent. He cannot, therefore, be made personally liable just trustee of the National Government's share in PHILSECO. In 1989,
because he "appears to be the controlling stockholder". Mere as a result of a quasi-reorganization of PHILSECO to settle its
ownership by a single stockholder or by another corporation is huge obligations to PNB, the National Government's
not of itself sufficient ground for disregarding the separate shareholdings in PHILSECO increased to 97.41% thereby reducing
corporate personality. 18 In this respect then, a modification of KAWASAKI's shareholdings to 2.59%.
the Resolution under review is called for. In the interest of the national economy and the government, the
WHEREFORE, the questioned Resolution of respondent public COP and the APT deemed it best to sell the National
official, dated May 2, 1980, is hereby modified. Petitioner Palay, Government's share in PHILSECO to private entities. After a series
Inc. is directed to refund to respondent Nazario M. Dumpit the of negotiations between the APT and KAWASAKI, they agreed
amount of P13,722.50, with interest at twelve (12%) percent per that the latter's right of first refusal under the JVA be
annum from November 8, 1974, the date of the filing of the "exchanged" for the right to top by five percent (5%) the highest
Complaint. The temporary Restraining Order heretofore issued is bid for the said shares. They further agreed that KAWASAKI
hereby lifted. No costs. SO ORDERED. would be entitled to name a company in which it was a
stockholder, which could exercise the right to top. On September
SPECIAL FIRST DIVISION 7, 1990, KAWASAKI informed APT that Philyards Holdings, Inc.
G.R. No. 124293 January 31, 2005 (PHI)1 would exercise its right to top.
J.G. SUMMIT HOLDINGS, INC., petitioner,
vs. At the pre-bidding conference held on September 18, 1993,
COURT OF APPEALS; COMMITTEE ON PRIVATIZATION, its Chairman and interested bidders were given copies of the JVA between NIDC
Members; ASSET PRIVATIZATION TRUST; and PHILYARDS HOLDINGS, and KAWASAKI, and of the Asset Specific Bidding Rules (ASBR)
INC., respondents. drafted for the National Government's 87.6% equity share in
RESOLUTION PHILSECO. The provisions of the ASBR were explained to the
PUNO, J.: interested bidders who were notified that the bidding would be
held on December 2, 1993. A portion of the ASBR reads:
For resolution before this Court are two motions filed by the
petitioner, J.G. Summit Holdings, Inc. for reconsideration of our 1.0 The subject of this Asset Privatization Trust (APT) sale through
Resolution dated September 24, 2003 and to elevate this case to public bidding is the National Government's equity in PHILSECO
the Court En Banc. The petitioner questions the Resolution which consisting of 896,869,942 shares of stock (representing 87.67%
reversed our Decision of November 20, 2000, which in turn of PHILSECO's outstanding capital stock), which will be sold as a
reversed and set aside a Decision of the Court of Appeals whole block in accordance with the rules herein enumerated.
promulgated on July 18, 1995. xxx xxx xxx
I. Facts 2.0 The highest bid, as well as the buyer, shall be subject to the
The undisputed facts of the case, as set forth in our Resolution of final approval of both the APT Board of Trustees and the
September 24, 2003, are as follows: Committee on Privatization (COP).

On January 27, 1997, the National Investment and Development
Corporation (NIDC), a government corporation, entered into a
Joint Venture Agreement (JVA) with Kawasaki Heavy Industries,
Ltd. of Kobe, Japan (KAWASAKI) for the construction, operation
and management of the Subic National Shipyard, Inc. (SNS) which
subsequently became the Philippine Shipyard and Engineering
Corporation (PHILSECO). Under the JVA, the NIDC and KAWASAKI
will contribute ₱330 million for the capitalization of PHILSECO in
the proportion of 60%-40% respectively. One of its salient
features is the grant to the parties of the right of first
refusal should either of them decide to sell, assign or transfer its
interest in the joint venture, viz:
1.4 Neither party shall sell, transfer or assign all or any part of its
interest in SNS [PHILSECO] to any third party without giving the
other under the same terms the right of first refusal. This
provision shall not apply if the transferee is a corporation owned
or controlled by the GOVERNMENT or by a KAWASAKI affiliate.
2.1 APT reserves the right in its sole discretion, to reject any or all
bids.
3.0 This public bidding shall be on an Indicative Price Bidding
basis. The Indicative price set for the National Government's
87.67% equity in PHILSECO is PESOS: ONE BILLION THREE
HUNDRED MILLION (₱1,300,000,000.00).
xxx xxx xxx
6.0 The highest qualified bid will be submitted to the APT Board
of Trustees at its regular meeting following the bidding, for the
purpose of determining whether or not it should be endorsed by
the APT Board of Trustees to the COP, and the latter approves the
same. The APT shall advise Kawasaki Heavy Industries, Inc.
and/or its nominee, [PHILYARDS] Holdings, Inc., that the highest
bid is acceptable to the National Government. Kawasaki Heavy
Industries, Inc. and/or [PHILYARDS] Holdings, Inc. shall then have
a period of thirty (30) calendar days from the date of receipt of
 8
such advice from APT within which to exercise their "Option to On February 2, 1994, petitioner was notified that PHI had fully
Top the Highest Bid" by offering a bid equivalent to the highest paid the balance of the purchase price of the subject bidding. On
bid plus five (5%) percent thereof. February 7, 1994, the APT notified petitioner that PHI had
exercised its option to top the highest bid and that the COP had
6.1 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] approved the same on January 6, 1994. On February 24, 1994,
Holdings, Inc. exercise their "Option to Top the Highest Bid," they
the APT and PHI executed a Stock Purchase Agreement.
shall so notify the APT about such exercise of their option and Consequently, petitioner filed with this Court a Petition for
deposit with APT the amount equivalent to ten percent (10%) of
Mandamus under G.R. No. 114057. On May 11, 1994, said
the highest bid plus five percent (5%) thereof within the thirty petition was referred to the Court of Appeals. On July 18, 1995,
(30)-day period mentioned in paragraph 6.0 above. APT will then
the Court of Appeals denied the same for lack of merit. It ruled
serve notice upon Kawasaki Heavy Industries, Inc. and/or that the petition for mandamus was not the proper remedy to
[PHILYARDS] Holdings, Inc. declaring them as the preferred
question the constitutionality or legality of the right of first
bidder and they shall have a period of ninety (90) days from the refusal and the right to top that was exercised by KAWASAKI/PHI,
receipt of the APT's notice within which to pay the balance of
and that the matter must be brought "by the proper party in the
their bid price. proper forum at the proper time and threshed out in a full blown
6.2 Should Kawasaki Heavy Industries, Inc. and/or [PHILYARDS] trial." The Court of Appeals further ruled that the right of first
Holdings, Inc. fail to exercise their "Option to Top the Highest refusal and the right to top are prima facie legal and that the
Bid" within the thirty (30)-day period, APT will declare the petitioner, "by participating in the public bidding, with full
highest bidder as the winning bidder. knowledge of the right to top granted to KAWASAKI/[PHILYARDS]
is…estopped from questioning the validity of the award given to
xxx xxx xxx [PHILYARDS] after the latter exercised the right to top and had
paid in full the purchase price of the subject shares, pursuant to
12.0 The bidder shall be solely responsible for examining with
the ASBR." Petitioner filed a Motion for Reconsideration of said
appropriate care these rules, the official bid forms, including any
Decision which was denied on March 15, 1996. Petitioner thus
addenda or amendments thereto issued during the bidding
filed a Petition for Certiorari with this Court alleging grave abuse
period. The bidder shall likewise be responsible for informing
of discretion on the part of the appellate court.
itself with respect to any and all conditions concerning the
PHILSECO Shares which may, in any manner, affect the bidder's On November 20, 2000, this Court rendered x x x [a] Decision
proposal. Failure on the part of the bidder to so examine and ruling among others that the Court of Appeals erred when it
inform itself shall be its sole risk and no relief for error or dismissed the petition on the sole ground of the impropriety of
omission will be given by APT or COP. . . . the special civil action of mandamus because the petition was
also one of certiorari. It further ruled that a shipyard like
At the public bidding on the said date, petitioner J.G. Summit
PHILSECO is a public utility whose capitalization must be sixty
Holdings, Inc.2 submitted a bid of Two Billion and Thirty Million
percent (60%) Filipino-owned. Consequently, the right to top
Pesos (₱2,030,000,000.00) with an acknowledgment of
granted to KAWASAKI under the Asset Specific Bidding Rules
KAWASAKI/[PHILYARDS'] right to top, viz:
(ASBR) drafted for the sale of the 87.67% equity of the National
4. I/We understand that the Committee on Privatization (COP) Government in PHILSECO is illegal — not only because it violates
has up to thirty (30) days to act on APT's recommendation based the rules on competitive bidding — but more so, because it
on the result of this bidding. Should the COP approve the highest allows foreign corporations to own more than 40% equity in the
bid, APT shall advise Kawasaki Heavy Industries, Inc. and/or its shipyard. It also held that "although the petitioner had the
nominee, [PHILYARDS] Holdings, Inc. that the highest bid is opportunity to examine the ASBR before it participated in the
acceptable to the National Government. Kawasaki Heavy bidding, it cannot be estopped from questioning the
Industries, Inc. and/or [PHILYARDS] Holdings, Inc. shall then have unconstitutional, illegal and inequitable provisions thereof."
a period of thirty (30) calendar days from the date of receipt of Thus, this Court voided the transfer of the national government's
such advice from APT within which to exercise their "Option to 87.67% share in PHILSECO to Philyard[s] Holdings, Inc., and
Top the Highest Bid" by offering a bid equivalent to the highest upheld the right of JG Summit, as the highest bidder, to take title
bid plus five (5%) percent thereof. to the said shares, viz:

As petitioner was declared the highest bidder, the COP approved WHEREFORE, the instant petition for review on certiorari is
the sale on December 3, 1993 "subject to the right of Kawasaki GRANTED. The assailed Decision and Resolution of the Court of
Heavy Industries, Inc./[PHILYARDS] Holdings, Inc. to top JGSMI's Appeals are REVERSED and SET ASIDE. Petitioner is ordered to
bid by 5% as specified in the bidding rules." pay to APT its bid price of Two Billion Thirty Million Pesos
(₱2,030,000,000.00), less its bid deposit plus interests upon the
On December 29, 1993, petitioner informed APT that it was finality of this Decision. In turn, APT is ordered to:
protesting the offer of PHI to top its bid on the grounds that: (a)
the KAWASAKI/PHI consortium composed of KAWASAKI, (a) accept the said amount of ₱2,030,000,000.00 less bid deposit
[PHILYARDS], Mitsui, Keppel, SM Group, ICTSI and Insular Life and interests from petitioner;
violated the ASBR because the last four (4) companies were the
(b) execute a Stock Purchase Agreement with petitioner;
losing bidders thereby circumventing the law and prejudicing the
weak winning bidder; (b) only KAWASAKI could exercise the right (c) cause the issuance in favor of petitioner of the certificates of
to top; (c) giving the same option to top to PHI constituted stocks representing 87.6% of PHILSECO's total capitalization;
unwarranted benefit to a third party; (d) no right of first refusal
can be exercised in a public bidding or auction sale; and (e) the (d) return to private respondent PHGI the amount of Two Billion
JG Summit consortium was not estopped from questioning the One Hundred Thirty-One Million Five Hundred Thousand Pesos
proceedings. (₱2,131,500,000.00); and
 9
(e) cause the cancellation of the stock certificates issued to PHI. placed in the agenda of the Court and noted by it in a formal
resolution dated November 28, 2001.12
SO ORDERED.
Opposing J.G. Summit’s motion to elevate the case en banc,
In separate Motions for Reconsideration, respondents
PHILYARDS points out the petitioner’s inconsistency in
submit[ted] three basic issues for x x x resolution: (1) Whether previously opposing PHILYARDS’ Motion to Refer the Case to the
PHILSECO is a public utility; (2) Whether under the 1977 JVA,
Court En Banc. PHILYARDS contends that J.G. Summit should now
KAWASAKI can exercise its right of first refusal only up to 40% of be estopped from asking that the case be referred to the
the total capitalization of PHILSECO; and (3) Whether the right to
Court en banc. PHILYARDS further contends that the Supreme
top granted to KAWASAKI violates the principles of competitive Court en banc is not an appellate court to which decisions or
bidding.3 (citations omitted)
resolutions of its divisions may be appealed citing Supreme Court
In a Resolution dated September 24, 2003, this Court ruled in Circular No. 2-89 dated February 7, 1989.13 PHILYARDS also
favor of the respondents. On the first issue, we held that alleges that there is no novel question of law involved in the
Philippine Shipyard and Engineering Corporation (PHILSECO) is present case as the assailed Resolution was based on well-settled
not a public utility, as by nature, a shipyard is not a public jurisprudence. Likewise, PHILYARDS stresses that the Resolution
utility4 and that no law declares a shipyard to be a public was merely an outcome of the motions for reconsideration filed
utility.5 On the second issue, we found nothing in the 1977 Joint by it and the COP and APT and is "consistent with the inherent
Venture Agreement (JVA) which prevents Kawasaki Heavy power of courts to ‘amend and control its process and orders so
Industries, Ltd. of Kobe, Japan (KAWASAKI) from acquiring more as to make them conformable to law and justice.’ (Rule 135, sec.
than 40% of PHILSECO’s total capitalization.6 On the final issue, 5)"14 Private respondent belittles the petitioner’s allegations
we held that the right to top granted to KAWASAKI in exchange regarding the change in ponente and the alleged executive
for its right of first refusal did not violate the principles of interference as shown by former Secretary of Finance Jose Isidro
competitive bidding.7 Camacho’s memorandum dated November 5, 2001 arguing that
these do not justify a referral of the present case to the Court en
On October 20, 2003, the petitioner filed a Motion for banc.
Reconsideration8 and a Motion to Elevate This Case to the
Court En Banc.9 Public respondents Committee on Privatization In insisting that its Motion to Elevate This Case to the Court En
(COP) and Asset Privatization Trust (APT), and private respondent Banc should be granted, J.G. Summit further argued that: its
Philyards Holdings, Inc. (PHILYARDS) filed their Comments on J.G. Opposition to the Office of the Solicitor General’s Motion to
Summit Holdings, Inc.’s (JG Summit’s) Motion for Reconsideration Refer is different from its own Motion to Elevate; different
and Motion to Elevate This Case to the Court En Banc on January grounds are invoked by the two motions; there was unwarranted
29, 2004 and February 3, 2004, respectively. "executive interference"; and the change in ponente is merely
noted in asserting that this case should be decided by the
II. Issues Court en banc.15
Based on the foregoing, the relevant issues to resolve to end this We find no merit in petitioner’s contention that the propriety of
litigation are the following: the bidding process involved in the present case has been
confused with the policy issue of the fate of the shipping industry
1. Whether there are sufficient bases to elevate the case at bar to
which, petitioner maintains, has never been an issue that is
the Court en banc.
determinative of this case. The Court’s Resolution of September
2. Whether the motion for reconsideration raises any new matter 24, 2003 reveals a clear and definitive ruling on the propriety of
or cogent reason to warrant a reconsideration of this Court’s the bidding process. In discussing whether the right to top
Resolution of September 24, 2003. granted to KAWASAKI in exchange for its right of first refusal
violates the principles of competitive bidding, we made an
Motion to Elevate this Case to the exhaustive discourse on the rules and principles of public bidding
Court En Banc and whether they were complied with in the case at bar.16This
Court categorically ruled on the petitioner’s argument that
The petitioner prays for the elevation of the case to the Court en PHILSECO, as a shipyard, is a public utility which should maintain
banc on the following grounds: a 60%-40% Filipino-foreign equity ratio, as it was a pivotal issue.
In doing so, we recognized the impact of our ruling on the
1. The main issue of the propriety of the bidding process involved
shipbuilding industry which was beyond avoidance.17
in the present case has been confused with the policy issue of
the supposed fate of the shipping industry which has never been We reject petitioner’s argument that the present case may be
an issue that is determinative of this case.10 considered under the Supreme Court Resolution dated February
23, 1984 which included among en banc cases those involving a
2. The present case may be considered under the Supreme Court
novel question of law and those where a doctrine or principle
Resolution dated February 23, 1984 which included among en
laid down by the court en banc or in division may be modified or
banc cases those involving a novel question of law and those
reversed. The case was resolved based on basic principles of the
where a doctrine or principle laid down by the Court en banc or
right of first refusal in commercial law and estoppel in civil law.
in division may be modified or reversed.11
Contractual obligations arising from rights of first refusal are not
3. There was clear executive interference in the judicial functions new in this jurisdiction and have been recognized in numerous
of the Court when the Honorable Jose Isidro Camacho, Secretary cases.18 Estoppel is too known a civil law concept to require an
of Finance, forwarded to Chief Justice Davide, a memorandum elongated discussion. Fundamental principles on public bidding
dated November 5, 2001, attaching a copy of the Foreign were likewise used to resolve the issues raised by the petitioner.
Chambers Report dated October 17, 2001, which matter was To be sure, petitioner leans on the right to top in a public bidding
in arguing that the case at bar involves a novel issue. We are not
 10
swayed. The right to top was merely a condition or a reservation discretion in deciding on how best to privatize the government’s
made in the bidding rules which was fully disclosed to all bidding shares in PHILSECO. It was not a whimsical or arbitrary condition
parties. In Bureau Veritas, represented by Theodor H. plucked from the ether and inserted in the bidding rules but a
Hunermann v. Office of the President, et al., 19 we dealt with this condition which the APT approved as the best way the
conditionality, viz: government could comply with its contractual obligations to
KAWASAKI under the JVA and its mandate of getting the most
x x x It must be stressed, as held in the case of A.C. Esguerra & advantageous deal for the government. The right to top had its
Sons v. Aytona, et al., (L-18751, 28 April 1962, 4 SCRA 1245), that
history in the mutual right of first refusal in the JVA and was
in an "invitation to bid, there is a condition imposed upon the reached by agreement of the government and KAWASAKI.
bidders to the effect that the bidding shall be subject to the right
of the government to reject any and all bids subject to its Further, there is no "executive interference" in the functions of
discretion. In the case at bar, the government has made its this Court by the mere filing of a memorandum by Secretary of
choice and unless an unfairness or injustice is shown, the losing Finance Jose Isidro Camacho. The memorandum was merely
bidders have no cause to complain nor right to dispute that "noted" to acknowledge its filing. It had no further legal
choice. This is a well-settled doctrine in this jurisdiction and significance. Notably too, the assailed Resolution dated
elsewhere." September 24, 2003 was decided unanimously by the Special
First Division in favor of the respondents.
The discretion to accept or reject a bid and award contracts is
vested in the Government agencies entrusted with that function. Again, we emphasize that a decision or resolution of a Division is
The discretion given to the authorities on this matter is of such that of the Supreme Court20 and the Court en banc is not an
wide latitude that the Courts will not interfere therewith, unless appellate court to which decisions or resolutions of a Division
it is apparent that it is used as a shield to a fraudulent award may be appealed.21
(Jalandoni v. NARRA, 108 Phil. 486 [1960]). x x x The exercise of
For all the foregoing reasons, we find no basis to elevate this case
this discretion is a policy decision that necessitates prior inquiry,
investigation, comparison, evaluation, and deliberation. This task to the Court en banc.
can best be discharged by the Government agencies concerned, Motion for Reconsideration
not by the Courts. The role of the Courts is to ascertain whether
a branch or instrumentality of the Government has transgressed Three principal arguments were raised in the petitioner’s Motion
its constitutional boundaries. But the Courts will not interfere for Reconsideration. First, that a fair resolution of the case should
with executive or legislative discretion exercised within those be based on contract law, not on policy considerations; the
boundaries. Otherwise, it strays into the realm of policy decision- contracts do not authorize the right to top to be derived from the
making. right of first refusal.22 Second, that neither the right of first
refusal nor the right to top can be legally exercised by the
It is only upon a clear showing of grave abuse of discretion that consortium which is not the proper party granted such right
the Courts will set aside the award of a contract made by a under either the JVA or the Asset Specific Bidding Rules
government entity. Grave abuse of discretion implies a (ASBR).23 Third, that the maintenance of the 60%-40%
capricious, arbitrary and whimsical exercise of power (Filinvest relationship between the National Investment and Development
Credit Corp. v. Intermediate Appellate Court, No. 65935, 30 Corporation (NIDC) and KAWASAKI arises from contract and from
September 1988, 166 SCRA 155). The abuse of discretion must be the Constitution because PHILSECO is a landholding corporation
so patent and gross as to amount to an evasion of positive duty and need not be a public utility to be bound by the 60%-40%
or to a virtual refusal to perform a duty enjoined by law, as to act constitutional limitation.24
at all in contemplation of law, where the power is exercised in an
arbitrary and despotic manner by reason of passion or hostility On the other hand, private respondent PHILYARDS asserts that
(Litton Mills, Inc. v. Galleon Trader, Inc., et al[.], L-40867, 26 July J.G. Summit has not been able to show compelling reasons to
1988, 163 SCRA 489). warrant a reconsideration of the Decision of the
Court.25 PHILYARDS denies that the Decision is based mainly on
The facts in this case do not indicate any such grave abuse of policy considerations and points out that it is premised on
discretion on the part of public respondents when they awarded principles governing obligations and contracts and corporate law
the CISS contract to Respondent SGS. In the "Invitation to such as the rule requiring respect for contractual stipulations,
Prequalify and Bid" (Annex "C," supra), the CISS Committee made upholding rights of first refusal, and recognizing the assignable
an express reservation of the right of the Government to "reject nature of contracts rights.26 Also, the ruling that shipyards are
any or all bids or any part thereof or waive any defects contained not public utilities relies on established case law and
thereon and accept an offer most advantageous to the fundamental rules of statutory construction. PHILYARDS stresses
Government." It is a well-settled rule that where such reservation that KAWASAKI’s right of first refusal or even the right to top is
is made in an Invitation to Bid, the highest or lowest bidder, as not limited to the 40% equity of the latter.27 On the landholding
the case may be, is not entitled to an award as a matter of issue raised by J.G. Summit, PHILYARDS emphasizes that this is a
right (C & C Commercial Corp. v. Menor, L-28360, 27 January non-issue and even involves a question of fact. Even assuming
1983, 120 SCRA 112). Even the lowest Bid or any Bid may be that this Court can take cognizance of such question of fact even
rejected or, in the exercise of sound discretion, the award may be without the benefit of a trial, PHILYARDS opines that landholding
made to another than the lowest bidder (A.C. Esguerra & Sons v. by PHILSECO at the time of the bidding is irrelevant because what
Aytona, supra, citing 43 Am. Jur., 788). (emphases is essential is that ultimately a qualified entity would eventually
supplied)1awphi1.nét hold PHILSECO’s real estate properties.28 Further, given the
Like the condition in the Bureau Veritas case, the right to top was assignable nature of the right of first refusal, any applicable
nationality restrictions, including landholding limitations, would
a condition imposed by the government in the bidding rules
which was made known to all parties. It was a condition imposed not affect the right of first refusal itself, but only the manner of
its exercise.29 Also, PHILYARDS argues that if this Court takes
on all bidders equally, based on the APT’s exercise of its
 11
cognizance of J.G. Summit’s allegations of fact regarding 3. Fraud and bad faith attend the alleged conversion of an
PHILSECO’s landholding, it must also recognize PHILYARDS’ inexistent right of first refusal to the right to top.
assertions that PHILSECO’s landholdings were sold to another
a. The history behind the birth of the right to top shows fraud
corporation.30 As regards the right of first refusal, private
and bad faith.
respondent explains that KAWASAKI’s reduced shareholdings
(from 40% to 2.59%) did not translate to a deprivation or loss of b. The right of first refusal was, indeed, "effectively useless."
its contractually granted right of first refusal.31 Also, the bidding
was valid because PHILYARDS exercised the right to top and it 4. Petitioner is not legally estopped to challenge the right to top
was of no moment that losing bidders later joined PHILYARDS in in this case.
raising the purchase price.32
a. Estoppel is unavailing as it would stamp validity to an act that
In cadence with the private respondent PHILYARDS, public is prohibited by law or against public policy.
respondents COP and APT contend:
b. Deception was patent; the right to top was an attractive
1. The conversion of the right of first refusal into a right to top by nuisance.
5% does not violate any provision in the JVA between NIDC and
c. The 10% bid deposit was placed in escrow.
KAWASAKI.
J.G. Summit’s insistence that the right to top cannot be sourced
2. PHILSECO is not a public utility and therefore not governed by
from the right of first refusal is not new and we have already
the constitutional restriction on foreign ownership.
ruled on the issue in our Resolution of September 24, 2003. We
3. The petitioner is legally estopped from assailing the validity of upheld the mutual right of first refusal in the JVA.34 We also
the proceedings of the public bidding as it voluntarily submitted ruled that nothing in the JVA prevents KAWASAKI from acquiring
itself to the terms of the ASBR which included the provision on more than 40% of PHILSECO’s total capitalization.35 Likewise,
the right to top. nothing in the JVA or ASBR bars the conversion of the right of
first refusal to the right to top. In sum, nothing new and of
4. The right to top was exercised by PHILYARDS as the nominee of significance in the petitioner’s pleading warrants a
KAWASAKI and the fact that PHILYARDS formed a consortium to reconsideration of our ruling.
raise the required amount to exercise the right to top the highest
bid by 5% does not violate the JVA or the ASBR. Likewise, we already disposed of the argument that neither the
right of first refusal nor the right to top can legally be exercised
5. The 60%-40% Filipino-foreign constitutional requirement for by the consortium which is not the proper party granted such
the acquisition of lands does not apply to PHILSECO because as right under either the JVA or the ASBR. Thus, we held:
admitted by petitioner itself, PHILSECO no longer owns real
property. The fact that the losing bidder, Keppel Consortium (composed of
Keppel, SM Group, Insular Life Assurance, Mitsui and ICTSI), has
6. Petitioner’s motion to elevate the case to the Court en banc is joined PHILYARDS in the latter's effort to raise ₱2.131 billion
baseless and would only delay the termination of this case.33 necessary in exercising the right to top is not contrary to law,
public policy or public morals. There is nothing in the ASBR that
In a Consolidated Comment dated March 8, 2004, J.G. Summit
countered the arguments of the public and private respondents bars the losing bidders from joining either the winning bidder
(should the right to top is not exercised) or KAWASAKI/PHI
in this wise:
(should it exercise its right to top as it did), to raise the purchase
1. The award by the APT of 87.67% shares of PHILSECO to price. The petitioner did not allege, nor was it shown by
PHILYARDS with losing bidders through the exercise of a right to competent evidence, that the participation of the losing bidders
top, which is contrary to law and the constitution is null and void in the public bidding was done with fraudulent intent. Absent any
for being violative of substantive due process and the abuse of proof of fraud, the formation by [PHILYARDS] of a consortium is
right provision in the Civil Code. legitimate in a free enterprise system. The appellate court is thus
correct in holding the petitioner estopped from questioning the
a. The bidders[’] right to top was actually exercised by losing validity of the transfer of the National Government's shares in
bidders.
PHILSECO to respondent.36
b. The right to top or the right of first refusal cannot co-exist with Further, we see no inherent illegality on PHILYARDS’ act in
a genuine competitive bidding.
seeking funding from parties who were losing bidders. This is a
c. The benefits derived from the right to top were unwarranted. purely commercial decision over which the State should not
interfere absent any legal infirmity. It is emphasized that the case
2. The landholding issue has been a legitimate issue since the at bar involves the disposition of shares in a corporation which
start of this case but is shamelessly ignored by the respondents. the government sought to privatize. As such, the persons with
whom PHILYARDS desired to enter into business with in order to
a. The landholding issue is not a non-issue.
raise funds to purchase the shares are basically its business. This
b. The landholding issue does not pose questions of fact. is in contrast to a case involving a contract for the operation of or
construction of a government infrastructure where the identity
c. That PHILSECO owned land at the time that the right of first of the buyer/bidder or financier constitutes an important
refusal was agreed upon and at the time of the bidding are most consideration. In such cases, the government would have to take
relevant. utmost precaution to protect public interest by ensuring that the
d. Whether a shipyard is a public utility is not the core issue in parties with which it is contracting have the ability to
this case. satisfactorily construct or operate the infrastructure.
 12
On the landholding issue, J.G. Summit submits that since Section 2. All lands of the public domain, waters, minerals, coal,
PHILSECO is a landholding company, KAWASAKI could exercise its petroleum, and other mineral oils, all forces of potential energy,
right of first refusal only up to 40% of the shares of PHILSECO due fisheries, forests or timber, wildlife, flora and fauna, and other
to the constitutional prohibition on landholding by corporations natural resources are owned by the State. With the exception of
with more than 40% foreign-owned equity. It further argues that agricultural lands, all other natural resources shall not be
since KAWASAKI already held at least 40% equity in PHILSECO, alienated. The exploration, development, and utilization of
the right of first refusal was inutile and as such, could not natural resources shall be under the full control and supervision
subsequently be converted into the right to top. 37 Petitioner of the State. The State may directly undertake such activities, or
also asserts that, at present, PHILSECO continues to violate the it may enter into co-production, joint venture, or production-
constitutional provision on landholdings as its shares are more sharing agreements with Filipino citizens, or corporations or
than 40% foreign-owned.38 PHILYARDS admits that it may have associations at least sixty per centum of whose capital is owned
previously held land but had already divested such by such citizens. Such agreements may be for a period not
landholdings.39 It contends, however, that even if PHILSECO exceeding twenty-five years, renewable for not more than
owned land, this would not affect the right of first refusal but twenty-five years, and under such terms and conditions as may
only the exercise thereof. If the land is retained, the right of first be provided by law. In cases of water rights for irrigation, water
refusal, being a property right, could be assigned to a qualified supply, fisheries, or industrial uses other than the development
party. In the alternative, the land could be divested before the of water power, beneficial use may be the measure and limit of
exercise of the right of first refusal. In the case at bar, the grant.
respondents assert that since the right of first refusal was validly
xxx xxx xxx
converted into a right to top, which was exercised not by
KAWASAKI, but by PHILYARDS which is a Filipino corporation (i.e., Section 7. Save in cases of hereditary succession, no private lands
60% of its shares are owned by Filipinos), then there is no shall be transferred or conveyed except to individuals,
violation of the Constitution.40 At first, it would seem that corporations, or associations qualified to acquire or hold lands of
questions of fact beyond cognizance by this Court were involved the public domain.42(emphases supplied)
in the issue. However, the records show that PHILYARDS admits it
had owned land up until the time of the bidding.41 Hence, the The petitioner further argues that "an option to buy land is void
only issue is whether KAWASAKI had a valid right of first refusal in itself (Philippine Banking Corporation v. Lui She, 21 SCRA 52
over PHILSECO shares under the JVA considering that PHILSECO [1967]). The right of first refusal granted to KAWASAKI, a
owned land until the time of the bidding and KAWASAKI already Japanese corporation, is similarly void. Hence, the right to top,
held 40% of PHILSECO’s equity. sourced from the right of first refusal, is also void."43 Contrary to
the contention of petitioner, the case of Lui She did not that say
We uphold the validity of the mutual rights of first refusal under "an option to buy land is void in itself," for we ruled as follows:
the JVA between KAWASAKI and NIDC. First of all, the right of
first refusal is a property right of PHILSECO shareholders, x x x To be sure, a lease to an alien for a reasonable period is
KAWASAKI and NIDC, under the terms of their JVA. This right valid. So is an option giving an alien the right to buy real
allows them to purchase the shares of their co-shareholder property on condition that he is granted Philippine citizenship. As
before they are offered to a third party. The agreement of co- this Court said in Krivenko vs. Register of Deeds:
shareholders to mutually grant this right to each other, by itself,
[A]liens are not completely excluded by the Constitution from the
does not constitute a violation of the provisions of the
use of lands for residential purposes. Since their residence in the
Constitution limiting land ownership to Filipinos and Filipino
Philippines is temporary, they may be granted temporary rights
corporations. As PHILYARDS correctly puts it, if PHILSECO still
such as a lease contract which is not forbidden by the
owns land, the right of first refusal can be validly assigned to a
Constitution. Should they desire to remain here forever and
qualified Filipino entity in order to maintain the 60%-40% ratio.
share our fortunes and misfortunes, Filipino citizenship is not
This transfer, by itself, does not amount to a violation of the Anti-
impossible to acquire.
Dummy Laws, absent proof of any fraudulent intent. The transfer
could be made either to a nominee or such other party which the But if an alien is given not only a lease of, but also an option to
holder of the right of first refusal feels it can comfortably do buy, a piece of land, by virtue of which the Filipino owner cannot
business with. Alternatively, PHILSECO may divest of its sell or otherwise dispose of his property, this to last for 50 years,
landholdings, in which case KAWASAKI, in exercising its right of then it becomes clear that the arrangement is a virtual transfer of
first refusal, can exceed 40% of PHILSECO’s equity. In fact, it can ownership whereby the owner divests himself in stages not only
even be said that if the foreign shareholdings of a landholding of the right to enjoy the land (jus possidendi, jus utendi, jus
corporation exceeds 40%, it is not the foreign stockholders’ fruendi and jus abutendi) but also of the right to dispose of it (jus
ownership of the shares which is adversely affected but the disponendi) — rights the sum total of which make up ownership.
capacity of the corporation to own land – that is, the corporation It is just as if today the possession is transferred, tomorrow, the
becomes disqualified to own land. This finds support under the use, the next day, the disposition, and so on, until ultimately all
basic corporate law principle that the corporation and its the rights of which ownership is made up are consolidated in an
stockholders are separate juridical entities. In this vein, the right alien. And yet this is just exactly what the parties in this case did
of first refusal over shares pertains to the shareholders whereas within this pace of one year, with the result that Justina
the capacity to own land pertains to the corporation. Hence, the Santos'[s] ownership of her property was reduced to a hollow
fact that PHILSECO owns land cannot deprive stockholders of concept. If this can be done, then the Constitutional ban against
their right of first refusal. No law disqualifies a person from alien landholding in the Philippines, as announced in Krivenko vs.
purchasing shares in a landholding corporation even if the latter Register of Deeds, is indeed in grave peril.44 (emphases supplied;
will exceed the allowed foreign equity, what the law disqualifies Citations omitted)
is the corporation from owning land. This is the clear import of
the following provisions in the Constitution:
 13
In Lui She, the option to buy was invalidated because it the Court En Banc is likewise DENIED for lack of merit. SO
amounted to a virtual transfer of ownership as the owner could ORDERED.
not sell or dispose of his properties. The contract in Lui
She prohibited the owner of the land from selling, donating, B. PIERCING THE CORPORATE VEIL:
mortgaging, or encumbering the property during the 50-year
EN BANC
period of the option to buy. This is not so in the case at bar
G.R. No. L-23893 October 29, 1968
where the mutual right of first refusal in favor of NIDC and VILLA REY TRANSIT, INC., plaintiff-appellant,
KAWASAKI does not amount to a virtual transfer of land to a non- vs.
Filipino. In fact, the case at bar involves a right of first refusal EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and
over shares of stock while the Lui She case involves an option to PUBLIC SERVICE COMMISSION,defendants.
buy the land itself. As discussed earlier, there is a distinction EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO.,
between the shareholder’s ownership of shares and the INC., defendants-appellants.
corporation’s ownership of land arising from the separate PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-
appellant,
juridical personalities of the corporation and its shareholders.
vs.
We note that in its Motion for Reconsideration, J.G. Summit JOSE M. VILLARAMA, third-party defendant-appellee.
alleges that PHILSECO continues to violate the Constitution as its Chuidian Law Office for plaintiff-appellant.
foreign equity is above 40% and yet owns long-term leasehold Bengzon, Zarraga & Villegas for defendant-appellant / third-party
rights which are real rights.45It cites Article 415 of the Civil Code plaintiff-appellant.
which includes in the definition of immovable property, Laurea & Pison for third-party defendant-appellee.
"contracts for public works, and servitudes and other real rights
ANGELES, J.:
over immovable property."46 Any existing landholding, however,
is denied by PHILYARDS citing its recent financial This is a tri-party appeal from the decision of the Court of First
statements.47 First, these are questions of fact, the veracity of Instance of Manila, Civil Case No. 41845, declaring null and void
which would require introduction of evidence. The Court needs the sheriff's sale of two certificates of public convenience in favor
to validate these factual allegations based on competent and of defendant Eusebio E. Ferrer and the subsequent sale thereof
reliable evidence. As such, the Court cannot resolve the by the latter to defendant Pangasinan Transportation Co., Inc.;
questions they pose. Second, J.G. Summit misreads the declaring the plaintiff Villa Rey Transit, Inc., to be the lawful
provisions of the Constitution cited in its own pleadings, to wit: owner of the said certificates of public convenience; and ordering
the private defendants, jointly and severally, to pay to the
29.2 Petitioner has consistently pointed out in the past that
plaintiff, the sum of P5,000.00 as and for attorney's fees. The
private respondent is not a 60%-40% corporation, and this
case against the PSC was dismissed.
violates the Constitution x x x The violation continues to this day
because under the law, it continues to own real property… The rather ramified circumstances of the instant case can best be
understood by a chronological narration of the essential facts, to
xxx xxx xxx
wit:
32. To review the constitutional provisions involved, Section 14,
Prior to 1959, Jose M. Villarama was an operator of a bus
Article XIV of the 1973 Constitution (the JVA was signed in 1977),
transportation, under the business name of Villa Rey Transit,
provided:
pursuant to certificates of public convenience granted him by the
"Save in cases of hereditary succession, no private lands shall be Public Service Commission (PSC, for short) in Cases Nos. 44213
transferred or conveyed except to individuals, corporations, or and 104651, which authorized him to operate a total of thirty-
associations qualified to acquire or hold lands of the public two (32) units on various routes or lines from Pangasinan to
domain." Manila, and vice-versa. On January 8, 1959, he sold the
aforementioned two certificates of public convenience to the
32.1 This provision is the same as Section 7, Article XII of the Pangasinan Transportation Company, Inc. (otherwise known as
1987 Constitution. Pantranco), for P350,000.00 with the condition, among others,
that the seller (Villarama) "shall not for a period of 10 years from
32.2 Under the Public Land Act, corporations qualified to acquire
the date of this sale, apply for any TPU service identical or
or hold lands of the public domain are corporations at least 60%
competing with the buyer."
of which is owned by Filipino citizens (Sec. 22, Commonwealth
Act 141, as amended). (emphases supplied) Barely three months thereafter, or on March 6, 1959: a
corporation called Villa Rey Transit, Inc. (which shall be referred
As correctly observed by the public respondents, the prohibition
to hereafter as the Corporation) was organized with a capital
in the Constitution applies only to ownership of land.48 It does
stock of P500,000.00 divided into 5,000 shares of the par value of
not extend to immovable or real property as defined under
P100.00 each; P200,000.00 was the subscribed stock; Natividad
Article 415 of the Civil Code.Otherwise, we would have a strange
R. Villarama (wife of Jose M. Villarama) was one of the
situation where the ownership of immovable property such as
incorporators, and she subscribed for P1,000.00; the balance of
trees, plants and growing fruit attached to the land49 would be
P199,000.00 was subscribed by the brother and sister-in-law of
limited to Filipinos and Filipino corporations only.
Jose M. Villarama; of the subscribed capital stock, P105,000.00
III. was paid to the treasurer of the corporation, who was Natividad
R. Villarama.
WHEREFORE, in view of the foregoing, the petitioner’s Motion
for Reconsideration is DENIED WITH FINALITY and the decision In less than a month after its registration with the Securities and
appealed from is AFFIRMED. The Motion to Elevate This Case to 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
 14
Fernando, for the sum of P249,000.00, of which P100,000.00 was sale of the same by Ferrer to Pantranco, were valid and regular,
paid upon the signing of the contract; P50,000.00 was payable and vested unto Pantranco, a superior right thereto.
upon the final approval of the sale by the PSC; P49,500.00 one
Pantranco, on its part, filed a third-party complaint against Jose
year after the final approval of the sale; and the balance of
M. Villarama, alleging that Villarama and the Corporation, are
P50,000.00 "shall be paid by the BUYER to the different suppliers
one and the same; that Villarama and/or the Corporation was
of the SELLER."
disqualified from operating the two certificates in question by
The very same day that the aforementioned contract of sale was virtue of the aforementioned agreement between said Villarama
executed, the parties thereto immediately applied with the PSC and Pantranco, which stipulated that Villarama "shall not for a
for its approval, with a prayer for the issuance of a provisional period of 10 years from the date of this sale, apply for any TPU
authority in favor of the vendee Corporation to operate the service identical or competing with the buyer."
service therein involved.1 On May 19, 1959, the PSC granted the
Upon the joinder of the issues in both the complaint and third-
provisional permit prayed for, upon the condition that "it may be
party complaint, the case was tried, and thereafter decision was
modified or revoked by the Commission at any time, shall be
rendered in the terms, as above stated.
subject to whatever action that may be taken on the basic
application and shall be valid only during the pendency of said As stated at the beginning, all the parties involved have appealed
application." Before the PSC could take final action on said from the decision. They submitted a joint record on appeal.
application for approval of sale, however, the Sheriff of Manila,
on July 7, 1959, levied on two of the five certificates of public Pantranco disputes the correctness of the decision insofar as it
convenience involved therein, namely, those issued under PSC holds that Villa Rey Transit, Inc. (Corporation) is a distinct and
cases Nos. 59494 and 63780, pursuant to a writ of execution separate entity from Jose M. Villarama; that the restriction clause
issued by the Court of First Instance of Pangasinan in Civil Case in the contract of January 8, 1959 between Pantranco and
No. 13798, in favor of Eusebio Ferrer, plaintiff, judgment creditor, Villarama is null and void; that the Sheriff's sale of July 16, 1959,
against Valentin Fernando, defendant, judgment debtor. The is likewise null and void; and the failure to award damages in its
Sheriff made and entered the levy in the records of the PSC. On favor and against Villarama.
July 16, 1959, a public sale was conducted by the Sheriff of the
Ferrer, for his part, challenges the decision insofar as it holds that
said two certificates of public convenience. Ferrer was the
the sheriff's sale is null and void; and the sale of
highest bidder, and a certificate of sale was issued in his name.
the two certificates in question by Valentin Fernando to the
Thereafter, Ferrer sold the two certificates of public convenience Corporation, is valid. He also assails the award of P5,000.00 as
to Pantranco, and jointly submitted for approval their attorney's fees in favor of the Corporation, and the failure to
corresponding contract of sale to the PSC.2 Pantranco therein award moral damages to him as prayed for in his counterclaim.
prayed that it be authorized provisionally to operate the service
The Corporation, on the other hand, prays for a review of that
involved in the said two certificates.
portion of the decision awarding only P5,000.00 as attorney's
The applications for approval of sale, filed before the PSC, by fees, and insisting that it is entitled to an award of P100,000.00
Fernando and the Corporation, Case No. 124057, and that of by way of exemplary damages.
Ferrer and Pantranco, Case No. 126278, were scheduled for a
After a careful study of the facts obtaining in the case, the vital
joint hearing. In the meantime, to wit, on July 22, 1959, the PSC
issues to be resolved are: (1) Does the stipulation between
issued an order disposing that during the pendency of the cases
Villarama and Pantranco, as contained in the deed of sale, that
and before a final resolution on the aforesaid applications, the
the former "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE
Pantranco shall be the one to operate provisionally the service
DATE OF THIS SALE, APPLY FOR ANY TPU SERVICE IDENTICAL OR
under the twocertificates embraced in the contract between
COMPETING WITH THE BUYER," apply to new lines only or does it
Ferrer and Pantranco. The Corporation took issue with this
include existing lines?; (2) Assuming that said stipulation covers
particular ruling of the PSC and elevated the matter to the
all kinds of lines, is such stipulation valid and enforceable?; (3) In
Supreme Court,3 which decreed, after deliberation, that until the
the affirmative, that said stipulation is valid, did it bind the
issue on the ownership of the disputed certificates shall have
Corporation?
been finally settled by the proper court, the Corporation should
be the one to operate the lines provisionally. For convenience, We propose to discuss the foregoing issues by
starting with the last proposition.
On November 4, 1959, the Corporation filed in the Court of First
Instance of Manila, a complaint for the annulment of the sheriff's The evidence has disclosed that Villarama, albeit was not an
sale of the aforesaid two certificates of public convenience (PSC incorporator or stockholder of the Corporation, alleging that he
Cases Nos. 59494 and 63780) in favor of the defendant Ferrer, did not become such, because he did not have sufficient funds to
and the subsequent sale thereof by the latter to Pantranco, invest, his wife, however, was an incorporator with the least
against Ferrer, Pantranco and the PSC. The plaintiff Corporation subscribed number of shares, and was elected treasurer of the
prayed therein that all the orders of the PSC relative to the Corporation. The finances of the Corporation which, under all
parties' dispute over the said certificates be annulled. concepts in the law, are supposed to be under the control and
administration of the treasurer keeping them as trust fund for
In separate answers, the defendants Ferrer and Pantranco
the Corporation, were, nonetheless, manipulated and disbursed
averred that the plaintiff Corporation had no valid title to the
as if they were the private funds of Villarama, in such a way and
certificates in question because the contract pursuant to which it
extent that Villarama appeared to be the actual owner-treasurer
acquired them from Fernando was subject to a suspensive
of the business without regard to the rights of the stockholders.
condition — the approval of the PSC — which has not yet been
The following testimony of Villarama,4together with the other
fulfilled, and, therefore, the Sheriff's levy and the consequent
evidence on record, attests to that effect:
sale at public auction of the certificates referred to, as well as the
 15
Q. Doctor, I want to go back again to the incorporation of the stockholders. The said accountant, however, testified that he was
Villa Rey Transit, Inc. You heard the testimony presented here by not aware of any amount of money that had actually passed
the bank regarding the initial opening deposit of ONE HUNDRED hands among the parties involved,8 and actually the only money
FIVE THOUSAND PESOS, of which amount Eighty-Five Thousand of the corporation was the P105,000.00 covered by the deposit
Pesos was a check drawn by yourself personally. In the direct slip Exh. 23, of which as mentioned above, P85,000.00 was paid
examination you told the Court that the reason you drew a check by Villarama's personal check.
for Eighty-Five Thousand Pesos was because you and your wife,
Further, the evidence shows that when the Corporation was in its
or your wife, had spent the money of the stockholders given to
initial months of operation, Villarama purchased and paid with
her for incorporation. Will you please tell the Honorable Court if
his personal checks Ford trucks for the Corporation. Exhibits 20
you knew at the time your wife was spending the money to pay
and 21 disclose that the said purchases were paid by Philippine
debts, you personally knew she was spending the money of the
Bank of Commerce Checks Nos. 992618-B and 993621-B,
incorporators?
respectively. These checks have been sufficiently established by
A. You know my money and my wife's money are one. We Fausto Abad, Assistant Accountant of Manila Trading & Supply
never talk about those things. Co., from which the trucks were purchased9 and Aristedes
Q. Doctor, your answer then is that since your money and Solano, an employee of the Philippine Bank of Commerce,10as
your wife's money are one money and you did not know when having been drawn by Villarama.
your wife was paying debts with the incorporator's money?
Exhibits 6 to 19 and Exh. 22, which are photostatic copies of
A. Because sometimes she uses my money, and sometimes
the money given to her she gives to me and I deposit the money. ledger entries and vouchers showing that Villarama had co-
mingled his personal funds and transactions with those made in
Q. Actually, aside from your wife, you were also the custodian
the name of the Corporation, are very illuminating evidence.
of some of the incorporators here, in the beginning?
Villarama has assailed the admissibility of these exhibits,
A. Not necessarily, they give to my wife and when my wife
contending that no evidentiary value whatsoever should be given
hands to me I did not know it belonged to the incorporators.
to them since "they were merely photostatic copies of the
Q. It supposes then your wife gives you some of the money
originals, the best evidence being the originals themselves."
received by her in her capacity as treasurer of the corporation?
According to him, at the time Pantranco offered the said exhibits,
A. Maybe.
Q. What did you do with the money, deposit in a regular it was the most likely possessor of the originals thereof because
they were stolen from the files of the Corporation and only
account?
Pantranco was able to produce the alleged photostat copies
A. Deposit in my account.
thereof.
Q. Of all the money given to your wife, she did not receive any
check? Section 5 of Rule 130 of the Rules of Court provides for the
A. I do not remember. requisites for the admissibility of secondary evidence when the
Q. Is it usual for you, Doctor, to be given Fifty Thousand Pesos original is in the custody of the adverse party, thus: (1)
without even asking what is this? opponent's possession of the original; (2) reasonable notice to
xxx xxx xxx opponent to produce the original; (3) satisfactory proof of its
JUDGE: Reform the question. existence; and (4) failure or refusal of opponent to produce the
Q. The subscription of your brother-in-law, Mr. Reyes, is Fifty- original in court.11 Villarama has practically admitted the second
Two Thousand Pesos, did your wife give you Fifty-two Thousand and fourth requisites.12As to the third, he admitted their
Pesos? previous existence in the files of the Corporation and also that he
A. I have testified before that sometimes my wife gives me had seen some of them.13 Regarding the first element,
money and I do not know exactly for what. Villarama's theory is that since even at the time of the issuance
of the subpoena duces tecum, the originals were already missing,
The evidence further shows that the initial cash capitalization of therefore, the Corporation was no longer in possession of the
the corporation of P105,000.00 was mostly financed by same. However, it is not necessary for a party seeking to
Villarama. Of the P105,000.00 deposited in the First National City introduce secondary evidence to show that the original is in the
Bank of New York, representing the initial paid-up capital of the actual possession of his adversary. It is enough that the
Corporation, P85,000.00 was covered by Villarama's personal circumstances are such as to indicate that the writing is in his
check. The deposit slip for the said amount of P105,000.00 was possession or under his control. Neither is it required that the
admitted in evidence as Exh. 23, which shows on its face that party entitled to the custody of the instrument should, on being
P20,000.00 was paid in cash and P85,000.00 thereof was covered notified to produce it, admit having it in his possession.14 Hence,
by Check No. F-50271 of the First National City Bank of New York. secondary evidence is admissible where he denies having it in his
The testimonies of Alfonso Sancho5 and Joaquin Amansec,6 both possession. The party calling for such evidence may introduce a
employees of said bank, have proved that the drawer of the copy thereof as in the case of loss. For, among the exceptions to
check was Jose Villarama himself. the best evidence rule is "when the original has been lost,
destroyed, or cannot be produced in court."15 The originals of
Another witness, Celso Rivera, accountant of the Corporation,
the vouchers in question must be deemed to have been lost, as
testified that while in the books of the corporation there appears
even the Corporation admits such loss. Viewed upon this light,
an entry that the treasurer received P95,000.00 as second
there can be no doubt as to the admissibility in evidence of
installment of the paid-in subscriptions, and, subsequently, also
Exhibits 6 to 19 and 22.
P100,000.00 as the first installment of the offer for second
subscriptions worth P200,000.00 from the original subscribers, Taking account of the foregoing evidence, together with Celso
yet Villarama directed him (Rivera) to make vouchers liquidating Rivera's testimony,16 it would appear that: Villarama supplied
the sums.7 Thus, it was made to appear that the P95,000.00 was the organization expenses and the assets of the Corporation,
delivered to Villarama in payment for equipment purchased from such as trucks and equipment;17 there was no actual payment
him, and the P100,000.00 was loaned as advances to the
 16
by the original subscribers of the amounts of P95,000.00 and in the management and disposition of its funds, was so extensive
P100,000.00 as appearing in the books;18 Villarama made use of and intimate that it is impossible to segregate and identify which
the money of the Corporation and deposited them to his private money belonged to whom. The interference of Villarama in the
accounts;19 and the Corporation paid his personal accounts.20 complex affairs of the corporation, and particularly its finances,
are much too inconsistent with the ends and purposes of the
Villarama himself admitted that he mingled the corporate funds
Corporation law, which, precisely, seeks to separate personal
with his own money.21 He also admitted that gasoline purchases responsibilities from corporate undertakings. It is the very
of the Corporation were made in his name22 because "he had
essence of incorporation that the acts and conduct of the
existing account with Stanvac which was properly secured and he corporation be carried out in its own corporate name because it
wanted the Corporation to benefit from the rebates that he
has its own personality.
received."23
The doctrine that a corporation is a legal entity distinct and
The foregoing circumstances are strong persuasive evidence
separate from the members and stockholders who compose it is
showing that Villarama has been too much involved in the affairs recognized and respected in all cases which are within reason
of the Corporation to altogether negative the claim that he was
and the law.29 When the fiction is urged as a means of
only a part-time general manager. They show beyond doubt that perpetrating a fraud or an illegal act or as a vehicle for the
the Corporation is his alter ego.
evasion of an existing obligation, the circumvention of statutes,
It is significant that not a single one of the acts enumerated the achievement or perfection of a monopoly or generally the
above as proof of Villarama's oneness with the Corporation has perpetration of knavery or crime,30 the veil with which the law
been denied by him. On the contrary, he has admitted them with covers and isolates the corporation from the members or
offered excuses. stockholders who compose it will be lifted to allow for its
consideration merely as an aggregation of individuals.
Villarama has admitted, for instance, having paid P85,000.00 of
the initial capital of the Corporation with the lame excuse that Upon the foregoing considerations, We are of the opinion, and so
"his wife had requested him to reimburse the amount entrusted hold, that the preponderance of evidence have shown that the
to her by the incorporators and which she had used to pay the Villa Rey Transit, Inc. is an alter ego of Jose M. Villarama, and that
obligations of Dr. Villarama (her husband) incurred while he was the restrictive clause in the contract entered into by the latter
still the owner of Villa Rey Transit, a single proprietorship." But and Pantranco is also enforceable and binding against the said
with his admission that he had received P350,000.00 from Corporation. For the rule is that a seller or promisor may not
Pantranco for the sale of the two certificates and one unit,24 it make use of a corporate entity as a means of evading the
becomes difficult to accept Villarama's explanation that he and obligation of his covenant.31 Where the Corporation is
his wife, after consultation,25 spent the money of their relatives substantially the alter ego of the covenantor to the restrictive
(the stockholders) when they were supposed to have their own agreement, it can be enjoined from competing with the
money. Even if Pantranco paid the P350,000.00 in check to him, covenantee.32
as claimed, it could have been easy for Villarama to have The Corporation contends that even on the supposition that Villa
deposited said check in his account and issued his own check to
Rey Transit, Inc. and Villarama are one and the same, the
pay his obligations. And there is no evidence adduced that the restrictive clause in the contract between Villarama and
said amount of P350,000.00 was all spent or was insufficient to
Pantranco does not include the purchase of existing lines but it
settle his prior obligations in his business, and in the light of the only applies to application for the new lines. The clause in
stipulation in the deed of sale between Villarama and Pantranco
dispute reads thus:
that P50,000.00 of the selling price was earmarked for the
payments of accounts due to his creditors, the excuse appears (4) The SELLER shall not, for a period of ten (10) years from the
unbelievable. date of this sale apply for any TPU service identical or competing
with the BUYER. (Emphasis supplied)
On his having paid for purchases by the Corporation of trucks
from the Manila Trading & Supply Co. with his personal checks, As We read the disputed clause, it is evident from the context
his reason was that he was only sharing with the Corporation his thereof that the intention of the parties was to eliminate the
credit with some companies. And his main reason for mingling seller as a competitor of the buyer for ten years along the lines of
his funds with that of the Corporation and for the latter's paying operation covered by the certificates of public convenience
his private bills is that it would be more convenient that he kept subject of their transaction. The word "apply" as broadly used
the money to be used in paying the registration fees on time, and has for frame of reference, a service by the seller on lines or
since he had loaned money to the Corporation, this would be set routes that would compete with the buyer along the routes
off by the latter's paying his bills. Villarama admitted, however, acquired by the latter. In this jurisdiction, prior authorization is
that the corporate funds in his possession were not only for needed before anyone can operate a TPU service,33whether the
registration fees but for other important obligations which were service consists in a new line or an old one acquired from a
not specified.26 previous operator. The clear intention of the parties was to
prevent the seller from conducting any competitive line for 10
Indeed, while Villarama was not the Treasurer of the Corporation
years since, anyway, he has bound himself not to apply for
but was, allegedly, only a part-time manager,27 he admitted not authorization to operate along such lines for the duration of such
only having held the corporate money but that he advanced and
period.34
lent funds for the Corporation, and yet there was no Board
Resolution allowing it.28 If the prohibition is to be applied only to the acquisition of new
certificates of public convenience thru an application with the
Villarama's explanation on the matter of his involvement with the Public Service Commission, this would, in effect, allow the seller
corporate affairs of the Corporation only renders more credible
just the same to compete with the buyer as long as his authority
Pantranco's claim that his control over the corporation, especially to operate is only acquired thru transfer or sale from a previous
 17
operator, thus defeating the intention of the parties. For what contracting parties. If the contract is reasonably necessary to
would prevent the seller, under the circumstances, from having a protect the interest of the parties, it will be upheld. (Emphasis
representative or dummy apply in the latter's name and then supplied.)
later on transferring the same by sale to the seller? Since
Analyzing the characteristics of the questioned stipulation, We
stipulations in a contract is the law between the contracting
find that although it is in the nature of an agreement suppressing
parties,
competition, it is, however, merely ancillary or incidental to the
Every person must, in the exercise of his rights and in the main agreement which is that of sale. The suppression or
performance of his duties, act with justice, give everyone his due, restraint is only partial or limited: first, in scope, it refers only to
and observe honesty and good faith. (Art. 19, New Civil Code.) 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;
We are not impressed of Villarama's contention that the re- and third, with respect to situs or territory, the restraint is only
wording of the two previous drafts of the contract of sale
along the lines covered by the certificates sold. In view of these
between Villarama and Pantranco is significant in that as it now limitations, coupled with the consideration of P350,000.00 for
appears, the parties intended to effect the least restriction. We
just two certificates of public convenience, and considering,
are persuaded, after an examination of the supposed drafts, that furthermore, that the disputed stipulation is only incidental to a
the scope of the final stipulation, while not as long and prolix as
main agreement, the same is reasonable and it is not harmful nor
those in the drafts, is just as broad and comprehensive. At most, obnoxious to public service.38 It does not appear that the
it can be said that the re-wording was done merely for brevity
ultimate result of the clause or stipulation would be to leave
and simplicity. solely to Pantranco the right to operate along the lines in
The evident intention behind the restriction was to eliminate the question, thereby establishing monopoly or predominance
sellers as a competitor, and this must be, considering such factors approximating thereto. We believe the main purpose of the
as the good will35 that the seller had already gained from the restraint was to protect for a limited time the business of the
riding public and his adeptness and proficiency in the trade. On buyer.
this matter, Corbin, an authority on Contracts has this to say.36
Indeed, the evils of monopoly are farfetched here. There can be
When one buys the business of another as a going concern, he no danger of price controls or deterioration of the service
usually wishes to keep it going; he wishes to get the location, the because of the close supervision of the Public Service
building, the stock in trade, and the customers. He wishes to step Commission.39 This Court had stated long ago,40that "when one
into the seller's shoes and to enjoy the same business relations devotes his property to a use in which the public has an interest,
with other men. He is willing to pay much more if he can get the he virtually grants to the public an interest in that use and
"good will" of the business, meaning by this the good will of the submits it to such public use under reasonable rules and
customers, that they may continue to tread the old footpath to regulations to be fixed by the Public Utility Commission."
his door and maintain with him the business relations enjoyed by
Regarding that aspect of the clause that it is merely ancillary or
the seller. incidental to a lawful agreement, the underlying reason
... In order to be well assured of this, he obtains and pays for the sustaining its validity is well explained in 36 Am. Jur. 537-539, to
seller's promise not to reopen business in competition with the wit:
business sold.
... Numerous authorities hold that a covenant which is incidental
As to whether or not such a stipulation in restraint of trade is to the sale and transfer of a trade or business, and which
valid, our jurisprudence on the matter37says: purports to bind the seller not to engage in the same business in
competition with the purchaser, is lawful and enforceable. While
The law concerning contracts which tend to restrain business or such covenants are designed to prevent competition on the part
trade has gone through a long series of changes from time to of the seller, it is ordinarily neither their purpose nor effect to
time with the changing condition of trade and commerce. With stifle competition generally in the locality, nor to prevent it at all
trifling exceptions, said changes have been a continuous in a way or to an extent injurious to the public. The business in
development of a general rule. The early cases show plainly a the hands of the purchaser is carried on just as it was in the
disposition to avoid and annul all contract which prohibited or hands of the seller; the former merely takes the place of the
restrained any one from using a lawful trade "at any time or at latter; the commodities of the trade are as open to the public as
any place," as being against the benefit of the state. Later, they were before; the same competition exists as existed before;
however, the rule became well established that if the restraint there is the same employment furnished to others after as
was limited to "a certain time" and within "a certain place," such before; the profits of the business go as they did before to swell
contracts were valid and not "against the benefit of the state." the sum of public wealth; the public has the same opportunities
Later cases, and we think the rule is now well established, have of purchasing, if it is a mercantile business; and production is not
held that a contract in restraint of trade is valid providing there islessened if it is a manufacturing plant.
a limitation upon either time or place. A contract, however,
which restrains a man from entering into business or trade The reliance by the lower court on tile case of Red Line
without either a limitation as to time or place, will be held Transportation Co. v. Bachrach41 and finding that the stipulation
invalid. is illegal and void seems misplaced. In the said Red Line case, the
agreement therein sought to be enforced was virtually a division
The public welfare of course must always be considered and if it of territory between two operators, each company imposing
be not involved and the restraint upon one party is not greater upon itself an obligation not to operate in any territory covered
than protection to the other requires, contracts like the one we by the routes of the other. Restraints of this type, among
are discussing will be sustained. The general tendency, we common carriers have always been covered by the general rule
believe, of modern authority, is to make the test whether the invalidating agreements in restraint of trade. 42
restraint is reasonably necessary for the protection of the
 18
Neither are the other cases relied upon by the plaintiff-appellee encumber or lease its property, franchise, certificates, privileges,
applicable to the instant case. In Pampanga Bus Co., Inc. v. or rights or any part thereof, ...," the same section also provides:
Enriquez,43the undertaking of the applicant therein not to apply
... Provided, however, That nothing herein contained shall be
for the lifting of restrictions imposed on his certificates of public
construed to prevent the transaction from being negotiated or
convenience was not an ancillary or incidental agreement. The
completed before its approval or to prevent the sale, alienation,
restraint was the principal objective. On the other hand, in Red
or lease by any public service of any of its property in the
Line Transportation Co., Inc. v. Gonzaga,44 the restraint there in
ordinary course of its business.
question not to ask for extension of the line, or trips, or increase
of equipment — was not an agreement between the parties but It is clear, therefore, that the requisite approval of the PSC is not
a condition imposed in the certificate of public convenience a condition precedent for the validity and consummation of the
itself. sale.
Upon the foregoing considerations, Our conclusion is that the Anent the question of damages allegedly suffered by the parties,
stipulation prohibiting Villarama for a period of 10 years to each of the appellants has its or his own version to allege.
"apply" for TPU service along the lines covered by the certificates
of public convenience sold by him to Pantranco is valid and Villa Rey Transit, Inc. claims that by virtue of the "tortious acts"
reasonable. Having arrived at this conclusion, and considering of defendants (Pantranco and Ferrer) in acquiring the certificates
that the preponderance of the evidence have shown that Villa of public convenience in question, despite constructive and
Rey Transit, Inc. is itself the alter ego of Villarama, We hold, as actual knowledge on their part of a prior sale executed by
prayed for in Pantranco's third party complaint, that the said Fernando in favor of the said corporation, which necessitated the
Corporation should, until the expiration of the 1-year period latter to file the action to annul the sheriff's sale to Ferrer and
abovementioned, be enjoined from operating the line subject of the subsequent transfer to Pantranco, it is entitled to collect
the prohibition. actual and compensatory damages, and attorney's fees in the
amount of P25,000.00. The evidence on record, however, does
To avoid any misunderstanding, it is here to be emphasized that not clearly show that said defendants acted in bad faith in their
the 10-year prohibition upon Villarama is not against his acquisition of the certificates in question. They believed that
application for, or purchase of, certificates of public convenience, because the bill of sale has yet to be approved by the Public
but merely the operation of TPU along the lines covered by the Service Commission, the transaction was not a consummated
certificates sold by him to Pantranco. Consequently, the sale sale, and, therefore, the title to or ownership of the certificates
between Fernando and the Corporation is valid, such that the was still with the seller. The award by the lower court of
rightful ownership of the disputed certificates still belongs to the attorney's fees of P5,000.00 in favor of Villa Rey Transit, Inc. is,
plaintiff being the prior purchaser in good faith and for value therefore, without basis and should be set aside.
thereof. In view of the ancient rule of caveat emptor prevailing in
this jurisdiction, what was acquired by Ferrer in the sheriff's sale Eusebio Ferrer's charge that by reason of the filing of the action
was only the right which Fernando, judgment debtor, had in the to annul the sheriff's sale, he had suffered and should be
certificates of public convenience on the day of the sale.45 awarded moral, exemplary damages and attorney's fees, cannot
be entertained, in view of the conclusion herein reached that the
Accordingly, by the "Notice of Levy Upon Personalty" the sale by Fernando to the Corporation was valid.
Commissioner of Public Service was notified that "by virtue of an
Order of Execution issued by the Court of First Instance of Pantranco, on the other hand, justifies its claim for damages with
Pangasinan, the rights, interests, or participation which the the allegation that when it purchased ViIlarama's business for
defendant, VALENTIN A. FERNANDO — in the above entitled case P350,000.00, it intended to build up the traffic along the lines
may have in the following realty/personalty is attached or levied covered by the certificates but it was rot afforded an opportunity
upon, to wit: The rights, interests and participation on the to do so since barely three months had elapsed when the
Certificates of Public Convenience issued to Valentin A. Fernando, contract was violated by Villarama operating along the same lines
in Cases Nos. 59494, etc. ... Lines — Manila to Lingayen, in the name of Villa Rey Transit, Inc. It is further claimed by
Dagupan, etc. vice versa." Such notice of levy only shows that Pantranco that the underhanded manner in which Villarama
Ferrer, the vendee at auction of said certificates, merely stepped violated the contract is pertinent in establishing punitive or moral
into the shoes of the judgment debtor. Of the same principle is damages. Its contention as to the proper measure of damages is
the provision of Article 1544 of the Civil Code, that "If the same that it should be the purchase price of P350,000.00 that it paid to
thing should have been sold to different vendees, the ownership Villarama. While We are fully in accord with Pantranco's claim of
shall be transferred to the person who may have first taken entitlement to damages it suffered as a result of Villarama's
possession thereof in good faith, if it should be movable breach of his contract with it, the record does not sufficiently
property." supply the necessary evidentiary materials upon which to base
the award and there is need for further proceedings in the lower
There is no merit in Pantranco and Ferrer's theory that the sale of court to ascertain the proper amount.
the certificates of public convenience in question, between the
Corporation and Fernando, was not consummated, it being only PREMISES CONSIDERED, the judgment appealed from is hereby
a conditional sale subject to the suspensive condition of its modified as follows:
approval by the Public Service Commission. While section 20(g)
1. The sale of the two certificates of public convenience in
of the Public Service Act provides that "subject to established
question by Valentin Fernando to Villa Rey Transit, Inc. is
limitation and exceptions and saving provisions to the contrary, it
declared preferred over that made by the Sheriff at public
shall be unlawful for any public service or for the owner, lessee
auction of the aforesaid certificate of public convenience in favor
or operator thereof, without the approval and authorization of
of Eusebio Ferrer;
the Commission previously had ... to sell, alienate, mortgage,
 19
2. Reversed, insofar as it dismisses the third-party complaint filed The Articles of Incorporation of the Marvel Building Corporation
by Pangasinan Transportation Co. against Jose M. Villarama, is dated February 12, 1947 and according to it the capital stock is
holding that Villa Rey Transit, Inc. is an entity distinct and P2,000,000, of which P1,025,000 was (at the time of
separate from the personality of Jose M. Villarama, and insofar as incorporation) subscribed and paid for by the following
it awards the sum of P5,000.00 as attorney's fees in favor of Villa incorporators:
Rey Transit, Inc.;
Maria B. Castro 250 shares P 250,000.00
3. The case is remanded to the trial court for the reception of
evidence in consonance with the above findings as regards the Amado A. Yatco 100 " 100,000.00
amount of damages suffered by Pantranco; and
Santiago Tan 100 " 100,000.00
4. On equitable considerations, without costs. So ordered.
Jose T. Lopez 90 " 90,000.00
EN BANC
G.R. No. L-5081 February 24, 1954
Benita Lamagna 90 " 90,000.00
MARVEL BUILDING CORPORATION, ET AL., plaintiffs-appellees,
vs.
SATURNINO DAVID, in his capacity as Collector, Bureau of Internal C.S. Gonzales 80 " 80,000.00
Revenue, defendant-appellant.
Assistant Solicitor General Francisco Carreon for appellant. Maria Cristobal 70 " 70,000.00
Antonio Quirino and Rosendo J. Tansinsin for appellees.
Segundo Esguerra, Sr. 75 " 75,000.00
LABRADOR, J.:
Ramon Sangalang 70 " 70,000.00
This action was brought by plaintiffs as stockholders of the
Marvel Building Corporation to enjoin the defendant Collector of Maximo Cristobal 55 " 55,000.00
Internal Revenue from selling at public auction various properties
described in the complaint, including three parcels of land, with Antonio Cristobal 45 " 45,000.00
the buildings situated thereon, known as the Aguinaldo Building,
the Wise Building, and the Dewey Boulevard-Padre Faura P1,025,000.0
Mansion, all registered in the name of the said corporation. Said 0
properties were seized and distrained by defendant to collect war
profits taxes assessed against plaintiff Maria B. Castro (Exhibit B). Maria B Castro was elected President and Maximo Cristobal,
Plaintiffs allege that the said three properties (lands and Secretary-Treasurer (Exhibit A).
buildings) belong to Marvel Building Corporation and not to The Wise Building was purchased on September 4, 1946, the
Maria B. Castro, while the defendant claims that Maria B. Castro purchase being made in the name of Dolores Trinidad, wife of
is the true and sole owner of all the subscribed stock of the Amado A. Yatco (Exhibit V), and the Aguinaldo Building, on
Marvel Building Corporation, including those appearing to have January 17, 1947, in the name of Segundo Esguerra, Sr. (Exhibit
been subscribed and paid for by the other members, and M). Both building were purchased for P1,800,000, but as the
consequently said Maria B. Castro is also the true and exclusive corporation had only P1,025,000, the balance of the purchase
owner of the properties seized. The trial court held that the price was obtained as loans from the Insular Life Assurance Co.,
evidence, which is mostly circumstantial, fails to show to its Ltd. and the Philippine Guaranty Co., Inc. (Exhibit C).
satisfaction that Maria B. Castro is the true owner of all the stock
certificates of the corporation, because the evidence is Of the incorporators of the Marvel Building Corporation, Maximo
susceptible of two interpretations and an interpretation may not Cristobal and Antonio Cristobal are half-brothers of Maria B.
be made which would deprive one of the property without due Castro, Maria Cristobal is a half-sister, and Segundo Esguerra, Sr.
process of law. a brother-in-law, husband of Maria Cristobal, Maria B. Castro's
half-sister. Maximo B. Cristobal did not file any income tax
It appears that on September 15, 1950, the Secretary of Finance, returns before the year 1946, except for three years 1939 and
upon consideration of the report of a special committee assigned 1940, but in these years he was exempted from the tax. He has
to study the war profits tax case of Mrs. Maria B. Castro, not filed any war profits tax return (Exhibit 54). Antonio Cristobal,
recommended the collection of P3,593,950.78 as war profits Segundo Esguerra, Sr. and Jose T. Lopez did not file any income
taxes for the latter, and on September 22, 1953 the President tax returns for the years prior to 1946, and neither did they file
instructed the Collector that steps be taken to collect the same any war profits tax returns (Exhibit 52). Maria Cristobal filed
(Exhibits 114, 114-A to 114-D). Pursuant thereto various income tax returns for the year 1929 to 1942, but they were
properties, including the three above mentioned, were seized by exempt from the tax (Exhibit 53). Benita A. Lamagna did not file
the Collector of Internal Revenue on October 31, 1950. On any income tax returns prior to 1945, except for 1942 which was
November 13, 1950, the original complaint in this case was filed. exempt. She did not file any was profits tax (Exhibit 55). Ramon
After trial, the Court of First Instance of Manila rendered M. Sangalang did not file income tax returns up to 1945 except
judgment ordering the release of the properties mentioned, and for the years 1936, 1937, 1938, 1939 and 1940. He has not filed
enjoined the Collector of Internal Revenue from selling the same. any war profits tax return (Exhibit 57). Amada A. Yatco did not file
The Collector of Internal Revenue has appealed to this Court income tax returns prior to 1945, except for the years 1937,
against the judgment. 1938, 1939, 1941 and 1942, but these were exempt. He did not
The following facts are not disputed, or are satisfactorily proved file any war profits tax return (Exhibit 58).
by the evidence: Antonio Cristobal's income in 1946 is P15,630, and in 1947,
P4,550 (Exhibits 59-60); Maximo B. Cristobal's income in 1946 is
P19,759.10, in 1947, P9,773.47 (Exhibits 61-62); Segundo

Esquerra's income in 1946 is P5,500, in 1947, P7,754.32 (Exhibits
63-64); Jose T. Lopez's income in 1946 is P20,785, in 1947,
P14,302.77 (Exhibits 69-70); Benita A. Lamagna's income in 1945
is P1,559, in 1946, P6,463.36, in 1947, P6,189.79 and her
husband's income in 1947 is P10,825.53 (Exhibits 65-68); Ramon
M. Sangalang's income in 1945 is P5,500, in 1946, P18,300.00
(Exhibits 71-72); Santiago Tan's income in 1945 is P456, in 1947 is
P9,167.95, and in 1947, P7,620.11 (Exhibits 73-75); and Amado
Yatco's income in 1945 is P12,600, in 1946, P23,960, and in 1947,
P11,160 (Exhibits 76-78).
In October, 1945 Maria B. Castro, Nicasio Yatco, Maxima Cristobal
de Esquerra, Maria Cristobal Lopez and Maximo Cristobal
organized the Maria B. Castro, Inc. with capital stock of P100,000,
of which Maria B. Castro subscribed for P99,600 and all others
for P100 each. This was increased in 1950 to P500,000 and Maria
B. Castro subscribed P76,000 and the others P1,000 each (Exhibit
126).
It does not appear that the stockholders or the board of directors
of the Marvel Building Corporation have ever held a business
meeting, for no books thereof or minutes meeting were ever
mentioned by the officers thereof or presented by them at the
trial. The by-laws of the corporation, if any had ever been
approved, has not been presented. Neither does it appear that
any report of the affairs of the corporation has been made, either
of its transactions or accounts.
From the book of accounts of the corporation, advances to the
Marvel Building Corporation of P125,000 were made by Maria B.
Castro in 1947, P102,916.05 in 1948 and P102,916.05 in 1948,
and P160,910.96 in 1949 (Exhibit 118).
The main issue involved in these proceedings is: Is Maria B.
Castro the owner of all the shares of stocks of Marvel Building
Corporation and the other stockholders mere dummies of hers?
The most important evidence presented by the Collector of
Internal Revenue to prove his claim that Maria B. Castro is the
sole and exclusive owner of the shares of stock of the Marvel
Building Corporation is supposed endorsement in blank of the
shares of stock issued in the name of the other incorporators,
and the possession thereof by Maria B. Castro. The existence of
said endorsed certificates was testified to by witnesses Felipe
Aquino, internal revenue examiner, Antonio Mariano, examiner,
and Crispin Llamado, Under Secretary of Finance, who declared
as follows: Towards the end of the year 1948 and about the
beginning of the year 1949, while Aquino and Mariano were
examining the books and papers were furnished by its secretary,
Maximo Cristobal, they came across an envelope containing
eleven stock certificates, bound together by an Acco fastener,
which (certificates) corresponded in number and in amount on
their face to the subscriptions of the stockholders that all the
certificates, except that in the name of Maria B. Castro, were
endorsed in the bank by the subscribers; that as the two revenue
agents could not agree what to do with the certificates, Aquino
brought them to Under-Secretary of Finance Llamado, who
thereupon suggested that photostatic copies thereof be taken;
that this was done, and the photostatic copies taken are (Exhibits
4, 5, 6, 7, 8, 9, 10, 11, 12 and 13; and in that July, 1950, copy-cat
copies of the above photostats were taken, and said copy-cat
copies are Exhibits 40-49.
Julio Llamado, bookkeeper of the Marvel Building Corporation
from 1947 to May, 1948, also testified that he was the one who
had prepared the original certificates, putting therein the
number of shares in words in handprint; that the originals were
20
given to him by Maria B. Castro for comparison with the articles
of incorporation; that they were not yet signed by the President
and by the Secretary-Treasurer when he had the certificates; and
that after the checking he returned all of them to Mrs. Castro. He
recognized the photostats, Exhibit 4 to 13 as photostats of the
said originals. He also declared that he also prepared a set of
stock certificates, similar to the certificates which were copied in
the photostats, the number of shares, and the date issue, and
that the certificates he had prepared are Exhibits H, H-1 to H-7
and J (Exhibits 30-38). This set of certificates was made by him
first and the set of which photostats were taken, a few days later.
The plaintiffs offered a half-hearted denial of the existence of the
endorsed blank certificates, Maximo Cristobal, secretary of the
corporation, saying that no investigation was ever made by
Aquino and Mariano in which said certificates were discovered by
the latter. They, however, vigorously attack the credibility of the
witnesses for the defendant, imputing to the Llamados, enmity
against Maria B. Castro, and to Aquino and Mariano, a very
doubtful conduct in not divulging the existence of the certificates
either Lobrin, Chief Income Tax Examiner, or to the Collector of
Internal Revenue, both their immediate chiefs. Reliance is also
placed on a certificate, Exhibit W, wherein Aquino and others
declare that the certificates (Exhibits 30 to 38, or H, H-1 to H-7
and J) were regular and were not endorsed when the same were
examined. In connection with this certificate, Exhibit W, we note
that it states that the certificates examined were Exhibits 30 to
38, the existence or character of which are not disputed. But the
statement contains nothing to the effect that the above
certificates were the only one existence, according to their
knowledge. Again the certificate was issued for an examination
on September 1949, not by Aquino and Mariano at the end of
1948 or the beginning of 1949. The certificate, therefore, neither
denies the existence of the endorsed certificates, nor that Aquino
and Mariano had made an examination of the papers of the
corporation at the end of the year 1948. It ca not, therefore,
discredit the testimonies of the defendant's witnesses.
As to the supposed enmity of the Llamados towards the plaintiff
Maria B. Castro, we note that, supposing that there really was
such enmity, it does not appear that it was of such magnitude or
force as could have induced the Llamados and Maria B. Castro
were close friends way back in 1947 and up to 1949; but that at
the time of the trial the friendship had been marred by
misunderstandings. We believe that in 1948 and 1949 the
Llamados were trusted friends of Maria B. Castro, and this
explains why they had knowledge of her secret transactions. The
younger Llamado even made advances for the hand of Maria B.
Castro's daughter, and this at the time when as a bookkeeper he
was entrusted with checking up the certificates of stock. When
the older Llamado kept secret the existence of the endorsed
certificates, the friendship between the two families was yet
intact; hence, the existence of the endorsed certificates must
have been kept to himself by the older Llamado. All the above
circumstances reinforce our belief that the Llamados had
personal knowledge of the facts they testify to, and the existence
of this knowledge in turn renders improbable plaintiffs' claim
that their testimonies were biased.
Attempt was also made by the plaintiffs to show by expert
evidence that the endorsement could have been superimposed,
i.e., that the signatures made on other papers and these were
pasted and thereafter the documents photographed. Judicial
experience is to the effect that the expert witnesses can always
be obtained for both sides of an issue, most likely because expert
witnesses are no longer impermeable to the influence of fees (II

Wigmore, Sec. 563(2), p. 646). And if parties are capable of
paying fees, expert opinion should be received with caution. In
the case at bar, the opinion on the supposed superimposition
was merely a possibility, and we note various circumstances
which proved that the signatures were not superimposed and
corroborate defendant's claim that they were genuine. In the first
place,, the printed endorsement contains a very heavy line at the
bottom for the signature of the endorsee. This line in almost all
the endorsements is as clear as the printed letters above it, and
at the points where the letters of the signature extend down and
transversed it (the line), there is no indication that the line is
covered by a superimposed paper. Again in these places both the
signatures and the lines are clear and distinct where they cross
one another. Had there been superimpositions the above
features could not have been possible. In the second place, Maria
B. Castro admitted having signed 25 stock certificates, but only
eleven were issued (t. s. n., p. 662). No explanation is given by
her why she had to sign as many as 25 forms when there were
only eleven subscribers and eleven forms to be filed. This
circumstances corroborate the young Llamado's declaration that
two sets of certificates had been prepared. The nineteen issue
must be Exhibits H, H-1 to H-7 and J, or Nos. 30 to 38, and the
stock certificates endorsed whose photostatic copies are Exhibits
4 to 13. It is to be remembered also, that it is a common practice
among unscrupulous merchants to carry two sets of books, one
set for themselves and another to be shown to tax collectors.
This practice could not have been unknown to Maria B. Castro,
who apparently had been able to evade the payment of her war
profits taxes. These circumstances, coupled with the testimony of
Julio Llamado that two sets of certificates were given to him for
checking, show to an impartial mind the existence of the set of
certificates endorsed in blank, thus confirming the testimonies of
the defendant's witnesses, Aquino, Mariano and Crispin Llamado,
and thus discrediting the obviously partial testimony of the
expert presented by plaintiffs. The genuineness of the signatures
on the endorsements is not disputed. How could the defendant
have secured these genuine signatures? Plaintiffs offer no
explanation for this, although they do not question them. It
follows that the genuine signatures must have been made on the
stock certificates themselves.
Next in importance among the evidence submitted by the
defendant collector to prove his contention that Maria B. Castro
is the sole owner of the shares of stock of the Marvel Building
Corporation, is the fact that the other stockholders did not have
incomes in such amounts, during the time of the organization of
the corporation in 1947, or immediately thereto, as to enable
them to pay in full for their supposed subscriptions. This fact is
proved by their income tax returns, or the absence thereof. Let
us take Amado A. Yatco as an example. Before 1945 his returns
were exempt from the tax, in 1945 he had P12,600 and in 1946,
P23,000. He has four children. How could he have paid P100,000
in 1945 and 1946? Santiago Tan who also contributed P100,000
had no appreciable income before 1946, and this year an income
of only P9,167.95. Jose T. Lopez also did not file any income tax
returns before 1940 and 1946 he had an income of only P20,785,
whereas he is supposed to have subscribed P90,000 worth of
stock early in 1947. Benita Lamagna had no returns either up to
1945, except in 1942, which was exempt and in 1945 she had an
income of P1,550 and in 1946, P6,463.36. In the same situation
are all the others, and besides, brothers and sisters and brother-
in-law of Maria B. Castro. On the other hand, Maria B. Castro had
been found to have made enormous gains or profits in her
business such that the taxes thereon were assessed at around
P3,000,000. There was, therefore, a prima facie case out by the
21
defendant collector that Maria B. Castro had furnished (& all the
money that the Marvel Building Corporation had.
In order the meet the above evidence only three of the plaintiffs
testified, namely, Maximo Cristobal, the corporation's secretary,
who made the general assertion on the witness stand that the
other stockholders paid for their shares in full, Maria B. Castro,
who stated that payments for the subscription were made to her,
and C.S. Gonzales, who admitted that Maria B. Castro, paid for
his subscription. After a careful study of the above testimonies,
however, we find them subject to various objections. Maximo
Cristobal declared that he issued provincial receipts for the
subscriptions supposedly paid to him in 1946; but none of the
supposed receipts were presented. If the subscriptions were
really received by him, big as the amounts were, he would have
been able to tell specifically, by dates and in fix amounts, when
and how the payments were made. The general assertion of
alleged payments, without the concrete days and amounts of
payments, are, according to our experience, positive
identifications of untruthfulness, for when a witness testified to a
fact that actually occurs, the act is concretely stated and no
generalization is made.
With respect to Maria B. Castro's testimony, we find it to be as
untruthful as that of Cristobal. She declared that payments of the
subscriptions took place between July and December, 1946, and
that first payments were first deposited by her in the National
City Bank of New York. A study of her account in said bank
(Exhibit 82), however, fails to show the alleged deposit of the
subscriptions during the year 1946 (See Exhibits 83-112). This
fact completely belies her assertion. As to the testimony of C.S.
Gonzales that Maria B. Castro advanced his subscription, there is
nothing in the evidence to corroborate it, and the circumstances
show otherwise. If he had really been a stockholder and Maria B.
Castro advanced his subscription, the agreement between him
and Castro should have been put in writing, the amount
advanced being quite considerable (P80,000), and it appearing
further that Gonzales is no close relative or confidant of Castro.
Lastly, it is significant that the plaintiffs, the supposed
subscribers, who should have come to court to assert that they
actually paid for their subscriptions, and are not mere dummies,
did not do so. They could not have afforded such a costly
indifference, valued at from P70,000 to P100,000 each, if they
were not actual dummies. This failure on their part to take the
witness stand to deny or refute the charge that they were mere
dummies is to us of utmost significance. What could have been
easier to disprove the charge that they were dummies, than for
them to come to court and show their receipts and testify on the
payments they have paid on their subscriptions? This they,
however refused to do so. They had it in their power to rebut the
charges, but they chose to keep silent. The non-production of
evidence that would naturally have been produced by an honest
and therefore fearless claimant permits the inference that its
tenor is unfavorable to the party's cause (II Wigmore, Sec. 285,
p.162). A party's silence to adverse testimony is equivalent to an
admission of its truth (Ibid, Sec. 289, p. 175).
Our consideration of the evidence submitted on both sides leads
us to a conclusion exactly opposite that arrived at by the trial
court. In general the evidence offered by the plaintiffs is
testimonial and direct evidence, easy of fabrication; that offered
by defendant, documentary and circumstantial, not only difficult
of fabrication but in most cases found in the possession of
plaintiffs. There is very little room for choice as between the two.
The circumstantial evidence is not only convincing; it is

conclusive. The existence of endorsed certificates, discovered by
the internal revenue agents between 1948 and 1949 in the
possession of the Secretary-Treasurer, the fact that twenty-five
certificates were signed by the president of the corporation, for
no justifiable reason, the fact that two sets of certificates were
issued, the undisputed fact that Maria B. Castro had made
enormous profits and, therefore, had a motive to hide them to
evade the payment of taxes, the fact that the other subscribers
had no incomes of sufficient magnitude to justify their big
subscriptions, the fact that the subscriptions were not receipted
for and deposited by the treasurer in the name of the
corporation but were kept by Maria B. Castro herself, the fact
that the stockholders or the directors never appeared to have
ever met to discuss the business of the corporation, the fact that
Maria B. Castro advanced big sums of money to the corporation
without any previous arrangement or accounting, and the fact
that the books of accounts were kept as if they belonged to
Maria B. Castro alone — these facts are of patent and potent
significance. What are their necessary implications? Maria B.
Castro would not have asked them to endorse their stock
certificates, or be keeping these in her possession, if they were
really the owners. They never would have consented that Maria
B. Castro keep the funds without receipts or accounting, nor that
she manages the business without their knowledge or
concurrence, were they owners of the stocks in their own rights.
Each and every one of the facts all set forth above, in the same
manner, is inconsistent with the claim that the stockholders,
other than Maria B. Castro, own their shares in their own right.
On the other hand, each and every one of them, and all of them,
can point to no other conclusion than that Maria B. Castro was
the sole and exclusive owner of the shares and that they were
only her dummies.
In our opinion, the facts and circumstances duly set forth above,
all of which have been proved to our satisfaction, prove
conclusively and beyond reasonable doubt (section 89, Rule 123
of the Rules of Court and section 42 of the Provisional law for the
application of the Penal Code) that Maria B. Castro is the sole
and exclusive owner of all the shares of stock of the Marvel
Building Corporation and that the other partners are her
dummies.
Wherefore, the judgment appealed from should be, as it hereby
is, reversed and the action filed by plaintiffs-appellees, dismissed, On October 16, 1986, the NLRC Research and Information
with costs against plaintiffs-appellees. So ordered.
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.
22
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
judgment1 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
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.
 23
The said writ had not been enforced by the special sheriff On the other hand, the General Information Sheet of HPPI
because, as stated in his progress report, dated November 2, revealed the following:
1989: 1. Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
1. All the employees inside petitioner's premises at 355 Maysan Antonio W. Lim P 400,000.00
Road, Valenzuela, Metro Manila, claimed that they were
Elisa C. Lim 57,700.00
employees of Hydro Pipes Philippines, Inc. (HPPI) and not by AWL Trading 455,000.00
respondent;
Dennis S. Cuyegkeng 40,100.00
2. Levy was made upon personal properties he found in the Teodulo R. Dino 100.00
premises; Virgilio O. Casino 100.00
2. Board of Directors
3. Security guards with high-powered guns prevented him from Antonio W. Lim Chairman
removing the properties he had levied upon.4 Elisa C. Lim Member
Dennis S. Cuyegkeng Member
The said special sheriff recommended that a "break-open order"
Virgilio O. Casino Member
be issued to enable him to enter petitioner's premises so that he
Teodulo R. Dino Member
could proceed with the public auction sale of the aforesaid
3. Corporate Officers
personal properties on November 7, 1989.
Antonio W. Lim President
On November 6, 1989, a certain Dennis Cuyegkeng filed a third- Dennis S. Cuyegkeng Assistant to the President
party claim with the Labor Arbiter alleging that the properties Elisa C. Lim Treasurer
sought to be levied upon by the sheriff were owned by Hydro Virgilio O. Casino Corporate Secretary
(Phils.), Inc. (HPPI) of which he is the Vice-President. 4. Principal Office
355 Maysan Road, Valenzuela, Metro Manila.6
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 On February 1, 1990, HPPI filed an Opposition to private
incorporator/stockholders. They also alleged that petitioner respondents' motion for issuance of a break-open order,
temporarily suspended its business operations in order to evade contending that HPPI is a corporation which is separate and
its legal obligations to them and that private respondents were distinct from petitioner. HPPI also alleged that the two
willing to post an indemnity bond to answer for any damages corporations are engaged in two different kinds of
which petitioner and HPPI may suffer because of the issuance of businesses, i.e., HPPI is a manufacturing firm while petitioner
the break-open order. was then engaged in construction.

In support of their claim against HPPI, private respondents On March 2, 1990, the Labor Arbiter issued an Order which
presented duly certified copies of the General Informations denied private respondents' motion for break-open order.
Sheet, dated May 15, 1987, submitted by petitioner to the
Private respondents then appealed to the NLRC. On April 23,
Securities Exchange Commission (SEC) and the General
1992, the NLRC set aside the order of the Labor Arbiter, issued a
Information Sheet, dated May 25, 1987, submitted by HPPI to the
break-open order and directed private respondents to file a
Securities and Exchange Commission.
bond. Thereafter, it directed the sheriff to proceed with the
The General Information Sheet submitted by the petitioner auction sale of the properties already levied upon. It dismissed
revealed the following: the third-party claim for lack of merit.

1. Breakdown of Subscribed Capital Petitioner moved for reconsideration but the motion was denied
Name of Stockholder Amount Subscribed by the NLRC in a Resolution, dated December 3, 1992.
HPPI P 6,999,500.00
Hence, the resort to the present petition.
Antonio W. Lim 2,900,000.00
Dennis S. Cuyegkeng 300.00 Petitioner alleges that the NLRC committed grave abuse of
Elisa C. Lim 100,000.00 discretion when it ordered the execution of its decision despite a
Teodulo R. Dino 100.00 third-party claim on the levied property. Petitioner further
Virgilio O. Casino 100.00 contends, that the doctrine of piercing the corporate veil should
2. Board of Directors not have been applied, in this case, in the absence of any
Antonio W. Lim Chairman showing that it created HPPI in order to evade its liability to
Dennis S. Cuyegkeng Member private respondents. It also contends that HPPI is engaged in the
Elisa C. Lim Member manufacture and sale of steel, concrete and iron pipes, a
Teodulo R. Dino Member business which is distinct and separate from petitioner's
Virgilio O. Casino Member construction business. Hence, it is of no consequence that
3. Corporate Officers petitioner and HPPI shared the same premises, the same
Antonio W. Lim President President and the same set of officers and subscribers.7
Dennis S. Cuyegkeng Assistant to the President
Elisa O. Lim Treasurer We find petitioner's contention to be unmeritorious.
Virgilio O. Casino Corporate Secretary
It is a fundamental principle of corporation law that a
4. Principal Office corporation is an entity separate and distinct from its
355 Maysan Road
stockholders and from other corporations to which it may be
Valenzuela, Metro Manila.5 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
24
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.

The conditions under which the juridical entity may be Furthermore, the NLRC stated that:
disregarded vary according to the peculiar facts and
Both information sheets were filed by the same Virgilio O. Casiño
circumstances of each case. No hard and fast rule can be
as the corporate secretary of both corporations. It would also not
accurately laid down, but certainly, there are some probative
be amiss to note that both corporations had the same president,
factors of identity that will justify the application of the doctrine
the same board of directors, the same corporate officers, and
of piercing the corporate veil, to wit:
substantially the same subscribers.
1. Stock ownership by one or common ownership of both
From the foregoing, it appears that, among other things, the
corporations.
respondent (herein petitioner) and the third-party claimant
2. Identity of directors and officers. shared the same address and/or premises. Under this
circumstances, (sic) it cannot be said that the property levied
3. The manner of keeping corporate books and records. upon by the sheriff were not of respondents.16
4. Methods of conducting the business.13
Clearly, petitioner ceased its business operations in order to
The SEC en banc explained the "instrumentality rule" which the evade the payment to private respondents of back wages and to
courts have applied in disregarding the separate juridical bar their reinstatement to their former positions. HPPI is
personality of corporations as follows: obviously a business conduit of petitioner corporation and its
emergence was skillfully orchestrated to avoid the financial
Where one corporation is so organized and controlled and its liability that already attached to petitioner corporation.
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 The facts in this case are analogous to Claparols v. Court of
"instrumentality" may be disregarded. The control necessary to Industrial Relations, 17 where we had the occasion to rule:
invoke the rule is not majority or even complete stock control but
Respondent court's findings that indeed the Claparols Steel and
such domination of instances, policies and practices that the Nail Plant, which ceased operation of June 30, 1957, was
controlled corporation has, so to speak, no separate mind, will or
SUCCEEDED by the Claparols Steel Corporation effective the next
existence of its own, and is but a conduit for its principal. It must day, July 1, 1957, up to December 7, 1962, when the latter finally
be kept in mind that the control must be shown to have been
ceased to operate, were not disputed by petitioner. It is very
exercised at the time the acts complained of took place. clear that the latter corporation was a continuation and
Moreover, the control and breach of duty must proximately
successor of the first entity . . . . Both predecessors and successor
cause the injury or unjust loss for which the complaint is made. were owned and controlled by petitioner Eduardo Claparols and
The test in determining the applicability of the doctrine of there was no break in the succession and continuity of the same
piercing the veil of corporate fiction is as follows: business. This "avoiding-the-liability" scheme is very patent,
considering that 90% of the subscribed shares of stock of the
1. Control, not mere majority or complete stock control, but Claparols Steel Corporation (the second corporation) was owned
complete domination, not only of finances but of policy and by respondent . . . Claparols himself, and all the assets of the
business practice in respect to the transaction attacked so that dissolved Claparols Steel and Nail plant were turned over to the
the corporate entity as to this transaction had at the time no emerging Claparols Steel Corporation.
separate mind, will or existence of its own;
It is very obvious that the second corporation seeks the
2. Such control must have been used by the defendant to commit protective shield of a corporate fiction whose veil in the present
fraud or wrong, to perpetuate the violation of a statutory or case could, and should, be pierced as it was deliberately and
other positive legal duty or dishonest and unjust act in maliciously designed to evade its financial obligation to its
contravention of plaintiff's legal rights; and employees.
3. The aforesaid control and breach of duty must proximately In view of the failure of the sheriff, in the case at bar, to effect a
cause the injury or unjust loss complained of. levy upon the property subject of the execution, private
respondents had no other recourse but to apply for a break-open
The absence of any one of these elements prevents "piercing the
order after the third-party claim of HPPI was dismissed for lack of
corporate veil." In applying the "instrumentality" or "alter ego"
merit by the NLRC. This is in consonance with Section 3, Rule VII
doctrine, the courts are concerned with reality and not form,
of the NLRC Manual of Execution of Judgment which provides
with how the corporation operated and the individual
that:
defendant's relationship to that operation.14
Should the losing party, his agent or representative, refuse or
Thus the question of whether a corporation is a mere alter ego, a
prohibit the Sheriff or his representative entry to the place where
mere sheet or paper corporation, a sham or a subterfuge is
the property subject of execution is located or kept, the
purely one of fact.15
judgment creditor may apply to the Commission or Labor Arbiter
concerned for a break-open order.
 25
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.
 26
EDUARDO CLAPAROLS V. CIR respondent workers.
160 Phil. 624
MAKASIAR, J.: Again, on December 15, 1964, respondent workers were
accompanied by a police officer to the company compound, but
A petition for certiorari to set aside the order of respondent then, they were again refused reinstatement by Cusi on the same
Court of Industrial Relations dated May 30, 1969 directing ground.
petitioners to pay back wages and bonuses to private
respondents as well as its resolution of July 5, 1969 denying the OnJanuary 15, 1965, the CIR Chief Examiner submitted his report
motion for reconsideration of said order in Case No. 32-ULP-Iloilo containing three computations, to wit:
entitled ''Allied Workers' Association, et. at. versus Eduardo
Claparols, et. at. al. "

"The first computation covers the period February 1, 1957 to

It appears that on August 6, 1957. a complaint for unfair labor
October 31,1964. The second is up to and including December 7,
practice was filed by herein private respondent Allied Workers'
1962, when the corporation stopped operations, while the third
Association, respondent Demetrio Garlitos and ten (10)
is only up to June 30, 1957 when the Claparols Steel and Nail
respondent workers against herein petitioners on account of the
Plant ceased to operate" (Annex B, Petition for Review
dismissal of respondent workers from petitioner Claparols Steel
on Certiorari, p. 14, Brief for appellees, p. 113,rec).
and Nail Plant.

On September 16,1963, respondent Court rendered its decision with the explanation that:
finding "Mr. Claparols guilty of union busting and" of having
"dismissed said complainants because of their union activities,"
and ordering respondents "(1) To cease and desist from
committing unfair labor practices against their employees and "6. Since the records of the Claparols Steel Corporation show that
laborers; (2) To reinstate said complainants to their former or it was established on July 1, 1957 succeeding the Claparols Steel
equivalent jobs, as soon as possible, with back wages from the and Nail Plant which ceased operations on June 30, 1957, and
date of their dismissal up to their actual reinstatement" (p. 12, that the Claparols Steel Corporation stopped operations on
Decision; p. 27, rec). December 7, 1962, three (3) computations are presented herein
for the consideration of this Honorable Court" (p. 2, Report of
A motion to reconsider the above decision was filed by herein Examiner, p. 29, rec.)
petitioners, which respondent Court, sitting en banc, denied in a
resolution dated January 27, 1964.
On January 23, 1965, petitioners filed an opposition alleging that
under the circumstances presently engulfing the company,
On March 30, 1964, counsel for herein respondent workers
petitioner Claparols could not personally reinstate respondent
(complainants in the ULP case) filed a motion for execution of
workers; that assuming the workers are entitled to back wages,
respondent Court's September 16, 1963 decision.
the same should only be limited to three months pursuant to the
court ruling in the case of Sta. Cecilia Sawmills vs. CIR (L-19273-
On May 14, 1964, respondent Court, in its order of September
74, February 20, 1964); and that since Claparols Steel
16, 1963, granted execution and directed herein petitioners.
Corporation ceased to operate on December 7, 1962, re-
employment of respondent workers cannot go beyond December
7, 1962.
"to reinstate the above complainants to their former or
equivalent jobs within five (5) days after receipt of a copy of this A reply to petitioner's opposition was filed by respondent
order. In order to implement the award of back wages, the Chief workers, alleging among others, that Claparols Steel and Nail
of the Examining Division or any of his assistants is hereby Plant and Claparols Steel and Nail Corporation are one and the
directed to proceed to the office of the respondents at same corporation controlled by petitioner Claparols, with the
Matabang, Talisay, Negros Occidental, and examine its payrolls latter corporation succeeding the former.
and other pertinent records and compute the back wages of the
complainants in accordance with the decision dated September On November 28, 1966, after conducting a series of hearings on
16, 1963, and. upon termination, to submit his report as soon as the report of the examiner, respondent Court issued an order,
possible for further disposition" (p. 7, Brief for Respondents, p. the dispositive portion of which reads:
113, rec).

which was reiterated by respondent Court in a subsequent order WHEREFORE, the Report of the Examiner filed on January
dated November 10,1964 (pp. 7-8, Brief for Respondents, p. 113, 15,1965, is hereby approved subject to the foregoing findings
rec). and dispositions. Consequently, the Corporation Auditing
Examiner is directed to recompute the back wages of
On December 14, 1964, respondent workers were accompanied complainants Demetrio Garlitos and Alfredo Ongsuco on the
by the Chief of Police of Talisay, Negros Occidental to the basis of F200.00 and P270.00 a month, respectively; to compute
compound of herein petitioner company to report for those of complainant Ignacio Quioyo as aforesaid; to compute
reinstatement per order of the court. Respondent workers were, the deductible earnings of complainants Ongsuco, Jorge
however, refused reinstatement by company accountant Semillano and Garlitos, as found in the body of this order; and to
Francisco Cusi for he had no order from plant owner Eduardo compute the bonuses of each and every complainant, except
Claparols nor from his lawyer Atty. Plaridel Katalbas, to reinstate Honorato Quioyo. Thereafter, as soon as possible, the Examiner
 27
should submit a report in compliance herewith of the Court's "xxx xxx xxx
further disposition" (p. 24, Brief for Respondents, p. 113, rec.) "4. The yearly bonuses of the employees and laborers of
respondent corporation are given on the following basis:

On December 7, 1966, a motion for reconsideration was filed by

petitioner, assailing respondent Court's ruling that (1) the ruling 'Basic Additional:
in the case of Sta. Cecilia Sawmills Inc. CIR, et. al. does not apply
in the case at bar; and (2) that bonus should be included in the
recoverable wages. "a. For every dependent 1% of monthly salary

On December 14, 1966, a counter-opposition was filed by private

respondents alleging that petitioners' motion for reconsideration For every dependent in
was pro forma, it not making express reference to the testimony "b. elementary grade 2% of monthly salary
or documentary evidence or to the provision of law alleged to be
contrary to such findings or conclusions of respondent Court.
"For every dependent in
On February 8, 1967, respondent Court of Industrial Relations c. 3% of monthly salary
high school
dismissed petitioners' motion for reconsideration for being pro
forma.

Whereupon, petitioners filed a petition for certiorari with this "d. For every dependent in 5% of monthly salary
COURT in G.R. No. L-27272 to set aside the November 28, 1966 college
order of respondent Court, as well as its February 8, 1967
resolution. Petitioners assigned therein as errors of law the very
same assignment of errors it raises in the present case, t wit: "xxx xxx xxx

"7. The computed x x x bonuses after deducting the earnings

"I elsewhere of Messrs. Ongsuco, Garlitos and Semillano, are as
"THE RESPONDENT COURT ERRED AND/OR ACTED WITH GRAVE follows:
ABUSE OF DISCRETION, AMOUNTING TO LACK OF JURISDICTION,
IN HOLDING IN THE ORDER UNDER REVIEW THAT BONUSES
SHOULD BE PAID TO THE RESPONDENT WORKERS DESPITE THE "Name xxx Bonuses xxx
FACT THAT THE SAME WAS NOT ADJUDICATED IN ITS ORIGINAL
DECISION. 1. Alfredo Ongsuco P1,620.00

2. Demetrio Garlitos 1,200.00

"II 3. Ignacio Quioyo 455.23
"THE RESPONDENT COURT ERRED AND/OR ACTED WITH GRAVE
ABUSE OF DISCRETION, AMOUNTING TO LACK OF JURISDICTION, 4. Aser Abancio 461.00
IN NOT APPLYING THE DOCTRINE LAID DOWN BY THIS
HONORABLE TRIBUNAL IN THE CASE OF 'SAT. CECILIA SAWMILLS, Ludovico
5. 752.05
INC. VS. C.I.R., ET. AL.,' G.R. No. L-19273-74, PROMULGATED ON Belopenos
FEBRUARY 29, 1964" (pp. 10-11, rec.) 6. Salvador Doroteo 714.70

7. Rosendo Espinosa 1,075.40

On April 27, 1967, the Supreme Court denied petitioner's
petition for certiorari (p. 77, rec. of L-27272), which was Gaudencio
8. 1,167.92
reiterated on May 19, 1967 (p. 27, Respondent's Brief, p. 113, Quioyo
rec.; p. 81, rec. of L-27272).
9. Jorge Semillano 1,212.08
On May 3, 1967, private respondent moved to have the workers' 10. Maximo Quioyo 449.41
back wages properly recomputed. A motion to the same end
was reiterated by private respondents on June 14, 1967. _________
_
On July 13, 1967, respondent Court directed a recomputation of
the back wages of respondent workers in accordance with its Total P9,107.79"
order dated November 28, 1966. The said order in part reads:
(Pp. 30-31, Respondent's Brief, p. 113,rec).
"WHEREFORE, the chief Auditing Examiner of the court or any of
his assistants, is hereby directed to recompute the back wages of
the workers involved in this case in accordance with the Order of On April 16, 1968. petitioners filed their opposition to the report
November 28, 1966, within 20 days from receipt of a copy of this of the Examiner dated March 21,1968 on grounds already
Order" (p. 28, Brief for Respondents, p. 113, rec.) rejected by respondent Court in its order dated November 28,
1966, and by the Supreme Court also in its ruling in G.R. No. L-
Then on March 21, 1968 the Chief Examiner came out with his 27272.
report, the disputed portion of which (regarding bonuses) reads:
 28
On May 4, 1968, a rejoinder to petitioners' opposition was filed The aforesaid resolution in G.R. No. L-27272 constitute the law of
by private respondents, alleging among others "that the grounds the instant case, wherein herein petitioners raised again
of petitioners' opposition were the same grounds raised by them practically the same issues invoked in the above mentioned case.
before and passed upon by respondent Court and this Honorable The denial of the petition in G.R. No. L-27272, suffices to warrant
Tribunal; that this order of November 28,1966 which passed the denial of the present petition; and We need not go any
upon these issues became final and executory on June 3,1967 further.
from the Honorable Supreme Court. (Order of respondent Court
dated July 13, 1967)." [P. 32, Brief for Respondents, p. 113, rec.]. However, without lending a sympathetic ear to the obvious
desire of herein petitioners of this Court to re-examine which
On July 26, 1968, private respondents filed their motion for would be an exercise in futility the final ruling in G.R. No. L-
approval of the Report of the Examiner submitted on March 21, 27272, which as above-stated is the law of the instant case, but
1968, alleging, among others, that petitioners, in their solely to remind herein petitioners, We reiterate the governing
opposition, did not actually dispute the data elicited by the Chief principles.
Examiner but rather harped on grounds which, as already stated,
had already been turned down by the Supreme Court. WE uniformly held that "a bonus is not demandable and
enforceable obligation, except when it is made part of the wage
On October 19, 1968, herein private respondents filed their or salary compensation" (Philippine Education Co. vs. CIR and the
"Constancia", submitting the case for resolution of respondent Union of Philippine Co. Employees [NLU], 92, Phil. 381; Ansay, et.
Court of Industrial Relations. al. vs. National Development Co., et. al., 107 Phil. 998, 999; Italics
supplied).
On May 30,1969, respondent Court issued an order, subject of
the present appeal, the dispositive portion of which reads: In Atok Big Wedge Mining Co. vs. Atok Big Wedge Mutual Benefit
Association (92 Phil. 754), this Court, thru Justice Labrador, held:

"WHEREFORE, there being no proof offered to substantiate

respondent Eduardo Claparols' opposition, the Examiner's Report
should be, and it is hereby, APPROVED. Consequently, pursuant
to the decision dated September 16, 1963, respondent x x x
(petitioners herein) are hereby directed to pay the respective
back wages and bonuses of the complainants (respondents
herein) x x x" (p 35, Brief for Respondents; p. 113, rec; italics
supplied).
On June 7, 1969, petitioners filed a motion for reconsideration on
practically the same grounds previously raised by them.
On June 30,1969, respondents filed an opposition to petitioners'
motion for reconsideration, with the following allegations:
"Whether or not bonus forms part of wages depends upon the
condition or circumstance for its payment. If it is an additional
compensation WHICH THE EMPLOYER PROMISED AND A GREED
to give without any condition imposed for its payment x x x then
it is part of the wage." (Italics supplied).
In Altomonte vs. Philippine American Drug Co. (106 Phil. 137),
the Supreme Court held that an employee is not entitled to
bonus where there is no showing that it had been granted by the
employer to its employees periodically or regularly as to become
part of their wages or salaries. The clear implication is that bonus
is recoverable as part of the wage or salary where the employer
regularly or periodically gives it to employees.

American jurisprudence equally regards bonuses as part of

"1. The issues raised, namely, whether bonuses should be
included in the award for back wages had already been resolved
by respondent court in its orders dated November 28, 1966, and
December 7, 1966, and in the Resolution of the Honorable
Supreme Court in G.R. No. L- 27272 dated April 26, 1967 and
May 19, 1967, and the same is already a settled and final issue.
"2. Petitioners' motion for reconsideration is merely a rehash of
previous arguments, effete and unrejuvenated, pro forma, and
intended merely to delay the proceedings.
As correctly contended by private respondents, the present
petition is barred by Our resolutions of April 26, 1967 and May
19, 1967 in G. R. No. L-27272 (Eduardo Claparols, et al. vs. CIR, et
al.) [pp. 77-83, rec. of L-27272] dismissing said case, wherein said
petitioners invoked the applicability of the doctrine in Sta. Cecilia
Sawmills, Inc. vs. CIR, et al. (L-19273-74, Feb. 29, 1964, 10 SCRA
433) and impugned the illegality of the order of respondent
Court dated November 28, 1966 directing the computation and
payment of the bonuses were not included in the decision of
September 16, 1963, which had long become final.
compensation or recoverable wages.
Thus, it was held that "x x x it follows that in determining the
regular rate of pay, a bonus which in fact constitutes PART OF AN
EMPLOYEE'S compensation, rather than a true gift or gratuity, has
to be taken into consideration." (48 Am. Jur. 2d, Labor and Labor
Relations, No. 1555, citing the cases of Triple "AAA " Co. vs. Wirtz
and Haber vs. Americana Corporation; Italics supplied). It was
further held that "x x x the regular rate includes incentive
bonuses paid to the employees in addition to the guaranteed
base rates regardless of any contract provision to the contrary
and even though such bonuses could not be determined or paid
until such time after the payday" (48 Am. Jur. 2d, Labor and Labor
Relations, No. 1555, citing the case of Walling vs. Harnischfeger
Corp., 325 US 427, 89 L Ed 1711, 65 S Ct. 1246; Italics supplied).
Petitioners in the present case do not dispute that as a matter of
tradition, the company has been doling out bonuses to
employees. In fact, the company balance sheets for the years
1956 to 1962 contained bonus and pension computations which
were never repudiated or questioned by petitioners. As such,
bonus for a given year earmarked as a matter of tradition for
distribution to employees has formed part of their recoverable
wages from the company. Moreover, with greater reason, should
 29
recovery of bonuses as part of back wages be observed in the where a corporation is merely an adjunct, business conduit or
present case since the company, in the light of the very alter ego of another corporation, the fiction of separate and
admission of company accountant Francisco Cusi, distributes distinct corporate entities should be disregarded.
bonuses to its employees even if the company has suffered
losses. Specifically, petitioner company has done this in 1962 To the same uniform effect are the decisions in the cases
(t.s.n., p. 149, Sept. 20, 1965). of Republic vs. Razon (L-17462, May 29, 1967, 20 SCRA 234)
and A.D. Santos, Inc. vs. Vasquez (L-23586, March 20, 1968,22
Since bonuses are part of back wages of private respondents, the SCRA 1156).
order of May 30, 1969, directing the payment of their bonuses,
did not amend the decision of September 16, 1963 of WE agree with respondent Court of Industrial Relations,
respondent Court directing payment of their wages, which has therefore, that the amount of back wages recoverable by
long become final and executory, in the same way that the respondent workers from petitioners should be the amount
previous order of May 14,1964 granting execution of said accruing up to December 7, 1962 when the Claparols Steel
decision of September 16, 1963 also directed the computation of Corporation ceased operations.
the wages to be paid to private respondents as decreed by the
decision of September 16, 1963. All the orders of May 30s 1969, WHEREFORE, PETITION IS HEREBY DENIED WITH TREBLE COSTS
November 28, 1966 and May 14, 1964 merely implement the AGAINST PETITIONERS TO BE PAID BY THEIR COUNSEL.
already final and executory decision of September 16, 1963.
EN BANC
G.R. No. L-13203 January 28, 1961
Petitioners insist that We adopt the ruling in the Sta. Cecilia
YUTIVO SONS HARDWARE COMPANY, petitioner,
Sawmills case wherein the recoverable back wages were limited
vs.
to only three (3) months: because as in the Sta. Cecilia Sawmills COURT OF TAX APPEALS and COLLECTOR OF INTERNAL
case, the Claparols Steel and Nail Plant ceased operations due to REVENUE, respondents.
enormous business reverses. Sycip, Quisumbing, Salazar & Associates for petitioner.
Office of the Solicitor General for respondents.
Respondent Court's findings that indeed the Claparols Steel and GUTIERREZ DAVID, J.:
Nail Plant, which ceased operation of June 30, 1957, v. as
SUCCEEDED by the Claparols Steel Corporation effective the next This is a petition for review of a decision of the Court of Tax
day, July 1, 1957 up to December 7, 1962, when the latter finally Appeals ordering petitioner to pay to respondent Collector of
ceased to operate, were not disputed by petitioners. It is very Internal Revenue the sum of P1,266,176.73 as sales tax
clear that the latter corporation was a continuation and deficiency for the third quarter of 1947 to the fourth quarter of
successor of the first entity, and its emergence was skillfully 1950; inclusive, plus 75% surcharge thereon, equivalent to
timed to avoid the financial liability that already attached to its P349,632.54, or a sum total of P2,215,809.27, plus costs of the
predecessor, the Claparols Steel and Nail Plant. Both suit.
predecessors and successor were owned and controlled by
From the stipulation of facts and the evidence adduced by both
petitioner Eduardo Claparols and there was no break in the
parties, it appears that petitioner Yutivo Sons Hardware Co.
succession and continuity of the same business. This "avoiding-
(hereafter referred to as Yutivo) is a domestic corporation,
the-liability" scheme is very patent, considering that 90% of the
organized under the laws of the Philippines, with principal office
subscribed shares of stocks of the Claparols Steel Corporation
at 404 Dasmariñas St., Manila. Incorporated in 1916, it was
(the second corporation) was owned by respondent (herein
engaged, prior to the last world war, in the importation and sale
petitioner) Claparols himself, and all the assets of the dissolved
of hardware supplies and equipment. After the liberation, it
Claparols Steel and Nail Plant were turned over to the emerging
resumed its business and until June of 1946 bought a number of
Claparols Steel Corporation.
cars and trucks from General Motors Overseas Corporation
(hereafter referred to as GM for short), an American corporation
It is very obvious that the second corporation seeks the
licensed to do business in the Philippines. As importer, GM paid
protective shield of a corporate fiction whose veil in the present
sales tax prescribed by sections 184, 185 and 186 of the Tax Code
case could, and should, be pierced as it was deliberately and
on the basis of its selling price to Yutivo. Said tax being collected
maliciously designed to evade its financial obligation to its
only once on original sales, Yutivo paid no further sales tax on its
employees.
sales to the public.

It is well remembering that in Yutivo & Sons Hardware Company
vs. Court of Tax Appeals (L-13203, Jan. 28, 1961, 1 SCRA 160), We
held that 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 or persons, or, in
the case of two corporations, will merge them into one.
In Liddel & Company, Inc. vs. Collector of Internal Revenue (L-
9687, June 30, 1961, 2 SCRA 632), this Court likewise held that
where a corporation is a dummy and serves no business purpose
and is intended only as a blind, the corporate fiction may be
ignored.
In Commissioner of Internal Revenue vs. Norton and Harrison
Company (L-17618, Aug. 31, 1964, 11 SCRA 714), We ruled that
On June 13, 1946, the Southern Motors, Inc. (hereafter referred
to as SM) was organized to engage in the business of selling cars,
trucks and spare parts. Its original authorized capital stock was
P1,000,000 divided into 10,000 shares with a par value of P100
each.
At the time of its incorporation 2,500 shares worth P250,000
appear to have been subscribed into equal proportions by Yu Khe
Thai, Yu Khe Siong, Hu Kho Jin, Yu Eng Poh, and Washington
Sycip. The first three named subscribers are brothers, being sons
of Yu Tiong Yee, one of Yutivo's founders. The latter two are
respectively sons of Yu Tiong Sin and Albino Sycip, who are
among the founders of Yutivo.

After the incorporation of SM and until the withdrawal of GM
from the Philippines in the middle of 1947, the cars and tracks
purchased by Yutivo from GM were sold by Yutivo to SM which,
in turn, sold them to the public in the Visayas and Mindanao.
When GM decided to withdraw from the Philippines in the
middle of 1947, the U.S. manufacturer of GM cars and trucks
appointed Yutivo as importer for the Visayas and Mindanao, and
Yutivo continued its previous arrangement of selling exclusively
to SM. In the same way that GM used to pay sales taxes based on
its sales to Yutivo, the latter, as importer, paid sales tax
prescribed on the basis of its selling price to SM, and since such
sales tax, as already stated, is collected only once on original
sales, SM paid no sales tax on its sales to the public.
On November 7, 1950, after several months of investigation by
revenue officers started in July, 1948, the Collector of Internal
Revenue made an assessment upon Yutivo and demanded from
the latter P1,804,769.85 as deficiency sales tax plus surcharge
covering the period from the third quarter of 1947 to the fourth
quarter of 1949; or from July 1, 1947 to December 31, 1949,
claiming that the taxable sales were the retail sales by SM to the
public and not the sales at wholesale made by, Yutivo to the
latter inasmuch as SM and Yutivo were one and the same
corporation, the former being the subsidiary of the latter.
The assessment was disputed by the petitioner, and a
reinvestigation of the case having been made by the agents of
the Bureau of Internal Revenue, the respondent Collector in his
letter dated November 15, 1952 countermanded his demand for
sales tax deficiency on the ground that "after several
investigations conducted into the matter no sufficient evidence
could be gathered to sustain the assessment of this Office based
on the theory that Southern Motors is a mere instrumentality or
subsidiary of Yutivo." The withdrawal was subject, however, to
the general power of review by the now defunct Board of Tax
Appeals. The Secretary of Finance to whom the papers relative to
the case were endorsed, apparently not agreeing with the
withdrawal of the assessment, returned them to the respondent
Collector for reinvestigation.
After another investigation, the respondent Collector, in a letter
to petitioner dated December 16, 1954, redetermined that the
aforementioned tax assessment was lawfully due the
government and in addition assessed deficiency sales tax due
from petitioner for the four quarters of 1950; the respondents' It is an elementary and fundamental principle of corporation law
last demand was in the total sum of P2,215,809.27 detailed as that a corporation is an entity separate and distinct from its
follows:
Deficiency 75% Total Amount
Sales Tax Surcharge Due
Assessment
(First) of
November
7, 1950 for
deficiency
sales Tax
for the
period
from 3rd
Qrtr 1947
to 4th Qrtr
1949
inclusive P1,031,296.60 P773,473.45 P1,804,769.05
Additional 234,880.13 176,160.09 411,040.22
30
Assessment
for period
from 1st to
4th Qrtr
1950,
inclusive
Total
amount
demanded
per letter
of
December
16, 1954 P1,266,176.73 P949,632.54 P2,215,809.27
This second assessment was contested by the petitioner Yutivo
before the Court of Tax Appeals, alleging that there is no valid
ground to disregard the corporate personality of SM and to hold
that it is an adjunct of petitioner Yutivo; (2) that assuming the
separate personality of SM may be disregarded, the sales tax
already paid by Yutivo should first be deducted from the selling
price of SM in computing the sales tax due on each vehicle; and
(3) that the surcharge has been erroneously imposed by
respondent. Finding against Yutivo and sustaining the respondent
Collector's theory that there was no legitimate or bona
fide purpose in the organization of SM — the apparent objective
of its organization being to evade the payment of taxes — and
that it was owned (or the majority of the stocks thereof are
owned) and controlled by Yutivo and is a mere subsidiary,
branch, adjunct, conduit, instrumentality or alter ego of the
latter, the Court of Tax Appeals — with Judge Roman Umali not
taking part — disregarded its separate corporate existence and
on April 27, 1957, rendered the decision now complained of. Of
the two Judges who signed the decision, one voted for the
modification of the computation of the sales tax as determined
by the respondent Collector in his decision so as to give
allowance for the reduction of the tax already paid (resulting in
the reduction of the assessment to P820,509.91 exclusive of
surcharges), while the other voted for affirmance. The dispositive
part of the decision, however, affirmed the assessment made by
the Collector. Reconsideration of this decision having been
denied, Yutivo brought the case to this Court thru the present
petition for review.
stockholders and from other corporation petitions to which it
may be connected. 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. (Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 496, citing I
Fletcher Cyclopedia of Corporation, Perm Ed., pp. 135 136;
United States vs. Milwaukee Refrigeration Transit Co., 142 Fed.,
247, 255 per Sanborn, J.) Another rule is that, when the
corporation is the "mere alter ego or business conduit of a
person, it may be disregarded." (Koppel [Phil.], Inc. vs.
Yatco, supra.)
After going over the voluminous record of the present case, we
are inclined to rule that the Court of Tax Appeals was not justified
in finding that SM was organized for no other purpose than to
defraud the Government of its lawful revenues. In the first place,
this corporation was organized in June, 1946 when it could not
have caused Yutivo any tax savings. From that date up to June 30,
1947, or a period of more than one year, GM was the importer of
 31
the cars and trucks sold to Yutivo, which, in turn resold them to On the other hand, if tax saving was the only justification for the
SM. During that period, it is not disputed that GM as importer, organization of SM, such justification certainly ceased with the
was the one solely liable for sales taxes. Neither Yutivo or SM waspassage of Republic Act No. 594 on February 16, 1951, governing
subject to the sales taxes on their sales of cars and trucks. The payment of advance sales tax by the importer based on the
sales tax liability of Yutivo did not arise until July 1, 1947 when it
landed cost of the imported article, increased by mark-ups of
became the importer and simply continued its practice of selling 25%, 50%, and 100%, depending on whether the imported article
to SM. The decision, therefore, of the Tax Court that SM was is taxed under sections 186, 185 and 184, respectively, of the Tax
organized purposely as a tax evasion device runs counter to the Code. Under Republic Act No. 594, the amount at which the
fact that there was no tax to evade. article is sold is immaterial to the amount of the sales tax. And
yet after the passage of that Act, SM continued to exist up to the
Making the observation from a newspaper clipping (Exh. "T") present and operates as it did many years past in the promotion
that "as early as 1945 it was known that GM was preparing to
and pursuit of the business purposes for which it was organized.
leave the Philippines and terminate its business of importing
vehicles," the court below speculated that Yutivo anticipated the In the third place, sections 184 to 186 of the said Code provides
withdrawal of GM from business in the Philippines in June, 1947. that the sales tax shall be collected "once only on every original
This observation, which was made only in the resolution on the sale, barter, exchange . . , to be paid by the manufacturer,
motion for reconsideration, however, finds no basis in the record. producer or importer." The use of the word "original" and the
On the other hand, GM had been an importer of cars in the express provision that the tax was collectible "once only"
Philippines even before the war and had but recently resumed its evidently has made the provisions susceptible of different
operation in the Philippines in 1946 under an ambitious plan to interpretations. In this connection, it should be stated that a
expand its operation by establishing an assembly plant here, so taxpayer has the legal right to decrease the amount of what
that it could not have been expected to make so drastic a otherwise would be his taxes or altogether avoid them by means
turnabout of not merely abandoning the assembly plant project which the law permits. (U.S. vs. Isham 17 Wall. 496, 506; Gregory
but also totally ceasing to do business as an importer. Moreover, vs. Helvering 293 U.S. 465, 469; Commr. vs. Tower, 327 U.S. 280;
the newspaper clipping, Exh. "T", was published on March 24, Lawton vs. Commr 194 F (2d) 380). Any legal means by the
1947, and clipping, merely reported a rumored plan that GM taxpayer to reduce taxes are all right Benry vs. Commr. 25 T. Cl.
would abandon the assembly plant project in the Philippines. 78). A man may, therefore, perform an act that he honestly
There was no mention of the cessation of business by GM which believes to be sufficient to exempt him from taxes. He does not
must not be confused with the abandonment of the assembly incur fraud thereby even if the act is thereafter found to be
plant project. Even as respect the assembly plant, the newspaper insufficient. Thus in the case of Court Holding Co. vs. Commr. 2 T.
clipping was quite explicit in saying that the Acting Manager Cl. 531, it was held that though an incorrect position in law had
refused to confirm that rumor as late as March 24, 1947, almost been taken by the corporation there was no suppression of the
a year after SM was organized. facts, and a fraud penalty was not justified.

At this juncture, it should be stated that the intention to
minimize taxes, when used in the context of fraud, must be
proved to exist by clear and convincing evidence amounting to
more than mere preponderance, and cannot be justified by a
mere speculation. This is because fraud is never lightly to be
presumed. (Vitelli & Sons vs. U.S 250 U.S. 355; Duffin vs. Lucas,
55 F (2d) 786; Budd vs. Commr., 43 F (2d) 509; Maryland Casualty
Co. vs. Palmette Coal Co., 40 F (2d) 374; Schoonfield Bros., Inc.
vs. Commr., 38 BTA 943; Charles Heiss vs. Commr 36 BTA 833;
Kerbaugh vs. Commr 74 F (2d) 749; Maddas vs. Commr., 114 F.
(2d) 548; Moore vs. Commr., 37 BTA 378; National City Bank of
New York vs. Commr., 98 (2d) 93; Richard vs. Commr., 15 BTA
316; Rea Gane vs. Commr., 19 BTA 518). (See also Balter, Fraud
Under Federal Law, pp. 301-302, citing numerous authorities:
Arroyo vs. Granada, et al., 18 Phil. 484.) Fraud is never imputed
and the courts never sustain findings of fraud upon
circumstances which, at the most, create only suspicion.
(Haygood Lumber & Mining Co. vs. Commr., 178 F (2d) 769;
Dalone vs. Commr., 100 F (2d) 507).
In the second place, SM was organized and it operated, under
circumstance that belied any intention to evade sales taxes. "Tax
evasion" is a term that connotes fraud thru the use of pretenses
and forbidden devices to lessen or defeat taxes. The transactions
between Yutivo and SM, however, have always been in the open,
embodied in private and public documents, constantly subject to
inspection by the tax authorities. As a matter of fact, after Yutivo
became the importer of GM cars and trucks for Visayas and
Mindanao, it merely continued the method of distribution that it
had initiated long before GM withdrew from the Philippines.
The evidence for the Collector, in our opinion, falls short of the
standard of clear and convincing proof of fraud. As a matter of
fact, the respondent Collector himself showed a great deal of
doubt or hesitancy as to the existence of fraud. He even doubted
the validity of his first assessment dated November 7, 1959. It
must be remembered that the fraud which respondent Collector
imputed to Yutivo must be related to its filing of sales tax returns
of less taxes than were legally due. The allegation of fraud,
however, cannot be sustained without the showing that Yutivo, in
filing said returns, did so fully knowing that the taxes called for
therein called for therein were less than what were legally due.
Considering that respondent Collector himself with the aid of his
legal staff, and after some two years of investigation and duty of
investigation and study concluded in 1952 that Yutivo's sales tax
returns were correct — only to reverse himself after another two
years — it would seem harsh and unfair for him to say in 1954
that Yutivo fully knew in October 1947 that its sales tax returns
were inaccurate.
On this point, one other consideration would show that the
intent to save taxes could not have existed in the minds of the
organizers of SM. The sales tax imposed, in theory and in
practice, is passed on to the vendee, and is usually billed
separately as such in the sales invoice. As pointed out by
petitioner Yutivo, had not SM handled the retail, the additional
tax that would have been payable by it, could have been easily
passed off to the consumer, especially since the period covered
by the assessment was a "seller's market" due to the post-war
scarcity up to late 1948, and the imposition of controls in the late
1949.

It is true that the arrastre charges constitute expenses of Yutivo
and its non-inclusion in the selling price by Yutivo cost the
Government P4.00 per vehicle, but said non-inclusion was
explained to have been due to an inadvertent accounting
omission, and could hardly be considered as proof of willful
channelling and fraudulent evasion of sales tax. Mere
understatement of tax in itself does not prove fraud. (James
Nicholson, 32 BTA 377, affirmed 90 F. (2) 978, cited in Merten's
Sec. 55.11 p. 21) The amount involved, moreover, is extremely
small inducement for Yutivo to go thru all the trouble of
organizing SM. Besides, the non-inclusion of these small arrastre
charges in the sales tax returns of Yutivo is clearly shown in the
records of Yutivo, which is uncharacteristic of fraud (See Insular
Lumber Co. vs. Collector, G.R. No. L-719, April 28, 1956.)
We are, however, inclined to agree with the court below that SM
was actually owned and controlled by petitioner as to make it a
mere subsidiary or branch of the latter created for the purpose of
selling the vehicles at retail and maintaining stores for spare
parts as well as service repair shops. It is not disputed that the
petitioner, which is engaged principally in hardware supplies and
equipment, is completely controlled by the Yutivo, Young or Yu
family. The founders of the corporation are closely related to
each other either by blood or affinity, and most of its
stockholders are members of the Yu (Yutivo or Young) family. It is,
likewise, admitted that SM was organized by the leading
stockholders of Yutivo headed by Yu Khe Thai. At the time of its
incorporation 2,500 shares worth P250,000.00 appear to have
been subscribed in five equal proportions by Yu Khe Thai, Yu Khe
Siong, Yu Khe Jin, Yu Eng Poh and Washington Sycip. The first
three named subscribers are brothers, being the sons of Yu Tien
Yee, one of Yutivo's founders. Yu Eng Poh and Washington Sycip
are respectively sons of Yu Tiong Sing and Alberto Sycip who are
co-founders of Yutivo. According to the Articles of Incorporation
of the said subscriptions, the amount of P62,500 was paid by the
aforenamed subscribers, but actually the said sum was advanced
by Yutivo. The additional subscriptions to the capital stock of SM
and subsequent transfers thereof were paid by Yutivo itself. The
payments were made, however, without any transfer of funds
from Yutivo to SM. Yutivo simply charged the accounts of the
subscribers for the amount allegedly advanced by Yutivo in
payment of the shares. Whether a charge was to be made
against the accounts of the subscribers or said subscribers were
to subscribe shares appears to constitute a unilateral act on the
part of Yutivo, there being no showing that the former initiated
the subscription.
The transactions were made solely by and between SM and
Yutivo. In effect, it was Yutivo who undertook the subscription of
shares, employing the persons named or "charged" with
corresponding account as nominal stockholders. Of course, Yu
Khe Thai, Yu Khe Jin, Yu Khe Siong and Yu Eng Poh were
manifestly aware of these subscriptions, but considering that
they were the principal officers and constituted the majority of
the Board of Directors of both Yutivo and SM, their subscriptions
could readily or easily be that of Yutivo's Moreover, these
persons were related to death other as brothers or first cousins.
There was every reason for them to agree in order to protect
their common interest in Yutivo and SM.
The issued capital stock of SM was increased by additional
subscriptions made by various person's but except Ng Sam Bak
and David Sycip, "payments" thereof were effected by merely
debiting 'or charging the accounts of said stockholders and
crediting the corresponding amounts in favor of SM, without
actually transferring cash from Yutivo. Again, in this instance, the
32
"payments" were Yutivo, by effected by the mere unilateral act of
Yutivo a accounts of the virtue of its control over the individual
persons charged, would necessarily exercise preferential rights
and control directly or indirectly, over the shares, it being the
party which really undertook to pay or underwrite payment
thereof.
The shareholders in SM are mere nominal stockholders holding
the shares for and in behalf of Yutivo, so even conceding that the
original subscribers were stockholders bona fide Yutivo was at all
times in control of the majority of the stock of SM and that the
latter was a mere subsidiary of the former.
True, petitioner and other recorded stockholders transferred
their shareholdings, but the transfers were made to their
immediate relatives, either to their respective spouses and
children or sometimes brothers or sisters. Yutivo's shares in SM
were transferred to immediate relatives of persons who
constituted its controlling stockholders, directors and officers.
Despite these purported changes in stock ownership in both
corporations, the Board of Directors and officers of both
corporations remained unchanged and Messrs. Yu Khe Thai, Yu
Khe Siong Hu Khe Jin and Yu Eng Poll (all of the Yu or Young
family) continued to constitute the majority in both boards. All
these, as observed by the Court of Tax Appeals, merely serve to
corroborate the fact that there was a common ownership and
interest in the two corporations.
SM is under the management and control of Yutivo by virtue of a
management contract entered into between the two parties. In
fact, the controlling majority of the Board of Directors of Yutivo is
also the controlling majority of the Board of Directors of SM. At
the same time the principal officers of both corporations are
identical. In addition both corporations have a common
comptroller in the person of Simeon Sy, who is a brother-in-law
of Yutivo's president, Yu Khe Thai. There is therefore no doubt
that by virtue of such control, the business, financial and
management policies of both corporations could be directed
towards common ends.
Another aspect relative to Yutivo's control over SM operations
relates to its cash transactions. All cash assets of SM were
handled by Yutivo and all cash transactions of SM were actually
maintained thru Yutivo. Any and all receipts of cash by SM
including its branches were transmitted or transferred
immediately and directly to Yutivo in Manila upon receipt
thereof. Likewise, all expenses, purchases or other obligations
incurred by SM are referred to Yutivo which in turn prepares the
corresponding disbursement vouchers and payments in relation
there, the payment being made out of the cash deposits of SM
with Yutivo, if any, or in the absence thereof which occurs
generally, a corresponding charge is made against the account of
SM in Yutivo's books. The payments for and charges against SM
are made by Yutivo as a matter of course and without need of
any further request, the latter would advance all such cash
requirements for the benefit of SM. Any and all payments and
cash vouchers are made on Yutivo stationery and made under
authority of Yutivo's corporate officers, without any copy thereof
being furnished to SM. All detailed records such as cash
disbursements, such as expenses, purchases, etc. for the account
of SM, are kept by Yutivo and SM merely keeps a summary
record thereof on the basis of information received from Yutivo.
All the above plainly show that cash or funds of SM, including
those of its branches which are directly remitted to Yutivo, are
placed in the custody and control of Yutivo, resources and
subject to withdrawal only by Yutivo. SM's being under Yutivo's
 33
control, the former's operations and existence became technical defense of separate corporate entity in order to arrive
dependent upon the latter. at the true tax liability of Yutivo.

Consideration of various other circumstances, especially when Petitioner contends that the respondent Collector had lost his
taken together, indicates that Yutivo treated SM merely as its right or authority to issue the disputed assessment by reason of
department or adjunct. For one thing, the accounting system prescription. The contention, in our opinion, cannot be sustained.
maintained by Yutivo shows that it maintained a high degree of It will be noted that the first assessment was made on November
control over SM accounts. All transactions between Yutivo and 7, 1950 for deficiency sales tax from 1947 to 1949. The
SM are recorded and effected by mere debit or credit entries corresponding returns filed by petitioner covering the said period
against the reciprocal account maintained in their respective was made at the earliest on October 1, as regards the third
books of accounts and indicate the dependency of SM as branch quarter of 1947, so that it cannot be claimed that the assessment
upon Yutivo. was not made within the five-year period prescribed in section
331 of the Tax Code invoked by petitioner. The assessment, it is
Apart from the accounting system, other facts corroborate or admitted, was withdrawn by the Collector on insufficiency of
independently show that SM is a branch or department of Yutivo.
evidence, but November 15, 1952 due to insufficiency of
Even the branches of SM in Bacolod, Iloilo, Cebu, and Davao treat evidence, but the withdrawal was made subject to the approval
Yutivo — Manila as their "Head Office" or "Home Office" as
of the Secretary of Finance and the Board of Tax Appeals,
shown by their letters of remittances or other correspondences. pursuant to the provisions of section 9 of Executive Order No.
These correspondences were actually received by Yutivo and the
401-A, series of 1951. The decision of the previous assessment of
reference to Yutivo as the head or home office is obvious from November 7, Collector countermanding the as 1950 was
the fact that all cash collections of the SM's branches are
forwarded to the Board of Tax Appeals through the Secretary of
remitted directly to Yutivo. Added to this fact, is that SM may Finance but that official, apparently disagreeing with the
freely use forms or stationery of Yutivo
decision, sent it back for re-investigation. Consequently, the
The fact that SM is a mere department or adjunct of Yutivo is assessment of November 7, 1950 cannot be considered to have
made more patent by the fact that arrastre conveying, and been finally withdrawn. That the assessment was subsequently
charges paid for the "operation of receiving, loading or reiterated in the decision of respondent Collector on December
unloading" of imported cars and trucks on piers and wharves, 16, 1954 did not alter the fact that it was made seasonably. In
were charged against SM. Overtime charges for the unloading of this connection, it would appear that a warrant of distraint and
cars and trucks as requested by Yutivo and incurred as part of its levy had been issued on March 28, 1951 in relation with this case
acquisition cost thereof, were likewise charged against and and by virtue thereof the properties of Yutivo were placed under
treated as expenses of SM. If Yutivo were the importer, these constructive distraint. Said warrant and constructive distraint
arrastre and overtime charges were Yutivo's expenses in have not been lifted up to the present, which shows that the
importing goods and not SM's. But since those charges were assessment of November 7, 1950 has always been valid and
made against SM, it plainly appears that Yutivo had sole authority subsisting.
to allocate its expenses even as against SM in the sense that the
Anent the deficiency sale tax for 1950, considering that the
latter is a mere adjunct, branch or department of the former. assessment thereof was made on December 16, 1954, the same
Proceeding to another aspect of the relation of the parties, the was assessed well within the prescribed five-year period.
management fees due from SM to Yutivo were taken up as Petitioner argues that the original assessment of November 7,
expenses of SM and credited to the account of Yutivo. If it were
1950 did not extend the prescriptive period on assessment. The
to be assumed that the two organizations are separate juridical argument is untenable, for, as already seen, the assessment was
entities, the corresponding receipts or receivables should have
never finally withdrawn, since it was not approved by the
been treated as income on the part of Yutivo. But such Secretary of Finance or of the Board of Tax Appeals. The
management fees were recorded as "Reserve for Bonus" and
authority of the Secretary to act upon the assessment cannot be
were therefore a liability reserve and not an income account. questioned, for he is expressly granted such authority under
This reserve for bonus were subsequently distributed directly to
section 9 of Executive Order No. 401-And under section 79 (c) of
and credited in favor of the employees and directors of Yutivo, the Revised Administrative Code, he has "direct control, direction
thereby clearly showing that the management fees were paid
and supervision over all bureaus and offices under his jurisdiction
directly to Yutivo officers and employees. and may, any provision of existing law to the contrary not
Briefly stated, Yutivo financed principally, if not wholly, the withstanding, repeal or modify the decision of the chief of said
business of SM and actually extended all the credit to the latter Bureaus or offices when advisable in public interest."
not only in the form of starting capital but also in the form of
It should here also be stated that the assessment in question was
credits extended for the cars and vehicles allegedly sold by Yutivo consistently protested by petitioner, making several requests for
to SM as well as advances or loans for the expenses of the latter
reinvestigation thereof. Under the circumstances, petitioner may
when the capital had been exhausted. Thus, the increases in the be considered to have waived the defense of prescription.
capital stock were made in advances or "Guarantee" payments
by Yutivo and credited in favor of SM. The funds of SM were all "Estoppel has been employed to prevent the application of the
merged in the cash fund of Yutivo. At all times Yutivo thru officers statute of limitations against the government in certain instances
and directors common to it and SM, exercised full control over in which the taxpayer has taken some affirmative action to
the cash funds, policies, expenditures and obligations of the prevent the collection of the tax within the statutory period. It is
latter. generally held that a taxpayer is estopped to repudiate waivers of
the statute of limitations upon which the government relied. The
Southern Motors being but a mere instrumentality, or adjunct of
cases frequently involve dissolved corporations. If no waiver has
Yutivo, the Court of Tax Appeals correctly disregarded the been given, the cases usually show come conduct directed to a
postponement of collection, such, for example, as some variety
 34
of request to apply an overassessment. The taxpayer has under the same terms as had been previously agreed upon
'benefited' and 'is not in a position to contest' his tax liability. A between the corporation and the Fines.
definite representation of implied authority may be involved, and
The return filed by the Court Holding Co. with the respondent
in many cases the taxpayer has received the 'benefit' of being
Commissioner of Internal Revenue reported no taxable gain as
saved from the inconvenience, if not hardship of immediate
having been received from the sale of its assets. The Millers, of
collection. "
course, reported a long term capital gain on the exchange of their
Conceivably even in these cases a fully informed Commissioner corporate stock with the corporate property. The Commissioner
may err to the sorrow of the revenues, but generally speaking, of Internal Revenue contended that the liquidating dividend to
the cases present a strong combination of equities against the stockholders had no purpose other than that of tax avoidance
taxpayer, and few will seriously quarrel with their application of and that, therefore, the sale by the Millers to the Fines of the
the doctrine of estoppel." (Mertens Law of Federal Income corporation's property was in substance a sale by the corporation
Taxation, Vol. 10-A, pp. 159-160.) itself, for which the corporation is subject to the taxable profit
thereon. In requiring the corporation to pay the taxable profit on
It is also claimed that section 9 of Executive Order No. 401-A,
account of the sale, the Commissioner of Internal Revenue,
series of 1951 — es involving an original assessment of more imposed a surcharge of 25% for delinquency, plus an additional
than P5,000 — refers only to compromises and refunds of taxes,
surcharge as fraud penalties.
but not to total withdrawal of the assessment. The contention is
without merit. A careful examination of the provisions of both The U. S. Court of Tax Appeals held that the sale by the Millers
sections 8 and 9 of Executive Order No. 401-A, series of 1951, was for no other purpose than to avoid the tax and was, in
reveals the procedure prescribed therein is intended as a check substance, a sale by the Court Holding Co., and that, therefore,
or control upon the powers of the Collector of Internal Revenue the said corporation should be liable for the assessed taxable
in respect to assessment and refunds of taxes. If it be conceded profit thereon. The Court of Tax Appeals also sustained the
that a decision of the Collector of Internal Revenue on partial Commissioner of Internal Revenue on the delinquency penalty of
remission of taxes is subject to review by the Secretary of 25%. However, the Court of Tax Appeals disapproved the fraud
Finance and the Board of Tax Appeals, then with more reason penalties, holding that an attempt to avoid a tax does not
should the power of the Collector to withdraw totally an necessarily establish fraud; that it is a settled principle that a
assessment be subject to such review. taxpayer may diminish his tax liability by means which the law
permits; that if the petitioner, the Court Holding Co., was of the
We find merit, however, in petitioner's contention that the Court
opinion that the method by which it attempted to effect the sale
of Tax Appeals erred in the imposition of the 5% fraud surcharge. in question was legally sufficient to avoid the imposition of a tax
As already shown in the early part of this decision, no element of
upon it, its adoption of that methods not subject to censure; and
fraud is present. that in taking a position with respect to a question of law, the
Pursuant to Section 183 of the National Internal Revenue Code substance of which was disclosed by the statement indorsed on it
the 50% surcharge should be added to the deficiency sales tax "in return, it may not be said that that position was taken
case a false or fraudulent return is willfully made." Although the fraudulently. We quote in full the pertinent portion of the
sales made by SM are in substance by Yutivo this does not decision of the Court of Tax Appeals: .
necessarily establish fraud nor the willful filing of a false or
". . . The respondent's answer alleges that the petitioner's failure
fraudulent return. to report as income the taxable profit on the real estate sale was
The case of Court Holding Co. v. Commissioner of Internal fraudulent and with intent to evade the tax. The petitioner filed a
Revenue (August 9, 1943, 2 TC 531, 541-549) is in point. The reply denying fraud and averring that the loss reported on its
petitioner Court Holding Co. was a corporation consisting of only return was correct to the best of its knowledge and belief. We
two stockholders, to wit: Minnie Miller and her husband Louis think the respondent has not sustained the burden of proving a
Miller. The only assets of third husband and wife corporation fraudulent intent. We have concluded that the sale of the
consisted of an apartment building which had been acquired for petitioner's property was in substance a sale by the petitioner,
a very low price at a judicial sale. Louis Miller, the husband, who and that the liquidating dividend to stockholders had no purpose
directed the company's business, verbally agreed to sell this other than that of tax avoidance. But the attempt to avoid tax
property to Abe C. Fine and Margaret Fine, husband and wife, for does not necessarily establish fraud. It is a settled principle that a
the sum of $54,000.00, payable in various installments. He taxpayer may diminish his liability by any means which the law
received $1,000.00 as down payment. The sale of this property permits. United States v. Isham, 17 Wall. 496; Gregory v.
for the price mentioned would have netted the corporation a Helvering, supra; Chrisholm v. Commissioner, 79 Fed. (2d) 14. If
handsome profit on which a large corporate income tax would the petitioner here was of the opinion that the method by which
have to be paid. On the afternoon of February 23, 1940, when it attempted to effect the sale in question was legally sufficient to
the Millers and the Fines got together for the execution of the avoid the imposition of tax upon it, its adoption of that method is
document of sale, the Millers announced that their attorney had not subject to censure. Petitioner took a position with respect to
called their attention to the large corporate tax which would have a question of law, the substance of which was disclosed by the
to be paid if the sale was made by the corporation itself. So statement endorsed on its return. We can not say, under the
instead of proceeding with the sale as planned, the Millers record before us, that that position was taken fraudulently. The
approved a resolution to declare a dividend to themselves determination of the fraud penalties is reversed."
"payable in the assets of the corporation, in complete liquidation
When GM was the importer and Yutivo, the wholesaler, of the
and surrender of all the outstanding corporate stock." The cars and trucks, the sales tax was paid only once and on the
building, which as above stated was the only property of the
original sales by the former and neither the latter nor SM paid
corporation, was then transferred to Mr. and Mrs. Miller who in taxes on their subsequent sales. Yutivo might have, therefore,
turn sold it to Mr. and Mrs. Fine for exactly the same price and
honestly believed that the payment by it, as importer, of the
 35
sales tax was enough as in the case of GM Consequently, in filing of Computed under Selling Price
its return on the basis of its sales to SM and not on those by the Vehicles Exclusive
Sales Gen. Cir Nos. 431 & Charged to the
latter to the public, it cannot be said that Yutivo deliberately of Sales Tax
Tax 400 Public
made a false return for the purpose of defrauding the
government of its revenues which will justify the imposition of 5% P11,912,219.57 P595,610.98 P12,507,83055
the surcharge penalty.
7% 909,559.50 63,669.16 973,228.66
We likewise find meritorious the contention that the Tax Court
erred in computing the alleged deficiency sales tax on the selling 10% 2,618,695.28 261,869.53 2,880,564.81
price of SM without previously deducting therefrom the sales tax
due thereon. The sales tax provisions (sees. 184.186, Tax Code) 15% 3,602,397.65 540,359.65 4,142,757.30
impose a tax on original sales measured by "gross selling price"
or "gross value in money". These terms, as interpreted by the 20% 267,150.50 53,430.10 320,580.60
respondent Collector, do not include the amount of the sales tax,
if invoiced separately. Thus, General Circular No. 431 of the 30% 837,146.97 251,114.09 1,088,291.06
Bureau of Internal Revenue dated July 29, 1939, which
implements sections 184.186 of the Tax Code provides: " 50% 74,244.30 37,122.16 111,366.46

. . .'Gross selling price' or gross value in money' of the articles
sold, bartered, exchanged, transferred as the term is used in the
aforecited sections (sections 184, 185 and 186) of the National
Internal Revenue Code, is the total amount of money or its
equivalent which the purchaser pays to the vendor to receive or
get the goods. However, if a manufacturer, producer, or importer,
in fixing the gross selling price of an article sold by him has
included an amount intended to cover the sales tax in the gross
selling price of the articles, the sales tax shall be based on the
gross selling price less the amount intended to cover the tax, if
the same is billed to the purchaser as a separate item.
General Circular No. 440 of the same Bureau reads:
Amount intended to cover the tax must be billed as a separate
em so as not to pay a tax on the tax. — On sales made after he
third quarter of 1939, the amount intended to cover the sales tax
must be billed to the purchaser as separate items in the, invoices
in order that the reduction thereof from the gross ailing price
may be allowed in the computation of the merchants' percentage
tax on the sales. Unless billed to the purchaser as a separate item
in the invoice, the amounts intended to cover the sales tax shall
be considered as part of the gross selling price of the articles
sold, and deductions thereof will not be allowed, (Cited in
Dalupan, Nat. Int. Rev. Code, Annotated, Vol. II, pp. 52-53.)
Yutivo complied with the above circulars on its sales to SM, and
as separately billed, the sales taxes did not form part of the
"gross selling price" as the measure of the tax. Since Yutivo had
previously billed the sales tax separately in its sales invoices to
SM General Circulars Nos. 431 and 440 should be deemed to
have been complied. Respondent Collector's method of
computation, as opined by Judge Nable in the decision
complained of —
. . . is unfair, because . . .(it is) practically imposing tax on a tax
already paid. Besides, the adoption of the procedure would in
certain cases elevate the bracket under which the tax is based.
The late payment is already penalized, thru the imposition of
surcharges, by adopting the theory of the Collector, we will be
creating an additional penalty not contemplated by law."
If the taxes based on the sales of SM are computed in accordance
with Gen. Circulars Nos. 431 and 440 the total deficiency sales
taxes, exclusive of the 25% and 50% surcharges for late payment
and for fraud, would amount only to P820,549.91 as shown in IN VIEW OF THE FOREGOING, the decision of the Court of Tax
the following computation: Appeals under review is hereby modified in that petitioner shall
be ordered to pay to respondent the sum of P820,549.91, plus
Rates Gross Sales of Sales Taxes Due and Total Gross
75% 8,000.00 6,000.00 14,000.00
TOTAL P20,220,413.77 P1,809,205.67 P22,038,619.44
Less Taxes Paid by Yutivo 988,655.76
Deficiency Tax still due P820,549.91
This is the exact amount which, according to Presiding Judge
Nable of the Court of Tax Appeals, Yutivo would pay, exclusive of
the surcharges.
Petitioner finally contends that the Court of Tax Appeals erred or
acted in excess of its jurisdiction in promulgating judgment for
the affirmance of the decision of respondent Collector by less
than the statutory requirement of at least two votes of its judges.
Anent this contention, section 2 of Republic Act No. 1125,
creating the Court of Tax Appeals, provides that "Any two judges
of the Court of Tax Appeals shall constitute a quorum, and the
concurrence of two judges shall be necessary to promulgate
decision thereof. . . . " It is on record that the present case was
heard by two judges of the lower court. And while Judge Nable
expressed his opinion on the issue of whether or not the amount
of the sales tax should be excluded from the gross selling price in
computing the deficiency sales tax due from the petitioner, the
opinion, apparently, is merely an expression of his general or
"private sentiment" on the particular issue, for he concurred the
dispositive part of the decision. At any rate, assuming that there
is no valid decision for lack of concurrence of two judges, the
case was submitted for decision of the court below on March 28,
1957 and under section 13 of Republic Act 1125, cases brought
before said court hall be decided within 30 days after submission
thereof. "If no decision is rendered by the Court within thirty
days from the date a case is submitted for decision, the party
adversely affected by said ruling, order or decision, may file with
said Court a notice of his intention to appeal to the Supreme
Court, and if no decision has as yet been rendered by the Court,
the aggrieved party may file directly with the Supreme Court an
appeal from said ruling, order or decision, notwithstanding the
foregoing provisions of this section." The case having been
brought before us on appeal, the question raised by petitioner as
become purely academic.
 36
25% surcharge thereon for late payment. So ordered without
costs.
 37
G.R. No. 151438 July 15, 2005 120,000 BTUH to the second floor of the Blanco Center building
at 119 Alfaro St., Salcedo Village, Makati, Metro Manila;
JARDINE DAVIES, INC., Petitioners,
vs. 2. Ordering defendants to jointly and severally reimburse plaintiff
JRB REALTY, INC., Respondent. not only the sums of P415,118.95 for unsaved electricity from
CALLEJO, SR., J.: 21st October 1981 to 7th January 1990 and P99,287.77 for repair
costs of the two service units from 7th March 1987 to 11th
Before us is a petition for review of the Decision[1] of the Court January 1990, with legal interest thereon from the filing of this
of Appeals (CA) in CA-G.R. CV No. 54201 affirming in toto that of Complaint until fully reimbursed, but also like unsaved electricity
the Regional Trial Court (RTC) in Civil Case No. 90-237 for specific costs and like repair costs therefrom until Prayer No. 1 above
performance; and the Resolution dated January 11, 2002 denying shall have been complied with;
the motion for reconsideration thereof.
3. Ordering defendants to jointly and severally pay plaintiff's
The facts are as follows: P150,000.00 attorney's fees and other costs of litigation, as well
as exemplary damages in an amount not less than or equal to
In 1979-1980, respondent JRB Realty, Inc. built a nine-storey Prayer 2 above; and
building, named Blanco Center, on its parcel of land located at
119 Alfaro St., Salcedo Village, Makati City. An air conditioning 4. Granting plaintiff such other and further relief as shall be just
system was needed for the Blanco Law Firm housed at the and equitable in the premises.[7]
second floor of the building. On March 13, 1980, the
respondent's Executive Vice-President, Jose R. Blanco, accepted Of the four defendants, only the petitioner filed its Answer. The
the contract quotation of Mr. A.G. Morrison, President of Aircon court did not acquire jurisdiction over Aircon because the latter
and Refrigeration Industries, Inc. (Aircon), for two (2) sets of ceased operations, as its corporate life ended on December 31,
Fedders Adaptomatic 30,000 kcal (Code: 10-TR) air conditioning 1986.[8] Upon motion, defendants Fedders Air Conditioning USA
equipment with a net total selling price of P99,586.00. and Maxim were declared in default.[9]
[2] Thereafter, two (2) brand new packaged air conditioners of 10
tons capacity each to deliver 30,000 kcal or 120,000 BTUH[3] On May 17, 1996, the RTC rendered its Decision, the dispositive
were installed by Aircon. When the units with rotary compressors portion of which reads:
were installed, they could not deliver the desired cooling
temperature. Despite several adjustments and corrective
WHEREFORE, judgment is hereby rendered ordering defendants
measures, the respondent conceded that Fedders Air
Jardine Davies, Inc., Fedders Air Conditioning USA, Inc. and
Conditioning USA's technology for rotary compressors for big
Maxim Industrial and Merchandising Corporation, jointly and
capacity conditioners like those installed at the Blanco Center
severally:
had not yet been perfected. The parties thereby agreed to
replace the units with reciprocating/semi-hermetic compressors
1. To deliver, install and place into operation the two (2) brand
instead. In a Letter dated March 26, 1981,[4] Aircon stated that it
new units of Fedders unitary packaged airconditioning units each
would be replacing the units currently installed with new ones
of 10 tons capacity with rotary compressors to deliver 30,000
using rotary compressors, at the earliest possible time.
kcal or 120,000 BTUH to the second floor of the Blanco Center
Regrettably, however, it could not specify a date when delivery
building, or to pay plaintiff the current price for two such units;
could be effected.

2. To reimburse plaintiff the amount of P556,551.55 as and for

TempControl Systems, Inc. (a subsidiary of Aircon until 1987)
the unsaved electricity bills from October 21, 1981 up to April 30,
undertook the maintenance of the units, inclusive of parts and
1995; and another amount of P185,951.67 as and for repair
services. In October 1987, the respondent learned, through
costs;
newspaper ads,[5] that Maxim Industrial and Merchandising
Corporation (Maxim, for short) was the new and exclusive
3. To pay plaintiff P50,000.00 as and for attorney's fees; and
licensee of Fedders Air Conditioning USA in the Philippines for
the manufacture, distribution, sale, installation and maintenance
4. Cost of suit.[10]
of Fedders air conditioners. The respondent requested that
Maxim honor the obligation of Aircon, but the latter refused.
The petitioner filed its notice of appeal with the CA, alleging that
Considering that the ten-year period of prescription was fast
the trial court erred in holding it liable because it was not a party
approaching, to expire on March 13, 1990, the respondent then
to the contract between JRB Realty, Inc. and Aircon, and that it
instituted, on January 29, 1990, an action for specific
had a personality separate and distinct from that of Aircon.
performance with damages against Aircon & Refrigeration
Industries, Inc., Fedders Air Conditioning USA, Inc., Maxim
On March 23, 2000, the CA affirmed the trial court's ruling in
Industrial & Merchandising Corporation and petitioner Jardine
toto; hence, this petition.
Davies, Inc.[6] The latter was impleaded as defendant,
considering that Aircon was a subsidiary of the petitioner. The
The petitioner raises the following assignment of errors:
respondent prayed that judgment be rendered, as follows:

I.THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE

1. Ordering the defendants to jointly and severally at their
FOR THE ALLEGED CONTRACTUAL BREACH OF AIRCON SOLELY
account and expense deliver, install and place in operation two
BECAUSE THE LATTER WAS FORMERLY JARDINE'S SUBSIDIARY.
brand new units of each 10-tons capacity Fedders unitary
packaged air conditioners with Fedders USA's technology
perfected rotary compressors to always deliver 30,000 kcal or
 38
II. Jardine.
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS
JARDINE'S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN Defendant Jardine's witness, Atty. Fe delos Santos-Quiaoit
NOT DECLARING AIRCON'S OBLIGATION TO DELIVER THE TWO (2) admitted that defendant Aircon, renamed Aircon & Refrigeration
AIRCONDITIONING UNITS TO JRB AS HAVING BEEN Industries, Inc. "is one of the subsidiaries of Jardine Davies" (TSN,
SUBSTANTIALLY COMPLIED WITH IN GOOD FAITH. September 22, 1995, p. 12). She also testified that Jardine
nominated, elected, and appointed the controlling majority of
the Board of Directors and the highest officers of Aircon (Ibid, pp.
III. 10,13-14).
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS
JARDINE'S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN The foregoing circumstances provide justifiable basis for this
NOT DECLARING JRB'S CAUSES OF ACTION AS HAVING BEEN
Court to disregard the fiction of corporate entity and treat
BARRED BY LACHES. defendant Aircon as part of the instrumentality of co-defendant
Jardine.[12]
IV. The respondent court arrived at the same conclusion basing its
ASSUMING ARGUENDO THAT AIRCON MAY BE CONSIDERED AS
ruling on the following documents, to wit:
JARDINE'S MERE ALTER EGO, THE COURT OF APPEALS ERRED IN
FINDING JRB ENTITLED TO RECOVER ALLEGED UNSAVED (a) Contract/Quotation #78-No. 80-1639 dated March 03, 1980
ELECTRICITY EXPENSES. (Exh. D-1);

(b) Newspaper Advertisements (Exhs. E-1 and F-1);

V.
THE COURT OF APPEALS ERRED IN HOLDING JARDINE LIABLE TO
(c) Letter dated March 26, 1981 of A.G. Morrison, President of
PAY ATTORNEY'S FEES. Aircon, to Atty. J.R. Blanco (Exh. J);

VI. (d) News items of Bulletin Today dated August 30, 1982 (Exh. L);
THE COURT OF APPEALS ERRED IN NOT HOLDING JRB LIABLE TO
JARDINE FOR DAMAGES.[11] (e) Balance Sheet of Jardine Davies, Inc. as of December 31, 1979
listing Aircon as one of its subsidiaries (Exh. P);
It is the well-settled rule that factual findings of the trial court, as
affirmed by the CA, are accorded high respect, even finality at (f) Financial Statement of Aircon as of December 31, 1982 and
times. However, considering that the factual findings of the CA 1981 (Exh. S);
and the RTC were based on speculation and conjectures,
unsupported by substantial evidence, the Court finds that the (g) Financial Statement of Aircon as of December 31, 1981 (Exh.
instant case falls under one of the excepted instances. There is, S-1).[13]
thus, a need to correct the error. Applying the doctrine of piercing the veil of corporate fiction,
both the respondent and trial courts conveniently held the
The trial court ruled that Aircon was a subsidiary of the petitioner liable for the alleged omissions of Aircon, considering
petitioner, and concluded, thus: that the latter was its instrumentality or corporate alter ego. The
petitioner is now before us, reiterating its defense of
separateness, and the fact that it is not a party to the contract.
Plaintiff's documentary evidence shows that at the time it
contracted with Aircon on March 13, 1980 (Exhibit "D") and on
We find merit in the petition.
the date the revised agreement was reached on March 26, 1981,
Aircon was a subsidiary of Jardine. The phrase "A subsidiary of
It is an elementary and fundamental principle of corporation law
Jardine Davies, Inc." was printed on Aircon's letterhead of its
that a corporation is an artificial being invested by law with a
March 13, 1980 contract with plaintiff (Exhibit "D-1"), as well as
personality separate and distinct from its stockholders and from
the Aircon's letterhead of Jardine's Director and Senior Vice-
other corporations to which it may be connected. While a
President A.G. Morrison and Aircon's President in his March 26,
corporation is allowed to exist solely for a lawful purpose, the
1981 letter to plaintiff (Exhibit "J-2") confirming the revised
law will regard it as an association of persons or in case of two
agreement. Aircon's newspaper ads of April 12 and 26, 1981 and
corporations, merge them into one, when this corporate legal
a press release on August 30, 1982 (Exhibits "E," "F" and "L") also
entity is used as a cloak for fraud or illegality.[14] This is the
show that defendant Jardine publicly represented Aircon to be its
doctrine of piercing the veil of corporate fiction which applies
subsidiary.
only when such corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or defend crime.
Records from the Securities and Exchange Commission (SEC) also
[15] The rationale behind piercing a corporation's identity is to
reveal that as per Jardine's December 31, 1986 and 1985
remove the barrier between the corporation from the persons
Financial Statements that "The company acts as general manager
comprising it to thwart the fraudulent and illegal schemes of
of its subsidiaries" (Exhibit "P"). Jardine's Consolidated Balance
those who use the corporate personality as a shield for
Sheet as of December 31, 1979 filed with the SEC listed Aircon as
undertaking certain proscribed activities.[16]
its subsidiary by owning 94.35% of Aircon (Exhibit "P-1"). Also,
Aircon's reportorial General Information Sheet as of April 1980
While it is true that Aircon is a subsidiary of the petitioner, it does
and April 1981 filed with the SEC show that Jardine was 94.34%
not necessarily follow that Aircon's corporate legal existence can
owner of Aircon (Exhibits "Q" and "R") and that out of seven
just be disregarded. In Velarde v. Lopez, Inc.,[17] the Court
members of the Board of Directors of Aircon, four (4) are also of
categorically held that a subsidiary has an independent and

separate juridical personality, distinct from that of its parent
company; hence, any claim or suit against the latter does not
bind the former, and vice versa. In applying the doctrine, the
following requisites must be established: (1) control, not merely
majority or complete stock control; (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 acts 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.[18]
The records bear out that Aircon is a subsidiary of the petitioner
only because the latter acquired Aircon's majority of capital
stock. It, however, does not exercise complete control over
Aircon; nowhere can it be gathered that the petitioner manages
the business affairs of Aircon. Indeed, no management
agreement exists between the petitioner and Aircon, and the
latter is an entirely different entity from the petitioner.[19]
Jardine Davies, Inc., incorporated as early as June 28, 1946,[20] is
primarily a financial and trading company. Its Articles of
Incorporation states among many others that the purposes for
which the said corporation was formed, are as follows:
(a) To carry on the business of merchants, commission
merchants, brokers, factors, manufacturers, and agents;
(b) Upon complying with the requirements of law applicable
thereto, to act as agents of companies and underwriters doing
and engaging in any and all kinds of insurance business.[21]
On the other hand, Aircon, incorporated on December 27, 1952,
[22] is a manufacturing firm. Its Articles of Incorporation states
that its purpose is mainly -
To carry on the business of manufacturers of commercial and
household appliances and accessories of any form, particularly to
manufacture, purchase, sell or deal in air conditioning and
refrigeration products of every class and description as well as
accessories and parts thereof, or other kindred articles; and to
erect, or buy, lease, manage, or otherwise acquire
manufactories, warehouses, and depots for manufacturing,
assemblage, repair and storing, buying, selling, and dealing in the
aforesaid appliances, accessories and products. …[23]
The existence of interlocking directors, corporate officers and
shareholders, which the respondent court considered, is not
enough justification to pierce the veil of corporate fiction, in the
absence of fraud or other public policy considerations.[24] But
even when there is dominance over the affairs of the subsidiary,
the doctrine of piercing the veil of corporate fiction applies only
when such fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime.[25] To warrant resort to
this extraordinary remedy, there must be proof that the
corporation is being used as a cloak or cover for fraud or
illegality, or to work injustice.[26] Any piercing of the corporate
veil has to be done with caution.[27] The wrongdoing must be
clearly and convincingly established. It cannot just be presumed.
[28]
In the instant case, there is no evidence that Aircon was formed
or utilized with the intention of defrauding its creditors or
evading its contracts and obligations. There was nothing
fraudulent in the acts of Aircon in this case. Aircon, as a
39
manufacturing firm of air conditioners, complied with its
obligation of providing two air conditioning units for the second
floor of the Blanco Center in good faith, pursuant to its contract
with the respondent. Unfortunately, the performance of the air
conditioning units did not satisfy the respondent despite several
adjustments and corrective measures. In a Letter[29] dated
October 22, 1980, the respondent even conceded that Fedders
Air Conditioning USA has not yet perhaps perfected its
technology of rotary compressors, and agreed to change the
compressors with the semi-hermetic type. Thus, Aircon
substituted the units with serviceable ones which delivered the
cooling temperature needed for the law office. After enjoying ten
(10) years of its cooling power, respondent cannot now complain
about the performance of these units, nor can it demand a
replacement thereof.
Moreover, it was reversible error to award the respondent the
amount of P556,551.55 representing the alleged 30% unsaved
electricity costs and P185,951.67 as maintenance cost without
showing any basis for such award. To justify a grant of actual or
compensatory damages, it is necessary to prove with a
reasonable degree of certainty, premised upon competent proof
and on the best evidence obtainable by the injured party, the
actual amount of loss.[30] The respondent merely based its
cause of action on Aircon's alleged representation that Fedders
air conditioners with rotary compressors can save as much as
30% on electricity compared to other brands. Offered in
evidence were newspaper advertisements published on April 12
and 26, 1981. The respondent then recorded its electricity
consumption from October 21, 1981 up to April 3, 1995 and
computed 30% thereof, which amounted to P556,551.55. The
Court rules that this amount is highly speculative and merely
hypothetical, and for which the petitioner can not be held
accountable.
First. The respondent merely relied on the newspaper
advertisements showing the Fedders window-type air
conditioners, which are far different from the big capacity air
conditioning units installed at Blanco Center.
Second. After such print advertisements, the respondent
informed Aircon that it was going to install an electric meter to
register its electric consumption so as to determine the electric
costs not saved by the presently installed units with semi-
hermetic compressors. Contrary to the allegations of the
respondent that this was in pursuance to their Revised
Agreement, no proof was adduced that Aircon agreed to the
respondent's proposition. It was a unilateral act on the part of
the respondent, which Aircon did not oblige or commit itself to
pay.
Third. Needless to state, the amounts computed are mere
estimates representing the respondent's self-serving claim of
unsaved electricity cost, which is too speculative and conjectural
to merit consideration. No other proofs, reports or bases of
comparison showing that Fedders Air Conditioning USA could
indeed cut down electricity cost by 30% were adduced.
Likewise, there is no basis for the award of P185,951.67
representing maintenance cost. The respondent merely
submitted a schedule[31]prepared by the respondent's
accountant, listing the alleged repair costs from March 1987 up
to June 1994. Such evidence is self-serving and can not also be
given probative weight, considering that there are no proofs of
receipts, vouchers, etc., which would substantiate the amounts
 40
paid for such services. Absent any more convincing proof, the opposition to the application. On June 15, 1999, petitioner filed
Court finds that the respondent's claims are without basis, and an opposition to the application for a writ of preliminary
cannot, therefore, be awarded. injunction to which the respondents filed a reply. On June 25,
1999, petitioner filed a motion to dismiss on the grounds of
We sustain the petitioner's separateness from that of Aircon in failure to state a cause of action and the absence of any privity
this case. It bears stressing that the petitioner was never a party between the petitioner and respondents. On June 30, 1999, the
to the contract. Privity of contracts take effect only between trial court judge issued an Order for the issuance of a writ of
parties, their successors-in-interest, heirs and assigns.[32] The preliminary injunction, which writ was correspondingly issued on
petitioner, which has a separate and distinct legal personality July 14, 1999. On October 4, 1999, the motion to dismiss was
from that of Aircon, cannot, therefore, be held liable. denied by the trial court judge for lack of merit.

Petitioner, thereafter, in a petition for certiorari and prohibition

IN VIEW OF THE FOREGOING, the petition is GRANTED. The
assailed the issuance of the writ of preliminary injunction before
assailed decision of the Court of Appeals, affirming the decision
the Court of Appeals. In the impugned decision,1 the appellate
of the Regional Trial Court is REVERSED and SET ASIDE. The
court dismissed the petition. Petitioner thus seeks recourse to
complaint of the respondent is DISMISSED. Costs against the
this Court and raises the following errors:
respondent. SO ORDERED.
1.
G.R. No. 142616 July 31, 2001
PHILIPPINE NATIONAL BANK, petitioner, THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING
vs. THE COMPLAINT A QUO, CONSIDERING THAT BY THE
RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN
ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF ACTION EXISTS
GENERAL MERCHANDISE,respondents.
AGAINST PETITIONER, WHICH IS NOT A REAL PARTY IN INTEREST
KAPUNAN, J.:
BEING A MERE ATTORNEY-IN-FACT AUTHORIZED TO ENFORCE AN
In a petition for review on certiorari under Rule 45 of the Revised ANCILLARY CONTRACT.
Rules of Court, petitioner seeks to annul and set aside the Court 2.
of Appeals' decision in C.A. CV G.R. S.P. No. 55374 dated March
27, 2000, affirming the Order issuing a writ of preliminary THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE
injunction of the Regional Trial Court of Makati, Branch 147 TRIAL COURT TO ISSUE IN EXCESS OR LACK OF JURISDICTION A
dated June 30, 1999, and its Order dated October 4, 1999, which WRIT OF PRELIMINARY INJUNCTION OVER AND BEYOND WHAT
denied petitioner's motion to dismiss. WAS PRAYED FOR IN THE COMPLAINT A QUO CONTRARY
TO CHIEF OF STAFF, AFP VS. GUADIZ JR., 101 SCRA 827.2
The antecedents of this case are as follows:
Petitioner prays, inter alia, that the Court of Appeals' Decision
Petitioner Philippine National Bank is a domestic corporation dated March 27, 2000 and the trial court's Orders dated June 30,
organized and existing under Philippine law. Meanwhile, 1999 and October 4, 1999 be set aside and the dismissal of the
respondents Ritratto Group, Inc., Riatto International, Inc. and complaint in the instant case.3
Dadasan General Merchandise are domestic corporations,
likewise, organized and existing under Philippine law. In their Comment, respondents argue that even
assuming arguendo that petitioner and PNB-IFL are two separate
On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a entities, petitioner is still the party-in-interest in the application
subsidiary company of PNB, organized and doing business in for preliminary injunction because it is tasked to commit acts of
Hong Kong, extended a letter of credit in favor of the foreclosing respondents' properties.4 Respondents maintain that
respondents in the amount of US$300,000.00 secured by real the entire credit facility is void as it contains stipulations in
estate mortgages constituted over four (4) parcels of land in violation of the principle of mutuality of contracts.5 In addition,
Makati City. This credit facility was later increased successively to respondents justified the act of the court a quo in applying the
US$1,140,000.00 in September 1996; to US$1,290,000.00 in doctrine of "Piercing the Veil of Corporate Identity" by stating
November 1996; to US$1,425,000.00 in February 1997; and that petitioner is merely an alter ego or a business conduit of
decreased to US$1,421,316.18 in April 1998. Respondents made PNB-IFL.6
repayments of the loan incurred by remitting those amounts to
their loan account with PNB-IFL in Hong Kong. The petition is impressed with merit.

However, as of April 30, 1998, their outstanding obligations stood Respondents, in their complaint, anchor their prayer for
at US$1,497,274.70. Pursuant to the terms of the real estate injunction on alleged invalid provisions of the contract:
mortgages, PNB-IFL, through its attorney-in-fact PNB, notified the
GROUNDS
respondents of the foreclosure of all the real estate mortgages
and that the properties subject thereof were to be sold at a I
public auction on May 27, 1999 at the Makati City Hall.
THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO
On May 25, 1999, respondents filed a complaint for injunction THE SOLE DISCRETION OF THE DEFENDANT PNB CONTRAVENES
with prayer for the issuance of a writ of preliminary injunction THE PRINCIPAL OF MUTUALITY OF CONTRACTS.
and/or temporary restraining order before the Regional Trial
Court of Makati. The Executive Judge of the Regional Trial Court II
of Makati issued a 72-hour temporary restraining order. On May
THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT
28, 1999, the case was raffled to Branch 147 of the Regional Trial
THE RATE OF INTEREST AGREED UPON MAY BE UNILATERALLY
Court of Makati. The trial judge then set a hearing on June 8,
MODIFIED BY DEFENDANT, THERE WAS NO STIPULATION THAT
1999. At the hearing of the application for preliminary injunction,
THE RATE OF INTEREST SHALL BE REDUCED IN THE EVENT THAT
petitioner was given a period of seven days to file its written
 41
THE APPLICABLE MAXIMUM RATE OF INTEREST IS REDUCED BY While there exists no definite test of general application in
LAW OR BY THE MONETARY BOARD.7 determining when a subsidiary may be treated as a mere
instrumentality of the parent corporation, some factors have
Based on the aforementioned grounds, respondents sought to
been identified that will justify the application of the treatment
enjoin and restrain PNB from the foreclosure and eventual sale of of the doctrine of the piercing of the corporate veil. The case
the property in order to protect their rights to said property by
of Garrett vs. Southern Railway Co.14 is enlightening. The case
reason of void credit facilities as bases for the real estate involved a suit against the Southern Railway Company. Plaintiff
mortgage over the said property.8
was employed by Lenoir Car Works and alleged that he sustained
The contract questioned is one entered into between respondent injuries while working for Lenoir. He, however, filed a suit against
and PNB-IFL, not PNB. In their complaint, respondents admit that Southern Railway Company on the ground that Southern had
petitioner is a mere attorney-in-fact for the PNB-IFL with full acquired the entire capital stock of Lenoir Car Works, hence, the
power and authority to, inter alia, foreclose on the properties latter corporation was but a mere instrumentality of the former.
mortgaged to secure their loan obligations with PNB-IFL. In other The Tennessee Supreme Court stated that as a general rule the
words, herein petitioner is an agent with limited authority and stock ownership alone by one corporation of the stock of another
specific duties under a special power of attorney incorporated in does not thereby render the dominant corporation liable for the
the real estate mortgage. It is not privy to the loan contracts torts of the subsidiary unless the separate corporate existence of
entered into by respondents and PNB-IFL. the subsidiary is a mere sham, or unless the control of the
subsidiary is such that it is but an instrumentality or adjunct of
The issue of the validity of the loan contracts is a matter between the dominant corporation. Said Court then outlined the
PNB-IFL, the petitioner's principal and the party to the loan circumstances which may be useful in the determination of
contracts, and the respondents. Yet, despite the recognition that whether the subsidiary is but a mere instrumentality of the
petitioner is a mere agent, the respondents in their complaint parent-corporation:
prayed that the petitioner PNB be ordered to re-compute the
rescheduling of the interest to be paid by them in accordance The Circumstance rendering the subsidiary an instrumentality. It
with the terms and conditions in the documents evidencing the is manifestly impossible to catalogue the infinite variations of fact
credit facilities, and crediting the amount previously paid to PNB that can arise but there are certain common circumstances which
by herein respondents.9 are important and which, if present in the proper combination,
are controlling.
Clearly, petitioner not being a part to the contract has no power
to re-compute the interest rates set forth in the contract. These are as follows:
Respondents, therefore, do not have any cause of action against (a) The parent corporation owns all or most of the capital stock
petitioner.
of the subsidiary.
The trial court, however, in its Order dated October 4, 1994, (b) The parent and subsidiary corporations have common
ruled that since PNB-IFL, is a wholly owned subsidiary of
directors or officers.
defendant Philippine National Bank, the suit against the
defendant PNB is a suit against PNB-IFL.10 In justifying its ruling, (c) The parent corporation finances the subsidiary.
the trial court, citing the case of Koppel Phil. Inc. vs.
(d) The parent corporation subscribes to all the capital stock of
Yatco,11 reasoned that the corporate entity may be disregarded
the subsidiary or otherwise causes its incorporation.
where a corporation is the mere alter ego, or business conduit of
a person or where the corporation is so organized and controlled (e) The subsidiary has grossly inadequate capital.
and its affairs are so conducted, as to make it merely an
instrumentality, agency, conduit or adjunct of another (f) The parent corporation pays the salaries and other expenses
corporation.12 or losses of the subsidiary.

We disagree. (g) The subsidiary has substantially no business except with the
parent corporation or no assets except those conveyed to or by
The general rule is that as a legal entity, a corporation has a the parent corporation.
personality distinct and separate from its individual stockholders
or members, and is not affected by the personal rights, (h) In the papers of the parent corporation or in the statements
obligations and transactions of the latter.13 The mere fact that a of its officers, the subsidiary is described as a department or
corporation owns all of the stocks of another corporation, taken division of the parent corporation, or its business or financial
alone is not sufficient to justify their being treated as one entity. responsibility is referred to as the parent corporation's own.
If used to perform legitimate functions, a subsidiary's separate
(i) The parent corporation uses the property of the subsidiary as
existence may be respected, and the liability of the parent
its own.
corporation as well as the subsidiary will be confined to those
arising in their respective business. The courts may in the (j) The directors or executives of the subsidiary do not act
exercise of judicial discretion step in to prevent the abuses of independently in the interest of the subsidiary but take their
separate entity privilege and pierce the veil of corporate entity. orders from the parent corporation.

We find, however, that the ruling in Koppel finds no application in
the case at bar. In said case, this Court disregarded the separate
existence of the parent and the subsidiary on the ground that the
latter was formed merely for the purpose of evading the
payment of higher taxes. In the case at bar, respondents fail to
show any cogent reason why the separate entities of the PNB
and PNB-IFL should be disregarded.
(k) The formal legal requirements of the subsidiary are not
observed.
The Tennessee Supreme Court thus ruled:
In the case at bar only two of the eleven listed indicia occur,
namely, the ownership of most of the capital stock of Lenoir by
 42
Southern, and possibly subscription to the capital stock of preventive remedy that may only be resorted to by a litigant to
Lenoir. . . The complaint must be dismissed. protect or preserve his rights or interests and for no other
purpose during the pendency of the principal action. The
Similarly, in this jurisdiction, we have held that the doctrine of
dismissal of the principal action thus results in the denial of the
piercing the corporate veil is an equitable doctrine developed to prayer for the issuance of the writ. Further, there is no showing
address situations where the separate corporate personality of a
that respondents are entitled to the issuance of the writ. Section
corporation is abused or used for wrongful purposes. The 3, Rule 58, of the 1997 Rules of Civil Procedure provides:
doctrine applies when the corporate fiction is used to defeat
public convenience, justify wrong, protect fraud or defend crime, SECTION 3. Grounds for issuance of preliminary injunction. — A
or when it is made as a shield to confuse the legitimate issues, or preliminary injunction may be granted when it is established:
where a corporation is the mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled (a) That the applicant is entitled to the relief demanded, and the
whole or part of such relief consists in restraining the
and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another commission or continuance of the act or acts complained of, or in
requiring the performance of an act or acts, either for a limited
corporation.15
period or perpetually,
In Concept Builders, Inc. v. NLRC,16 we have laid the test in
(b) That the commission, continuance or non-performance of the
determining the applicability of the doctrine of piercing the veil
acts or acts complained of during the litigation would probably
of corporate fiction, to wit:
work injustice to the applicant; or
1. Control, not mere majority or complete control, but complete
domination, not only of finances but of policy and business (c) That a party, court, agency or a person is doing, threatening,
or is attempting to do, or is procuring or suffering to be done,
practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no some act or acts probably in violation of the rights of the
applicant respecting the subject of the action or proceeding, and
separate mind, will or existence of its own.
tending to render the judgment ineffectual.
2. Such control must have been used by the defendant to commit
Thus, an injunctive remedy may only be resorted to when there
fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty, or dishonest and, unjust act in is a pressing necessity to avoid injurious consequences which
cannot be remedied under any standard
contravention of plaintiffs legal rights; and,
compensation.21 Respondents do not deny their indebtedness.
3. The aforesaid control and breach of duty must proximately Their properties are by their own choice encumbered by real
cause the injury or unjust loss complained of. estate mortgages. Upon the non-payment of the loans, which
were secured by the mortgages sought to be foreclosed, the
The absence of any one of these elements prevents "piercing the
mortgaged properties are properly subject to a foreclosure sale.
corporate veil." In applying the "instrumentality" or "alter ego" Moreover, respondents questioned the alleged void stipulations
doctrine, the courts are concerned with reality and not form,
in the contract only when petitioner initiated the foreclosure
with how the corporation operated and the individual proceedings. Clearly, respondents have failed to prove that they
defendant's relationship to the operation.17
have a right protected and that the acts against which the writ is
Aside from the fact that PNB-IFL is a wholly owned subsidiary of to be directed are violative of said right.22 The Court is not
petitioner PNB, there is no showing of the indicative factors that unmindful of the findings of both the trial court and the
the former corporation is a mere instrumentality of the latter are appellate court that there may be serious grounds to nullify the
present. Neither is there a demonstration that any of the evils provisions of the loan agreement. However, as earlier discussed,
sought to be prevented by the doctrine of piercing the corporate respondents committed the mistake of filing the case against the
veil exists. Inescapably, therefore, the doctrine of piercing the wrong party, thus, they must suffer the consequences of their
corporate veil based on the alter ego or instrumentality doctrine error.
finds no application in the case at bar.
All told, respondents do not have a cause of action against the
In any case, the parent-subsidiary relationship between PNB and petitioner as the latter is not privy to the contract the provisions
PNB-IFL is not the significant legal relationship involved in this of which respondents seek to declare void. Accordingly, the case
case since the petitioner was not sued because it is the parent before the Regional Trial Court must be dismissed and the
company of PNB-IFL. Rather, the petitioner was sued because it preliminary injunction issued in connection therewith, must be
acted as an attorney-in-fact of PNB-IFL in initiating the lifted.
foreclosure proceedings. A suit against an agent cannot without
IN VIEW OF THE FOREGOING, the petition is hereby GRANTED.
compelling reasons be considered a suit against the principal. The assailed decision of the Court of Appeals is hereby
Under the Rules of Court, every action must be prosecuted or
REVERSED. The Orders dated June 30, 1999 and October 4, 1999
defended in the name of the real party-in-interest, unless of the Regional Trial Court of Makati, Branch 147 in Civil Case No.
otherwise authorized by law or these Rules.18 In mandatory
99-1037 are hereby ANNULLED and SET ASIDE and the complaint
terms, the Rules require that "parties-in-interest without whom in said case DISMISSED. SO ORDERED.
no final determination can be had, an action shall be joined
either as plaintiffs or defendants."19 In the case at bar, the G.R. No. 170689 March 17, 2009
injunction suit is directed only against the agent, not the PANTRANCO EMPLOYEES ASSOCIATION (PEA-PTGWO) and PANTRANCO
principal. RETRENCHED EMPLOYEES ASSOCIATION (PANREA), Petitioners,
vs.
Anent the issuance of the preliminary injunction, the same must NATIONAL LABOR RELATIONS COMMISSION (NLRC), PANTRANCO
be lifted as it is a mere provisional remedy but adjunct to the NORTH EXPRESS, INC. (PNEI), PHILIPPINE NATIONAL BANK (PNB),
main suit.20 A writ of preliminary injunction is an ancillary or PHILIPPINE NATIONAL BANK-MANAGEMENT AND DEVELOPMENT
 43
CORPORATION (PNB-MADECOR), and MEGA PRIME REALTY AND various labor claims commenced by the former employees of
HOLDINGS CORPORATION (MEGA PRIME), Respondents. PNEI where the latter obtained favorable decisions.
x - - - - - - - - - - - - - - - - - - - - - - -x
G.R. No. 170705 March 17, 2009 On July 5, 2002, the Labor Arbiter issued the Sixth Alias Writ of
PHILIPPINE NATIONAL BANK, Petitioner, Execution10 commanding the NLRC Sheriffs to levy on the assets
vs. of PNEI in order to satisfy the ₱722,727,150.22 due its former
PANTRANCO EMPLOYEES ASSOCIATION, INC. (PEA-PTGWO), employees, as full and final satisfaction of the judgment awards
PANTRANCO RETRENCHED EMPLOYEES ASSOCIATION (PANREA) AND
in the labor cases. The sheriffs were likewise instructed to
PANTRANCO ASSOCIATION OF CONCERNED EMPLOYEES (PACE), ET AL.,
proceed against PNB, PNB-Madecor and Mega Prime.11 In
PHILIPPINE NATIONAL BANK-MANAGEMENT DEVELOPMENT
CORPORATION (PNB-MADECOR), and MEGA PRIME REALTY HOLDINGS, implementing the writ, the sheriffs levied upon the four valuable
INC., Respondents. pieces of real estate located at the corner of Quezon and
DECISION Roosevelt Avenues, on which the former Pantranco Bus Terminal
NACHURA, J.: stood. These properties were covered by Transfer Certificate of
Title (TCT) Nos. 87881-87884, registered under the name of PNB-
Before us are two consolidated petitions assailing the Court of Madecor.12 Subsequently, Notice of Sale of the foregoing real
Appeals (CA) Decision1 dated June 3, 2005 and its properties was published in the newspaper and the sale was set
Resolution2 dated December 7, 2005 in CA-G.R. SP No. 80599. on July 31, 2002. Having been notified of the auction sale,
motions to quash the writ were separately filed by PNB-Madecor
In G.R. No. 170689, the Pantranco Employees Association (PEA)
and Mega Prime, and PNB. They likewise filed their Third-Party
and Pantranco Retrenched Employees Association (PANREA) pray
Claims.13 PNB-Madecor anchored its motion on its right as the
that the CA decision be set aside and a new one be entered,
registered owner of the Pantranco properties, and Mega Prime as
declaring the Philippine National Bank (PNB) and PNB
the successor-in-interest. For its part, PNB sought the
Management and Development Corporation (PNB-Madecor)
nullification of the writ on the ground that it was not a party to
jointly and solidarily liable for the ₱722,727,150.22 National
the labor case.14 In its Third-Party Claim, PNB alleged that PNB-
Labor Relations Commission (NLRC) judgment in favor of the
Madecor was indebted to the former and that the Pantranco
Pantranco North Express, Inc. (PNEI) employees;3 while in G.R.
properties
No. 170705, PNB prays that the auction sale of the Pantranco
properties be declared null and void.4 would answer for such debt. As such, the scheduled auction sale
of the aforesaid properties was not legally in order.15
The facts of the case, as found by the CA,5 and established in
Republic of the Phils. v. NLRC,6 Pantranco North Express, Inc. v. On September 10, 2002, the Labor Arbiter declared that the
NLRC,7 and PNB MADECOR v. Uy,8 follow: subject Pantranco properties were owned by PNB-Madecor. It
being a corporation with a distinct and separate personality, its
The Gonzales family owned two corporations, namely, the PNEI
assets could not answer for the liabilities of PNEI. Considering,
and Macris Realty Corporation (Macris). PNEI provided
however, that PNB-Madecor executed a promissory note in favor
transportation services to the public, and had its bus terminal at
of PNEI for ₱7,884,000.00, the writ of execution to the extent of
the corner of Quezon and Roosevelt Avenues in Quezon City. The
the said amount was concerned was considered valid.16
terminal stood on four valuable pieces of real estate (known as
Pantranco properties) registered under the name of Macris.9 The PNB’s third-party claim – to nullify the writ on the ground that it
Gonzales family later incurred huge financial losses despite has an interest in the Pantranco properties being a creditor of
attempts of rehabilitation and loan infusion. In March 1975, their PNB-Madecor, – on the other hand, was denied because it only
creditors took over the management of PNEI and Macris. By had an inchoate interest in the properties.17
1978, full ownership was transferred to one of their creditors, the
National Investment Development Corporation (NIDC), a The dispositive portion of the Labor Arbiter’s September 10,
subsidiary of the PNB. 2002 Resolution is quoted hereunder:

Macris was later renamed as the National Realty Development WHEREFORE, the Third Party Claim of PNB Madecor and/or Mega
Corporation (Naredeco) and eventually merged with the National Prime Holdings, Inc. is hereby GRANTED and concomitantly the
Warehousing Corporation (Nawaco) to form the new PNB levies made by the sheriffs of the NLRC on the properties of PNB
subsidiary, the PNB-Madecor. Madecor should be as it (sic) is hereby LIFTED subject to the
payment by PNB Madecor to the complainants the amount of
In 1985, NIDC sold PNEI to North Express Transport, Inc. (NETI), a ₱7,884,000.00.
company owned by Gregorio Araneta III. In 1986, PNEI was
among the several companies placed under sequestration by the The Motion to Quash and Third Party Claim of PNB is hereby
Presidential Commission on Good Government (PCGG) shortly DENIED.
after the historic events in EDSA. In January 1988, PCGG lifted the The Motion to Quash of PNB Madecor and Mega Prime Holdings,
sequestration order to pave the way for the sale of PNEI back to Inc. is hereby PARTIALLY GRANTED insofar as the amount of the
the private sector through the Asset Privatization Trust (APT). writ exceeds ₱7,884,000.00.
APT thus took over the management of PNEI.
The Motion for Recomputation and Examination of Judgment
In 1992, PNEI applied with the Securities and Exchange Awards is hereby DENIED for want of merit.
Commission (SEC) for suspension of payments. A management
committee was thereafter created which recommended to the The Motion to Expunge from the Records
SEC the sale of the company through privatization. As a cost- claimants/complainants Opposition dated August 3, 2002 is
saving measure, the committee likewise suggested the hereby DENIED for lack of merit.
retrenchment of several PNEI employees. Eventually, PNEI ceased
SO ORDERED.18
its operation. Along with the cessation of business came the
 44
On appeal to the NLRC, the same was denied and the Labor On June 3, 2005, the CA rendered the assailed decision affirming
Arbiter’s disposition was affirmed.19 Specifically, the NLRC the NLRC resolutions.
concluded as follows:
The appellate court pointed out that PNB, PNB-Madecor and
(1) PNB-Madecor and Mega Prime contended that it would be Mega Prime are corporations with personalities separate and
impossible for them to comply with the requirement of the labor distinct from PNEI. As such, there being no cogent reason to
arbiter to pay to the PNEI employees the amount of ₱7.8 million pierce the veil of corporate fiction, the separate personalities of
as a condition to the lifting of the levy on the properties, since the above corporations should be maintained. The CA added that
the credit was already garnished by Gerardo Uy and other the Pantranco properties were never owned by PNEI; rather,
creditors of PNEI. The NLRC found no evidence that Uy had their titles were registered under the name of PNB-Madecor. If
satisfied his judgment from the promissory note, and opined that PNB and PNB-Madecor could not answer for the liabilities of
even if the credit was in custodia legis, the claim of the PNEI PNEI, with more reason should Mega Prime not be held liable
employees should enjoy preference under the Labor Code. being a mere successor-in-interest of PNB-Madecor.

(2) The PNEI employees contested the finding that PNB-Madecor Unsatisfied, PEA-PTGWO and PANREA filed their motion for
was indebted to the PNEI for only ₱7.8 million without reconsideration;24 while PNB filed its Partial Motion for
considering the accrual of interest. But the NLRC said that there Reconsideration.25 PNB pointed out that PNB-Madecor was
was no evidence that demand was made as a basis for reckoning made to answer for ₱7,884,000.00 to the PNEI employees by
interest. virtue of the promissory note it (PNB-Madecor) earlier executed
in favor of PNEI. PNB, however, questioned the June 23, 2004
(3) The PNEI employees further argued that the labor arbiter may auction sale as the ₱7.8 million debt had already been satisfied
not properly conclude from a decision of Judge Demetrio
pursuant to this Court’s decision in PNB MADECOR v. Uy.26
Macapagal Jr. of the RTC of Quezon City that PNB-Madecor was
the owner of the properties as his decision was reconsidered by Both motions were denied by the appellate court.27
the next presiding judge, nor from a decision of the Supreme
Court that PNEI was a mere lessee of the properties, the fact In two separate petitions, PNB and the former PNEI employees
come up to this Court assailing the CA decision and resolution.
being that the transfer of the properties to PNB-Madecor was
done to avoid satisfaction of the claims of the employees with The former PNEI employees raise the lone error, thus:
the NLRC and that as a result of a civil case filed by Mega Prime, The Honorable Court of Appeals palpably departed from the
the subsequent sale of the properties by PNB to Mega Prime was established rules and jurisprudence in ruling that private
rescinded. The NLRC pointed out that while the Macapagal respondents Pantranco North Express, Inc. (PNEI), Philippine
decision was set aside by Judge Bruselas and hence, his findings National Bank (PNB), Philippine National Bank Management and
could not be invoked by the labor arbiter, the titles of PNB- Development Corporation (PNB-MADECOR), Mega Prime Realty
Madecor are conclusive and there is no evidence that PNEI had and Holdings, Inc. (Mega Prime) are not jointly and severally
ever been an owner. The Supreme Court had observed in its answerable to the ₱722,727,150.22 Million NLRC money
decision that PNEI owed back rentals of ₱8.7 million to PNB- judgment awards in favor of the 4,000 individual members of the
Madecor. Petitioners.28
(4) The PNEI employees faulted the labor arbiter for not finding They claim that PNB, through PNB-Madecor, directly benefited
that PNEI, PNB, PNB-Madecor and Mega Prime were all jointly from the operation of PNEI and had complete control over the
and severally liable for their claims. The NLRC underscored the funds of PNEI. Hence, they are solidarily answerable with PNEI
fact that PNEI and Macris were subsidiaries of NIDC and had for the unpaid money claims of the employees.29 Citing A.C.
passed through and were under the Asset Privatization Trust Ransom Labor Union-CCLU v. NLRC,30 the employees insist that
(APT) when the labor claims accrued. The labor arbiter was where the employer corporation ceases to exist and is no longer
correct in not granting PNB’s third-party claim because at the able to satisfy the judgment awards in favor of its employees, the
time the causes of action accrued, the PNEI was managed by a owner of the employer corporation should be made jointly and
management committee appointed by the PNB as the new severally liable.31 They added that malice or bad faith need not
owner of PNRI (sic) and Macris through a deed of assignment or be proven to make the owners liable.
transfer of ownership. The NLRC says at length that the same is
not true with PNB-Madecor which is now the registered owner of On the other hand, PNB anchors its petition on this sole
the properties.20 assignment of error, viz.:

The parties’ separate motions for reconsideration were likewise THE AUCTION SALE OF THE PROPERTY COVERED BY TCT NO.
denied.21 Thereafter, the matter was elevated to the CA by 87884 INTENDED TO PARTIALLY SATISFY THE CLAIMS OF FORMER
PANREA, PEA-PTGWO and the Pantranco Association of WORKERS OF PNEI IN THE AMOUNT OF ₱7,884,000.00 (THE
Concerned Employees. The latter group, however, later withdrew AMOUNT OF PNB-MADECOR’S PROMISSORY NOTE IN FAVOR OF
its petition. The former employees’ petition was docketed as CA-PNEI) IS NOT IN ORDER AS THE SAID PROPERTY IS NOT OWNED
G.R. SP No. 80599. BY PNEI. FURTHER, THE SAID PROMISSORY NOTE HAD ALREADY
BEEN GARNISHED IN FAVOR OF GERARDO C. UY WHICH LED TO
PNB-Madecor and Mega Prime likewise filed their separate THREE (3) PROPERTIES UNDER THE NAME OF PNB-MADECOR,
petition before the CA which was docketed as CA-G.R. SP No. NAMELY TCT NOS. 87881, 87882 AND 87883, BEING LEVIED AND
80737, but the same was dismissed.22 SOLD ON EXECUTION IN THE "PNB-MADECOR VS. UY" CASE (363
In view of the ₱7,884,000.00 debt of PNB-Madecor to PNEI, on SCRA 128 [2001]) AND "GERARDO C. UY VS. PNEI" (CIVIL CASE
NO. 95-72685, RTC MANILA, BRANCH 38).32
June 23, 2004, an auction sale was conducted over the Pantranco
properties to satisfy the claim of the PNEI employees, wherein PNB insists that the Pantranco properties could no longer be
CPAR Realty was adjudged as the highest bidder.23 levied upon because the promissory note for which the Labor

Arbiter held PNB-Madecor liable to PNEI, and in turn to the
latter’s former employees, had already been satisfied in favor of
Gerardo C. Uy. It added that the properties were in fact awarded
to the highest bidder. Besides, says PNB, the subject properties
were not owned by PNEI, hence, the execution sale thereof was
not validly effected.33
Both petitions must fail.
G.R. No. 170689
Stripped of the non-essentials, the sole issue for resolution raised
by the former PNEI employees is whether they can attach the
properties (specifically the Pantranco properties) of PNB, PNB-
Madecor and Mega Prime to satisfy their unpaid labor claims
against PNEI.
45
Lastly, while we recognize that there are peculiar circumstances
or valid grounds that may exist to warrant the piercing of the
corporate veil, 43 none applies in the present case whether
between PNB and PNEI; or PNB and PNB-Madecor.
Under the doctrine of "piercing the veil of corporate fiction," the
court looks at the corporation as a mere collection of individuals
or an aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation
unifying the group.44 Another formulation of this doctrine is that
when two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when
necessary to protect the rights of third parties, disregard the
legal fiction that two corporations are distinct entities and treat
them as identical or as one and the same.45

We answer in the negative. Whether the separate personality of the corporation should be
pierced hinges on obtaining facts appropriately pleaded or
First, the subject property is not owned by the judgment debtor, proved. However, any piercing of the corporate veil has to be
that is, PNEI. Nowhere in the records was it shown that PNEI done with caution, albeit the Court will not hesitate to disregard
owned the Pantranco properties. Petitioners, in fact, never the corporate veil when it is misused or when necessary in the
alleged in any of their pleadings the fact of such ownership. What interest of justice. After all, the concept of corporate entity was
was established, instead, in PNB MADECOR v. Uy34 and PNB v. not meant to promote unfair objectives.46
Mega Prime Realty and Holdings Corporation/Mega Prime Realty
and Holdings Corporation v. PNB35 was that the properties were As between PNB and PNEI, petitioners want us to disregard their
owned by Macris, the predecessor of PNB-Madecor. Hence, they separate personalities, and insist that because the company,
cannot be pursued against by the creditors of PNEI. PNEI, has already ceased operations and there is no other way by
which the judgment in favor of the employees can be satisfied,
We would like to stress the settled rule that the power of the corporate officers can be held jointly and severally liable with the
court in executing judgments extends only to properties company. Petitioners rely on the pronouncement of this Court in
unquestionably belonging to the judgment debtor alone.36 To be A.C. Ransom Labor Union-CCLU v. NLRC47 and subsequent
sure, one man’s goods shall not be sold for another man’s cases.48
debts.37 A sheriff is not authorized to attach or levy on property
not belonging to the judgment debtor, and even incurs liability if This reliance fails to persuade. We find the aforesaid decisions
he wrongfully levies upon the property of a third person.38 inapplicable to the instant case.

Second, PNB, PNB-Madecor and Mega Prime are corporations For one, in the said cases, the persons made liable after the
with personalities separate and distinct from that of PNEI. PNB is company’s cessation of operations were the officers and agents
sought to be held liable because it acquired PNEI through NIDC at of the corporation. The rationale is that, since the corporation is
the time when PNEI was suffering financial reverses. PNB- an artificial person, it must have an officer who can be presumed
Madecor is being made to answer for petitioners’ labor claims as to be the employer, being the person acting in the interest of the
the owner of the subject Pantranco properties and as a employer. The corporation, only in the technical sense, is the
subsidiary of PNB. Mega Prime is also included for having employer.49 In the instant case, what is being made liable is
acquired PNB’s shares over PNB-Madecor. another corporation (PNB) which acquired the debtor
corporation (PNEI).
The general rule is that a corporation has a personality separate
and distinct from those of its stockholders and other Moreover, in the recent cases Carag v. National Labor Relations
corporations to which it may be connected.39 This is a fiction Commission50 and McLeod v. National Labor Relations
created by law for convenience and to prevent Commission,51 the Court explained the doctrine laid down in AC
injustice.40 Obviously, PNB, PNB-Madecor, Mega Prime, and PNEI Ransom relative to the personal liability of the officers and
are corporations with their own personalities. The "separate agents of the employer for the debts of the latter. In AC Ransom,
personalities" of the first three corporations had been recognizedthe Court imputed liability to the officers of the corporation on
by this Court in PNB v. Mega Prime Realty and Holdings the strength of the definition of an employer in Article 212(c)
Corporation/Mega Prime Realty and Holdings Corporation v. (now Article 212[e]) of the Labor Code. Under the said provision,
PNB41 where we stated that PNB was only a stockholder of PNB- employer includes any person acting in the interest of an
Madecor which later sold its shares to Mega Prime; and that employer, directly or indirectly, but does not include any labor
PNB-Madecor was the owner of the Pantranco properties. organization or any of its officers or agents except when acting as
Moreover, these corporations are registered as separate entities employer. It was clarified in Carag and McLeod that Article 212(e)
and, absent any valid reason, we maintain their separate of the Labor Code, by itself, does not make a corporate officer
identities and we cannot treat them as one. personally liable for the debts of the corporation. It added that
the governing law on personal liability of directors or officers for
Neither can we merge the personality of PNEI with PNB simply debts of the corporation is still Section 3152 of the Corporation
because the latter acquired the former. Settled is the rule that Code.
where one corporation sells or otherwise transfers all its assets
to another corporation for value, the latter is not, by that fact More importantly, as aptly observed by this Court in AC Ransom,
alone, liable for the debts and liabilities of the transferor.42 it appears that Ransom, foreseeing the possibility or probability
of payment of backwages to its employees, organized Rosario to

replace Ransom, with the latter to be eventually phased out if
the strikers win their case. The execution could not be
implemented against Ransom because of the disposition
posthaste of its leviable assets evidently in order to evade its just
and due obligations.53Hence, the Court sustained the piercing of
the corporate veil and made the officers of Ransom personally
liable for the debts of the latter.
Clearly, what can be inferred from the earlier cases is that the
doctrine of piercing the corporate veil applies only in three (3)
basic areas, namely: 1) defeat of public convenience as when the
corporate fiction is used as a vehicle for the evasion of an existing
obligation; 2) fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or 3) alter ego
cases, where a corporation is merely a farce since it 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.54 In the absence of
malice, bad faith, or a specific provision of law making a
corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities.55
46
5. The subsidiary has grossly inadequate capital;
6. The parent corporation pays the salaries and other expenses
or losses of the subsidiary;
7. The subsidiary has substantially no business except with the
parent corporation or no assets except those conveyed to or by
the parent corporation;
8. In the papers of the parent corporation or in the statements of
its officers, the subsidiary is described as a department or
division of the parent corporation, or its business or financial
responsibility is referred to as the parent corporation’s own;
9. The parent corporation uses the property of the subsidiary as
its own;
10. The directors or executives of the subsidiary do not act
independently in the interest of the subsidiary, but take their
orders from the parent corporation;
11. The formal legal requirements of the subsidiary are not
observed.

Applying the foregoing doctrine to the instant case, we quote

with approval the CA disposition in this wise: None of the foregoing circumstances is present in the instant
case. Thus, piercing of PNB-Madecor’s corporate veil is not
It would not be enough, then, for the petitioners in this case, the warranted. Being a mere successor-in-interest of PNB-Madecor,
PNEI employees, to rest on their laurels with evidence that PNB with more reason should no liability attach to Mega Prime.
was the owner of PNEI. Apart from proving ownership, it is
necessary to show facts that will justify us to pierce the veil of G.R. No. 170705
corporate fiction and hold PNB liable for the debts of PNEI. The In its petition before this Court, PNB seeks the annulment of the
burden undoubtedly falls on the petitioners to prove their June 23, 2004 execution sale of the Pantranco properties on the
affirmative allegations. In line with the basic jurisprudential ground that the judgment debtor (PNEI) never owned said lots. It
principles we have explored, they must show that PNB was using likewise contends that the levy and the eventual sale on
PNEI as a mere adjunct or instrumentality or has exploited or execution of the subject properties was null and void as the
misused the corporate privilege of PNEI. promissory note on which PNB-Madecor was made liable had
We do not see how the burden has been met. Lacking proof of a already been satisfied.
nexus apart from mere ownership, the petitioners have not It has been repeatedly stated that the Pantranco properties
provided us with the legal basis to reach the assets of which were the subject of execution sale were owned by Macris
corporations separate and distinct from PNEI.56 and later, the PNB-Madecor. They were never owned by PNEI or
Assuming, for the sake of argument, that PNB may be held liable PNB. Following our earlier discussion on the separate
for the debts of PNEI, petitioners still cannot proceed against the personalities of the different corporations involved in the instant
Pantranco properties, the same being owned by PNB-Madecor, case, the only entity which has the right and interest to question
notwithstanding the fact that PNB-Madecor was a subsidiary of the execution sale and the eventual right to annul the same, if
PNB. The general rule remains that PNB-Madecor has a any, is PNB-Madecor or its successor-in-interest. Settled is the
personality separate and distinct from PNB. The mere fact that a rule that proceedings in court must be instituted by the real
corporation owns all of the stocks of another corporation, taken party in interest.
alone, is not sufficient to justify their being treated as one entity.
A real party in interest is the party who stands to be benefited or
If used to perform legitimate functions, a subsidiary’s separate injured by the judgment in the suit, or the party entitled to the
existence shall be respected, and the liability of the parent avails of the suit.59 "Interest" within the meaning of the rule
corporation as well as the subsidiary will be confined to those means material interest, an interest in issue and to be affected by
arising in their respective businesses.57 the decree, as distinguished from mere interest in the question
In PNB v. Ritratto Group, Inc.,58 we outlined the circumstances involved, or a mere incidental interest.60 The interest of the
which are useful in the determination of whether a subsidiary is party must also be personal and not one based on a desire to
but a mere instrumentality of the parent-corporation, to wit: vindicate the constitutional right of some third and unrelated
party.61 Real interest, on the other hand, means a present
1. The parent corporation owns all or most of the capital stock of substantial interest, as distinguished from a mere expectancy or a
the subsidiary; future, contingent, subordinate, or consequential interest.62

2. The parent and subsidiary corporations have common Specifically, in proceedings to set aside an execution sale, the real
directors or officers; party in interest is the person who has an interest either in the
property sold or the proceeds thereof. Conversely, one who is not
3. The parent corporation finances the subsidiary;
interested or is not injured by the execution sale cannot question
4. The parent corporation subscribes to all the capital stock of its validity.63
the subsidiary or otherwise causes its incorporation;
 47
In justifying its claim against the Pantranco properties, PNB Officer of First Builder Multi-Purpose Cooperative (FBMC),
alleges that Mega Prime, the buyer of its entire stockholdings in solidarily liable with FMBC for damages.
PNB-Madecor was indebted to it (PNB). Considering that said
Stripped of non-essentials, the respective versions of the parties
indebtedness remains unpaid, PNB insists that it has an interest
have been summarized by the Court of Appeals as follows:
over PNB-Madecor and Mega Prime’s assets.
Plaintiff Johnny Ong tried to acquire from the defendants a
Again, the contention is bereft of merit. While PNB has an
"townhome" described as Unit No. 4 of Atrium Townhomes in
apparent interest in Mega Prime’s assets being the creditor of
Cebu City. As reflected in a Contract to Sell, the selling price of
the latter for a substantial amount, its interest remains inchoate
the unit was P3,400,000.00 pesos, for a lot area of eighty-eight
and has not yet ripened into a present substantial interest, which
(88) square meters with a three-storey building. Out of the
would give it the standing to maintain an action involving the
purchase price, plaintiff was able to pay the amount
subject properties. As aptly observed by the Labor Arbiter, PNB
of P1,060,000.00. Prior to the full payment of this amount,
only has an inchoate right to the properties of Mega Prime in
plaintiff claims that defendants Andre Almocera and First
case the latter would not be able to pay its indebtedness. This is
Builders fraudulently concealed the fact that before and at the
especially true in the instant case, as the debt being claimed by
time of the perfection of the aforesaid contract to sell, the
PNB is secured by the accessory contract of pledge of the entire
property was already mortgaged to and encumbered with the
stockholdings of Mega Prime to PNB-Madecor.64
Land Bank of the Philippines (LBP). In addition, the construction
The Court further notes that the Pantranco properties (or a of the house has long been delayed and remains unfinished. On
portion thereof ) were sold on execution to satisfy the unpaid March 13, 1999, Lot 4-a covered by TCT No. 148818, covering the
obligation of PNB-Madecor to PNEI. PNB-Madecor was thus unit was advertised in a local tabloid for public auction for
made liable to the former PNEI employees as the judgment foreclosure of mortgage. It is the assertion of the plaintiff that
debtor of PNEI. It has long been established in PNB-Madecor v. had it not for the fraudulent concealment of the mortgage and
Uy and other similar cases that PNB-Madecor had an unpaid encumbrance by defendants, he would have not entered into the
obligation to PNEI amounting to more or less ₱7 million which contract to sell.
could be validly pursued by the creditors of the latter. Again, this
strengthens the proper parties’ right to question the validity of On the other hand, defendants assert that on March 20, 1995,
First Builders Multi-purpose Coop. Inc., borrowed money in the
the execution sale, definitely not PNB.
amount of P500,000.00 from Tommy Ong, plaintiff’s brother. This
Besides, the issue of whether PNB has a substantial interest over amount was used to finance the documentation requirements of
the Pantranco properties has already been laid to rest by the the LBP for the funding of the Atrium Town Homes. This loan will
Labor Arbiter.65 It is noteworthy that in its Resolution dated be applied in payment of one (1) town house unit which Tommy
September 10, 2002, the Labor Arbiter denied PNB’s Third-Party Ong may eventually purchase from the project. When the project
Claim primarily because PNB only has an inchoate right over the was under way, Tommy Ong wanted to buy another townhouse
Pantranco properties.66Such conclusion was later affirmed by for his brother, Johnny Ong, plaintiff herein, which then, the
the NLRC in its Resolution dated June 30, amount of P150,000.00 was given as additional partial payment.
2003.67 Notwithstanding said conclusion, PNB did not elevate However, the particular unit was not yet identified. It was only on
the matter to the CA via a petition for review. Hence it is January 10, 1997 that Tommy Ong identified Unit No. 4 plaintiff’s
presumed to be satisfied with the adjudication therein.68 That chosen unit and again tendered P350,000.00 as his third partial
decision of the NLRC has become final as against PNB and can no payment. When the contract to sell for Unit 4 was being drafted,
longer be reviewed, much less reversed, by this Court.69 This is Tommy Ong requested that another contract to sell covering Unit
in accord with the doctrine that a party who has not appealed 5 be made so as to give Johnny Ong another option to choose
cannot obtain from the appellate court any affirmative relief whichever unit he might decide to have. When the construction
other than the ones granted in the appealed decision.70 was already in full blast, defendants were informed by Tommy
Ong that their final choice was Unit 5. It was only upon knowing
WHEREFORE, premises considered, the petitions are hereby that the defendants will be selling Unit 4 to some other persons
DENIED for lack of merit. SO ORDERED.
for P4million that plaintiff changed his choice from Unit 5 to Unit
4.4

In trying to recover the amount he paid as down payment for the

D. OTHERS: townhouse unit, respondent Johnny Ong filed a complaint for
THIRD DIVISION Damages before the RTC of Cebu City, docketed as Civil Case No.
G.R. No. 170479 February 18, 2008 CEB-23687, against defendants Andre T. Almocera and FBMC
ANDRE T. ALMOCERA, petitioner, alleging that defendants were guilty of fraudulent concealment
vs. and breach of contract when they sold to him a townhouse unit
JOHNNY ONG, respondent. without divulging that the same, at the time of the perfection of
DECISION their contract, was already mortgaged with the Land Bank of the
CHICO-NAZARIO, J.:
Philippines (LBP), with the latter causing the foreclosure of the
mortgage and the eventual sale of the townhouse unit to a third
Before Us is a Petition for Review on Certiorari under Rule 45 of
person.
the 1997 Rules of Civil Procedure which seeks to set aside the
Decision1 of the Court of Appeals dated 18 July 2005 in CA-G.R. In their Answer, defendants denied liability claiming that the
CV No. 75610 affirming in toto the Decision2 of Branch 11 of the foreclosure of the mortgage on the townhouse unit was caused
Regional Trial Court (RTC) of Cebu City in Civil Case No. CEB- by the failure of complainant Johnny Ong to pay the balance of
23687 and its Resolution3 dated 16 November 2005 denying the price of said townhouse unit.
petitioner’s motion for reconsideration. The RTC decision found
petitioner Andre T. Almocera, Chairman and Chief Executive
 48
After the pre-trial conference was terminated, trial on the merits sell. It agreed with the finding of the trial court that the
ensued. Respondent and his brother, Thomas Y. Ong, took the nonpayment of the balance of P2.4M by respondent to
witness stand. For defendants, petitioner testified. defendants was proper in light of such delay and the fact that the
property subject of the case was foreclosed and auctioned. It
In a Decision dated 20 May 2002, the RTC disposed of the case in added that the trial court did not err in giving credence to
this manner:
respondent’s assertion that had he known beforehand that the
WHEREFORE, in view of all the foregoing premises, judgment is unit was used as collateral with the LBP, he would not have
hereby rendered in this case in favor of the plaintiff and against proceeded in buying the townhouse. Like the trial court, the
the defendants: Court of Appeals gave no weight to defendants’ argument that
had respondent paid the balance of the purchase price of the
(a) Ordering the defendants to solidarily pay to the plaintiff the townhouse, the mortgage could have been released. It explained:
sum of P1,060,000.00, together with a legal interest thereon at
6% per annum from April 21, 1999 until its full payment before We cannot find fault with the choice of plaintiff not to further
finality of the judgment. Thereafter, if the amount adjudged dole out money for a property that in all events, would never be
remains unpaid, the interest rate shall be 12% per annum his. Moreover, defendants could, if they were really desirous of
computed from the time when the judgment becomes final and satisfying their obligation, demanded that plaintiff pay the
executory until fully satisfied; outstanding balance based on their contract. This they had not
done. We can fairly surmise that defendants could not comply
(b) Ordering the defendants to solidarily pay to the plaintiff the with their obligation themselves, because as testified to by Mr.
sum of P100,000.00 as moral damages, the sum of P50,000.00 as Almocera, they already signified to LBP that they cannot pay their
attorney’s fee and the sum of P15,619.80 as expenses of outstanding loan obligations resulting to the foreclosure of the
litigation; and townhouse.8
(c) Ordering the defendants to pay the cost of this suit.5 Moreover, as to the issue of petitioner’s solidary liability, it said
that this issue was belatedly raised and cannot be treated for the
The trial court ruled against defendants for not acting in good
first time on appeal.
faith and for not complying with their obligations under their
contract with respondent. In the Contract to Sell6 involving Unit On 18 July 2005, the Court of Appeals denied the appeal and
4 of the Atrium Townhomes, defendants agreed to sell said affirmed in toto the decision of the trial court. The dispositive
townhouse to respondent for P3,400,000.00. The down payment portion of the decision reads:
was P1,000,000.00, while the balance of P2,400,000.00 was to be
paid in full upon completion, delivery and acceptance of the IN LIGHT OF ALL THE FOREGOING, this appeal is DENIED. The
townhouse. Under the contract which was signed on 10 January assailed decision of the Regional Trial Court, Branch 11, Cebu City
1997, defendants agreed to complete and convey to respondent in Civil Case No. CEB-23687 is AFFIRMED in toto.9
the unit within six months from the signing thereof. In a Resolution dated 16 November 2005, the Court of Appeals
The trial court found that respondent was able to make a down denied defendants’ motion for reconsideration.
payment or partial payment of P1,060,000.00 and that the Petitioner is now before us pleading his case via a Petition for
defendants failed to complete the construction of, as well as
Review on Certiorari under Rule 45 of the 1997 Rules of Civil
deliver to respondent, the townhouse within six months from the Procedure. The petition raises the following issues:
signing of the contract. Moreover, respondent was not informed
by the defendants at the time of the perfection of their contract I. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
that the subject townhouse was already mortgaged to LBP. The HOLDING THAT DEFENDANT HAS INCURRED DELAY.
mortgage was foreclosed by the LBP and the townhouse was
eventually sold at public auction. It said that defendants were II. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
SUSTAINING RESPONDENT’S REFUSAL TO PAY THE BALANCE OF
guilty of fraud in their dealing with respondent because the
mortgage was not disclosed to respondent when the contract THE PURCHASE PRICE.
was perfected. There was also non-compliance with their III. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN
obligations under the contract when they failed to complete and HOLDING THAT DEFENDANT ANDRE T. ALMOCERA IS SOLIDARILY
deliver the townhouse unit at the agreed time. On the part of LIABLE WITH THE DEFENDANT COOPERATIVE FOR DAMAGES TO
respondent, the trial court declared he was justified in PLAINTIFF.10
suspending further payments to the defendants and was entitled
to the return of the down payment. It cannot be disputed that the contract entered into by the
parties was a contract to sell. The contract was denominated as
Aggrieved, defendants appealed the decision to the Court of such and it contained the provision that the unit shall be
Appeals assigning the following as errors: conveyed by way of an Absolute Deed of Sale, together with the
attendant documents of Ownership – the Transfer Certificate of
1. THE LOWER COURT ERRED IN HOLDING THAT PLAINTIFF HAS A
VALID CAUSE OF ACTION FOR DAMAGES AGAINST Title and Certificate of Occupancy – and that the balance of the
contract price shall be paid upon the completion and delivery of
DEFENDANT(S).
the unit, as well as the acceptance thereof by respondent. All
2. THE LOWER COURT ERRED IN HOLDING THAT DEFENDANT these clearly indicate that ownership of the townhouse has not
ANDRE T. ALMOCERA IS SOLIDARILY LIABLE WITH THE passed to respondent.
COOPERATIVE FOR THE DAMAGES TO THE PLAINTIFF.7
In Serrano v. Caguiat, 11 we explained:
The Court of Appeals ruled that the defendants incurred delay
when they failed to deliver the townhouse unit to the A contract to sell is akin to a conditional sale where the efficacy
or obligatory force of the vendor’s obligation to transfer title is
respondent within six months from the signing of the contract to

subordinated to the happening of a future and uncertain event,
so that if the suspensive condition does not take place, the
parties would stand as if the conditional obligation had never
existed. The suspensive condition is commonly full payment of
the purchase price.
The differences between a contract to sell and a contract of sale
are well-settled in jurisprudence. As early as 1951, in Sing Yee v. delay from the time the obligee judicially or extrajudicially
Santos [47 O.G. 6372 (1951)], we held that:
"x x x [a] distinction must be made between a contract of sale in
which title passes to the buyer upon delivery of the thing sold
and a contract to sell x x x where by agreement the ownership is
reserved in the seller and is not to pass until the full payment of
the purchase price is made. In the first case, non-payment of the
price is a negative resolutory condition; in the second case, full
payment is a positive suspensive condition. Being contraries,
their effect in law cannot be identical. In the first case, the
vendor has lost and cannot recover the ownership of the land
sold until and unless the contract of sale is itself resolved and set
aside. In the second case, however, the title remains in the
vendor if the vendee does not comply with the condition
precedent of making payment at the time specified in the
contract."
In other words, in a contract to sell, ownership is retained by the
seller and is not to pass to the buyer until full payment of the The contract subject of this case contains reciprocal obligations
price.
The Contract to Sell entered into by the parties contains the
following pertinent provisions:
4. TERMS OF PAYMENT:
49
ownership of the townhouse be transferred to him, but merely
asks that the amount or down payment he had made be
returned to him.
Article 1169 of the Civil Code reads:
Art. 1169. Those obliged to deliver or to do something incur in
demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in
order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the
obligation it appears that the designation of the time when the
thing is to be delivered or the service is to be rendered was a
controlling motive for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner
with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins.
which were to be fulfilled by the parties, i.e., to complete and
deliver the townhouse within six months from the execution of
the contract to sell on the part of petitioner and FBMC, and to
pay the balance of the contract price upon completion and
delivery of the townhouse on the part of the respondent.

4a. ONE MILLION PESOS (P1,000,000.00) is hereby acknowledged In the case at bar, the obligation of petitioner and FBMC which is
as Downpayment for the above-mentioned Contract Price. to complete and deliver the townhouse unit within the
prescribed period, is determinative of the respondent’s
4b. The Balance, in the amount of TWO MILLION FOUR obligation to pay the balance of the contract price. With their
HUNDRED PESOS (P2,400,000.00) shall be paid thru financing failure to fulfill their obligation as stipulated in the contract, they
Institution facilitated by the SELLER, preferably Landbank of the incurred delay and are liable for damages.13They cannot insist
Philippines (LBP). that respondent comply with his obligation. Where one of the
Upon completion, delivery and acceptance of the BUYER of the parties to a contract did not perform the undertaking to which he
was bound by the terms of the agreement to perform, he is not
Townhouse Unit, the BUYER shall have paid the Contract Price in
entitled to insist upon the performance of the other party.14
full to the SELLER.
On the first assigned error, petitioner insists there was no delay
xxxx
when the townhouse unit was not completed within six months
6. COMPLETION DATES OF THE TOWNHOUSE UNIT: from the signing of the contract inasmuch as the mere lapse of
the stipulated six (6) month period is not by itself enough to
The unit shall be completed and conveyed by way of an Absolute constitute delay on his part and that of FBMC, since the law
Deed of Sale together with the attendant documents of
requires that there must either be judicial or extrajudicial
Ownership in the name of the BUYER – the Transfer Certificate of demand to fulfill an obligation so that the obligor may be
Title and Certificate of Occupancy within a period of six (6)
declared in default. He argues there was no evidence introduced
months from the signing of Contract to Sell.12 showing that a prior demand was made by respondent before
From the foregoing provisions, it is clear that petitioner and the original action was instituted in the trial court.
FBMC had the obligation to complete the townhouse unit within We do not agree.
six months from the signing of the contract. Upon compliance
therewith, the obligation of respondent to pay the balance Demand is not necessary in the instant case. Demand by the
of P2,400,000.00 arises. Upon payment thereof, the townhouse respondent would be useless because the impossibility of
shall be delivered and conveyed to respondent upon the complying with their (petitioner and FBMC) obligation was due to
execution of the Absolute Deed of Sale and other relevant their fault. If only they paid their loans with the LBP, the
documents. mortgage on the subject townhouse would not have been
foreclosed and thereafter sold to a third person.
The evidence adduced shows that petitioner and FBMC failed to
fulfill their obligation -- to complete and deliver the townhouse Anent the second assigned error, petitioner argues that if there
within the six-month period. With petitioner and FBMC’s non- was any delay, the same was incurred by respondent because he
fulfillment of their obligation, respondent refused to pay the refused to pay the balance of the contract price.
balance of the contract price. Respondent does not ask that
 50
We find his argument specious. In the case below, the pleadings and the evidence of the
defendants are one and the same and never had it made to
As above-discussed, the obligation of respondent to pay the appear that Almocera is a person distinct and separate from the
balance of the contract price was conditioned on petitioner and
other defendant. In fine, we cannot treat this error for the first
FBMC’s performance of their obligation. Considering that the time on appeal. We cannot in good conscience, let the defendant
latter did not comply with their obligation to complete and
Almocera raise the issue of piercing the veil of corporate fiction
deliver the townhouse unit within the period agreed upon, just because of the adverse decision against him. x x x.18
respondent could not have incurred delay. For failure of one
party to assume and perform the obligation imposed on him, the To allow petitioner to pursue such a defense would undermine
other party does not incur delay.15 basic considerations of due process. Points of law, theories,
issues and arguments not brought to the attention of the trial
Under the circumstances obtaining in this case, we find that court will not be and ought not to be considered by a reviewing
respondent is justified in refusing to pay the balance of the
court, as these cannot be raised for the first time on appeal. It
contract price. He was never in possession of the townhouse unit would be unfair to the adverse party who would have no
and he can no longer be its owner since ownership thereof has
opportunity to present further evidence material to the new
been transferred to a third person who was not a party to the theory not ventilated before the trial court.19
proceedings below. It would simply be the height of inequity if
we are to require respondent to pay the balance of the contract As to the award of damages granted by the trial court, and
price. To allow this would result in the unjust enrichment of affirmed by the Court of Appeals, we find the same to be proper
petitioner and FBMC. The fundamental doctrine of unjust and reasonable under the circumstances.
enrichment is the transfer of value without just cause or
WHEREFORE, the petition is DENIED. The Decision of the Court of
consideration. The elements of this doctrine which are present in
this case are: enrichment on the part of the defendant; Appeals dated 18 July 2005 in CA-G.R. CV No. 75610
is AFFIRMED. Costs against the petitioner. SO ORDERED.
impoverishment on the part of the plaintiff; and lack of cause.
The main objective is to prevent one to enrich himself at the
expense of another. It is commonly accepted that this doctrine
simply means a person shall not be allowed to profit or enrich
himself inequitably at another's expense.16Hence, to allow
petitioner and FBMC keep the down payment made by
respondent amounting to P1,060,000.00 would result in their
unjust enrichment at the expense of the respondent. Thus, said
amount should be returned.

What is worse is the fact that petitioner and FBMC intentionally

failed to inform respondent that the subject townhouse which he
was going to purchase was already mortgaged to LBP at the time
of the perfection of their contract. This deliberate withholding by
petitioner and FBMC of the mortgage constitutes fraud and bad
faith. The trial court had this say:

In the light of the foregoing environmental circumstances and

milieu, therefore, it appears that the defendants are guilty of
fraud in dealing with the plaintiff. They performed voluntary and
willful acts which prevent the normal realization of the
prestation, knowing the effects which naturally and necessarily
arise from such acts. Their acts import a dishonest purpose or
some moral obliquity and conscious doing of a wrong. The said
acts certainly gtive rise to liability for damages (8 Manresa 72;
Borrell-Macia 26-27; 3 Camus 34; O’Leary v. Macondray &
Company, 454 Phil. 812; Heredia v. Salinas, 10 Phil. 157). Article
1170 of the New Civil Code of the Philippines provides expressly
that "those who in the performance of their obligations are guilty
of fraud and those who in any manner contravene the tenor
thereof are liable for damages.17

On the last assigned error, petitioner contends that he should not

be held solidarily liable with defendant FBMC, because the latter
is a separate and distinct entity which is the seller of the subject
townhouse. He claims that he, as Chairman and Chief Executive
Officer of FBMC, cannot be held liable because his representing
FBMC in its dealings is a corporate act for which only FBMC
should be held liable.

This issue of piercing the veil of corporate fiction was never

raised before the trial court. The same was raised for the first
time before the Court of Appeals which ruled that it was too late
in the day to raise the same. The Court of Appeals declared: