Corpo Cases2

Corporation.
Page2 of Syllabus
Rights of Corporation; Practice of Profession (correction from page 1)
Good Earth vs CA ..90
(Sorry namali ang case sa page1.Instead of this, PNB case ang nalagay ko )
Santps vs NLRC.93
Alfafara vs Acebedo Optical..,,,2
Malayang Samahan ng Manggagawa vs Ramos ..96
Separate Juridical Personality; General Rule
Powton Conglomerate v Agcolicol ..104
Stockholders of F. Guanzon vs ROD Manila ..5
Lowe, Inc., et.al. vs CA107
San Juan Steel vs CA ..6
Piercing the Veil; Stockholders
Feliciano vs Commission on Audit .13
*(In syllabus: Padilla vs CA, 362 S 620)
Sulo ng Bayan vs Araneta .20
But 362 S 620 is Marubeni Corp. vs Lirag112
Luxuria Homes vs CA 23
Piercing the Veil; Privileges
Concept Builders Inc. vs NLRC .27
Manila Gas vs Collector116
Villa Rey Transit vs Ferrer .32
Piercing the Veil; Obligations and Debts
Francisco Motors Corporation vs CA 38
Traders Royal Bank vs CA..118
PNB vs Andrada Electric .................41
CKH Industrial vs CA .120
Magsaysay-Labrador vs CA .45
Piercing the Veil; Subsidiary Corporations
PDIC vs Citibank 47
Alert Security vs Balmaceda .52
Hacienda Luisita vs Presidential Agrarian ..126
Heirs of Fe Tan Uy vs International Exchange55

Stronghold Insurance vs Cuenca.59
Mercy Vda De Roxas vs Our Ladys Foundation .64
DBP vs Hydro Resources67
ABBOT Laboratories vs Alcaraz 72
NUCCIO SAVERIOS vs Puyat ...80
Piercing the Veil; General Rule
Prisma Construction vs Arthur Menchavez...83
Piercing the Veil; Majority Equity Ownership
*DBP vs NLRC .87
Piercing the Veil; Corporate Officers
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Corporation.Page2 of Syllabus
[G.R. No. 148384. April 17, 2002]
DOCTORS ROSA P. ALFAFARA, VIVIAN DYHONGPO, MARIA TORRES, EMMA YBAEZ, ELSA CABARDO, REBECCA SANTIAGO, PRISCILLA
NARVASA, SUSIE CHAN, CLARO CINCO, FELIPE CINCO, CARMEN MODESTO, FELISA LIMKIMSO, ARLENE DORIO, ROSALINDA BONO, and
SUSAN YU, in their own behalf and in behalf of all the other 80 optometrists-members of the SAMAHAN NG OPTOMETRISTS SA PILIPINASCEBU CHAPTER, petitioners, vs. ACEBEDO OPTICAL, CO., INC., respondent.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision,[1] dated January 20, 2000, of the Court of Appeals, setting aside the decision,[2]
dated September 3, 1993, of the Regional Trial Court, Branch 9, Cebu City, which enjoined respondent Acebedo Optical Co., Inc., its
agents, representatives, and/or employees from practicing optometry, as defined in 1(a) of Republic Act No. 1998, in the province and
cities of Cebu, and the resolution, dated May 10, 2001, of the appeals court denying petitioners motion for reconsideration.
Petitioners are optometrists. They brought, in their own behalf and in behalf of 80 other optometrists, who are members of the Samahan
ng Optometrists sa Pilipinas-Cebu Chapter, an injunctive suit in the Regional Trial Court, Branch 9, Cebu City to enjoin respondent
Acebedo Optical Co., Inc. and its agents, representatives, and/or employees from practicing optometry in the province of Cebu. In their
complaint, they alleged that respondent opened several optical shops in Cebu and announced to the public, through leaflets, newspapers,
and other forms of advertisement, the availability of ready-to-wear eyeglasses for sale at P60.00 each and free services by optometrists
in such outlets. They claimed that, through the licensed optometrists under its employ, respondent had been engaging in the practice of
optometry by examining the human eye, analyzing the ocular functions, prescribing ophthalmic lenses, prisms, and contact lenses; and
conducting ocular exercises, visual trainings, orthoptics, prosthetics, and other preventive or corrective measures for the aid, correction,
or relief of the human eye. They contended that such acts of respondent were done in violation of the Optometry Law (R.A. No. 1998)[3]
and the Code of Ethics for Optometrists, promulgated by the Board of Examiners in Optometry on July 11, 1983. They sought payment to
them of attorneys fees, litigation expenses, and the costs of the suit.*4+
The trial court at first dismissed the suit but, on motion of petitioners, reinstated the action and granted their prayer for a writ of
preliminary injunction and/or restraining order. Petitioners argued that the case involved a pure question of law, i.e., whether or not
respondents hiring of optometrists was violative of the applicable laws, and that, as such, the case was an exception to the rule requiring
exhaustion of administrative remedies as a condition for the filing of an injunctive suit. They further alleged that the Board of Optometry
held itself to be without jurisdiction over the president of respondent Acebedo Company as he was not duly registered with the
Professional Regulation Commission.
In its answer, respondent averred that the advertisements referred to by petitioner were part of its promotion to make known to the
public the opening of its new branches in Cebu; that incidental to its business of selling optical products, it hired duly licensed
optometrists who conducted eye examination, prescribed ophthalmic lenses, and rendered other services; that it exercised neither
control nor supervision over the optometrists under its employ; and that the hired optometrists exercised neither control nor supervision
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in the sale of optical products and accessories by respondent. By way of special and affirmative defense, respondent stated that the
optometrists should be impleaded as party-defendants because they were indispensable parties; that the trial court had no jurisdiction
over the case; that the filing of the complaint was barred by res judicata as similar suits had been previously dismissed by the Court of
First instance of Lucena City and the Securities and Exchange Commission; and that the petitioners were guilty of forum-shopping.
Respondent sought the recovery of P100,000.00 as moral damages, P500,000.00 as exemplary damages, and P100,000.00 as attorneys
fees.[5]
During the pre-trial conference, the parties entered into the following stipulation of facts: that the petitioners were duly licensed
optometrists; that the petitioners were all members of the Samahan ng Optometrists ng Pilipinas (SOP)-Cebu Chapter; that SOP-Cebu
Chapter was a chapter of SOP Incorporated, a national organization; that the SOP-Cebu Chapter had a program called Sight Saving
Month; that the Sight Saving Month program was also a program of the SOP nationwide; that petitioners SOP Sight Saving Month
program provided free consultations; that respondent was a corporation with several outlets in Cebu; that respondent was selling optical
products and ready-to-wear eyeglasses of limited grades; that during the opening of its new branches in Cebu, the respondent
advertised its products through leaflets, newspapers, and other similar means, such as streamers and loudspeakers on board a vehicle;
that respondent hired optometrists who conducted eye examinations, prescribed ophthalmic lenses, and rendered other optometry
services; and that while the hired optometrists received their salary from respondent, they are not precluded from seeking other sources
of income.[6]
The evidence for the petitioners showed that respondent advertised its ready-to-wear eyeglasses in newspapers, posters pasted on the
walls, and announcements made in roving jeeps. A witness testified that he purchased a pair of eyeglasses for P66.00 (P60.00 plus P6.00
for VAT) without any prior eye examination by an optometrist. A week later, he had vision difficulty and consulted an optometrist who
advised him to buy a pair of eyeglasses with the correct grade. Petitioners thus sought to prove that the selling of ready-to-wear
eyeglasses by respondent was detrimental to the public.
On the other hand, respondent maintained that before the customers purchased the ready-to-wear eyeglasses on display, they either
have a prior prescription from an optometrist or had to be examined first by the branch optometrist. Customers thus had the option
either to buy the ready-to-wear eyeglasses on display or to order a new pair of eyeglasses.
After hearing, judgment was rendered in favor of petitioners. The trial court found that the hiring of licensed optometrists by the
respondent was unlawful because it resulted in the practice of the optometry profession by respondent, a juridical person. It ruled that
respondent could not raise the issue of res judicata as there was no decision on the merits of the case rendered by any court of
competent jurisdiction and, consequently, petitioners could not be guilty of forum-shopping. As to petitioners failure to implead the
optometrists in the employ of respondent, the trial court explained that since the issue involved the propriety of respondents hiring of
optometrists to perform optometry services, the optometrists did not have to be impleaded as defendants. As to whether respondents
selling of ready-to-wear eyeglasses to customers without prior eye examination violated the applicable laws and was detrimental to the
public, the trial court ruled that petitioners failed to substantiate such claim.
Respondent appealed to the Court of Appeals contending that the trial court erred in holding that respondent was illegally engaged in the
practice of Optometry; that being indispensable parties, the licensed optometrists employed by respondent should have been impleaded
as defendants; and that the trial court erred in not holding that petitioners, by filing several harassment suits before various fora, were
guilty of forum-shopping.
(1) To make optometric examinations outside of his regular clinic, unless he shall have received an unsolicited written request by the
person or persons to be examined;
The Court of Appeals reversed the decision of the trial court and dismissed the complaint of petitioners. Citing the case of Samahan ng
Optometrists sa Pilipinas, Ilocos Sur-Abra Chapter v. Acebedo International Corporation,*7+ the appeals court ruled that respondents
hiring of licensed optometrists did not constitute practice of optometry nor violate any law. As to the second issue raised, the Court of
Appeals stated that since the complaint was lodged solely against respondent for its hiring of optometrists, whatever decision the trial
court would render would solely affect respondent since what was sought to be restrained was the employment of licensed optometrists;
hence, the optometrists were not indispensable parties. Anent the issue of forum-shopping, the appeals court found no cogent reason to
reverse the findings of the trial court that the administrative case before the Professional Regulation Commission was not decided on the
merits while the letters of petitioners sent to government officials did not constitute judicial proceedings.
Petitioners filed a motion for reconsideration but their motion was denied. Hence, this petition alleging that the Court of Appeals erred in
holding that respondent Acebedo was not engaged in the practice of optometry.
The petition has no merit.
First. Petitioners contend that the ruling in Samahan ng Optometrists sa Pilipinas, Ilocos Sur-Abra Chapter v. Acebedo International
Corporation[8] is no longer controlling because of the later case of Apacionado v. Professional Regulation Commission.[9] In Apacionado,
petitioners Ma. Cristina Apacionado and Zenaida Robil, who were employed by Acebedo as optometrists, were suspended from the
practice of optometry for two (2) years by the Board of Optometry for violation of R.A. No. 1998 and Art. III, 6 of the Code of Ethics for
Optometrists for having participated in the promotional advertisement of Acebedo, entitled Libreng Konsulta sa Mata: Reading Glasses
P60.00, held from July 5-14, 1989 in Tuguegarao, Cagayan. In affirming the suspension of the optometrists, the Professional Regulation
Commission found that by rendering professional services to Acebedos clientele (free eye consultations and refractions), petitioners were
guilty of unprofessional conduct. Consequently, their professional licenses as optometrists were suspended for two (2) years. This was
because the services of the two optometrists were the ones being offered to the public for free. The decision of the Professional
Regulation Commission was affirmed by the Court of Appeals and later by this Court. As our resolution, dated July 12, 1999,[10] stated in
pertinent parts:
Thus, the instant petition which must likewise fail.
The Court finds the decision of the Court of Appeals to be in accordance with the law. The Rules and Regulation[s] of the Board of
Examiners for [O]ptometry are quite explicit, and Rule 56 provides:
Rule 56. Acts Constituting Unprofessional Conduct.- It shall be considered unprofessional for any registered optometrist:
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(2) To advertise a price or prices [of] spectacle frames, mountings, or ophthalmic lenses and other ophthalmic devices used in the practice
of Optometry and to be associated with, or remain in the employ of, any person who does such advertising;
(4) To advertise free examination, examination included, discounts, installments, wholesale and retail, or similar words and
phrases which would tend to remove the spirit of professionalism;
(11) To use Mobile Units for conducting refraction in any area within ten (10) kilometers of a Municipality.
Likewise, Section 6 of the Code of Ethics for optometrists states:
SEC. 6. The following are deemed, among others, to be unethical and are deemed to constitute unprofessional conduct:
c. Performing optometric examination outside of the regular office, unless he shall have received unsolicited request to make such an
examination.
u. To use Mobile Units for conducting refraction in any area within ten (10) kilometers of a Municipality.
These provisions petitioners, through Acebedo, were found to have violated.
Petitioners cannot deny that it was their skills as optometrists as well as their licenses which Acebedo used in order to enable itself to
render optometric services to its clientele. Under such arrangement, petitioners acted as tools of Acebedo so that the latter can offer the
whole package of services to its clientele.
Corollarily, Republic Act No. 1998 pertinently provides:
SEC. 20. Revocation or suspension of certificate. - The Board may, after giving proper notice and hearing to the party concerned, revoke
or suspend a certificate of registration for the causes mentioned in the next preceding section, or for unprofessional conduct.
Having knowingly allowed themselves to be used as tools in furtherance of [the] unauthorized practice of optometry, petitioners are
clearly liable for unethical and unprofessional practice of their profession. The Court, thus finds no error committed by the Court of
Appeals.
WHEREFORE, petition is denied due course.
In Samahan ng Optometrists sa Pilipinas, Ilocos Sur-Abra Chapter v. Acebedo International Corporation,[13] petitioners opposed
respondent Acebedos application for a municipal permit to operate a branch in Candon, Ilocos Sur. They brought suit to enjoin
respondent Acebedo from employing optometrists as this allegedly constituted an indirect violation of R.A. No. 1998, which prohibits
corporations from exercising professions reserved only to natural persons. The committee created by the Mayor of Candon to pass on
Acebedos application denied the same and ordered the closure of Acebedo optical shops. Acebedo appealed but its appeal was
dismissed by the trial court on the ground that it was practicing optometry. On appeal, the Court of Appeals held that Acebedo was not
operating as an optical clinic nor engaged in the practice of optometry, although it employed licensed optometrists. Acebedo simply
dispensed optical and ophthalmic instruments and supplies. It was pointed out that R.A. No. 1998 does not prohibit corporations from
employing licensed optometrists. What it prohibits is the practice of optometry by individuals who do not have a license to practice. The
prohibition is addressed to natural persons who are required to have a valid certificate of registration as optometrist and who must be
of good moral character. This Court affirmed the ruling of the appeals court and explained that even under R.A. No. 8050 (Revised
Optometry Law) there is no prohibition against the hiring by corporations of optometrists. The fact that Acebedo hired optometrists who
practiced their profession in the course of their employment in Acebedos optical shops did not mean that it was itself engaged in the
practice of optometry.
We see no reason to deviate from the ruling that a duly licensed optometrist is not prohibited from being employed by respondent and
that respondent cannot be said to be exercising the optometry profession by reason of such employment.
Second. Petitioners argue that an optometrist, who is employed by a corporation, such as Acebedo, is not acting on his own capacity but
as an employee or agent of the corporation. They contend that, as a mere employee or agent, such optometrist cannot be held
personally liable for his acts done in the course of his employment as an optometrist under the following provisions of the Civil Code.
Thus,
Petitioners cite the Tennessee Supreme Court statement in Lens Crafter, Inc. v. Sunquist,[11] stating that:
Art. 1897. The agent who acts as such is not personally liable to the party with whom he contracts, unless he expressly binds himself or
exceeds the limits of his authority without giving such party sufficient notice of his powers.
The logical result would be that corporations and business partnerships might practice law, medicine, dentistry or any other profession by
the simple expedient of employing licensed agents. And, if this were permitted, professional standards would be practically destroyed
and professions requiring special training would be commercialized, to the public detriment.The ethics of any profession is based upon
personal or individual responsibility.
The contention has no merit. An optometrist is a person who has been certified by the Board of Optometry and registered with the
Professional Regulation Commission as qualified to practice optometry in the Philippines.[12] Thus, only natural persons can engage in the
practice of optometry and not corporations. Respondent, which is not a natural person, cannot take the licensure examinations for
optometrist and, therefore, it cannot be registered as an optometrist under R.A. No. 1998. It is noteworthy that, in Apacionado, the Court
did not find Acebedo to be engaged in the practice of optometry. The optometrists in that case were found guilty of unprofessional
conduct and their licenses were suspended for two (2) years for having participated, in their capacities as optometrists, in the
implementation of the promotional advertisement of Acebedo. In contrast, in the case at bar, respondent is merely engaged in the
business of selling optical products, not in the practice of optometry, whether directly or indirectly, through its hired optometrists.
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Art. 1910. The principal must comply with all the obligations which the agent may have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the principal is not bound except when he ratifies it expressly or tacitly.
This contention likewise has no merit. While the optometrists are employees of respondent, their practice of optometry is separate and
distinct from the business of respondent of selling optical products. They are personally liable for acts done in the course of their practice
in the same way that if respondent is sued in court in connection with its business of selling optical products, the optometrists need not
be impleaded as party defendants. In that regard, the Board of Optometry and the Professional Regulation Commission regulate their
practice and have exclusive original jurisdiction over them.
G.R. No. L-18216
In the later case of Acebedo Optical Company, Inc. v. Court of Appeals,[14] petitioner Acebedo was granted by the City Mayor of Iligan a
business permit subject to certain conditions, to wit:
October 30, 1962
STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,

vs.
1.
Since it is a corporation, Acebedo cannot put up an optical clinic but only a commercial store;
2.
Acebedo cannot examine and/or prescribe reading and similar optical glasses for patients, because these are functions of optical
clinics;
REGISTER OF DEEDS OF MANILA, respondent-appellee.
Ramon C. Fernando for petitioners-appellants.

Office of the Solicitor General for respondent-appellee.
3.
Acebedo cannot sell reading and similar eyeglasses without a prescription having first been made by an independent optometrist
(not its employee) or independent optical clinic. Acebedo can only sell directly to the public, without need of a prescription, Ray-Ban and
similar eyeglasses;
4.
Acebedo cannot advertise optical lenses and eyeglasses, but can advertise Ray-Ban and similar glasses and frames;
5.
Acebedo is allowed to grind lenses but only upon the prescription of an independent optometrist.
The Samahang Optometrist sa Pilipinas-Iligan Chapter sought the cancellation and/or revocation of Acebedos permit on the ground that
it had violated the conditions for its business permit. After due investigation, Acebedo was found guilty of violating the conditions of its
permit and, as a consequence, its permit was cancelled. Acebedo was advised that its permit would not be renewed. Acebedo filed a
petition for certiorari, prohibition, and mandamus in the Regional Trial Court, but its petition was dismissed for non-exhaustion of
administrative remedies. Acebedo then filed a petition for certiorari, prohibition, and mandamus with the Court of Appeals. At first, its
petition was dismissed. On appeal, however, the decision of the Court of Appeals was reversed. This Court held that a business permit is
issued primarily to regulate the conduct of a business and, therefore, the City Mayor cannot, through the issuance of such permit,
regulate the practice of a profession, like optometry. This Court held Acebedo to be entitled to a permit to do business as an optical shop
because, although it had duly licensed optometrists in its employ, it did not apply for a license to engage in the practice of optometry as a
corporate body or entity.
BAUTISTA ANGELO, J.:
On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc. executed a certificate of liquidation of the assets of the
corporation reciting, among other things, that by virtue of a resolution of the stockholders adopted on September 17, 1960, dissolving the
corporation, they have distributed among themselves in proportion to their shareholdings, as liquidating dividends, the assets of said
corporation, including real properties located in Manila.
The certificate of liquidation, when presented to the Register of Deeds of Manila, was denied registration on seven grounds, of which the
following were disputed by the stockholders:
3.
The number of parcels not certified to in the acknowledgment;
5.
P430.50 Reg. fees need be paid;
6.
P940.45 documentary stamps need be attached to the document;
WHEREFORE, the petition is DENIED for lack of showing that the Court of Appeals committed a reversible error.
7.
The judgment of the Court approving the dissolution and directing the disposition of the assets of the corporation need be
presented (Rules of Court, Rule 104, Sec. 3).
SO ORDERED.
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Deciding the consulta elevated by the stockholders, the Commissioner of Land Registration overruled ground No. 7 and sustained
requirements Nos. 3, 5 and 6.
WHEREFORE, we affirm the resolution appealed from, with costs against appellants.
[G.R. No. 129459. September 29, 1998]
The stockholders interposed the present appeal.
As correctly stated by the Commissioner of Land Registration, the propriety or impropriety of the three grounds on which the denial of the
registration of the certificate of liquidation was predicated hinges on whether or not that certificate merely involves a distribution of the
corporation's assets or should be considered a transfer or conveyance.
SAN JUAN STRUCTURAL AND STEEL FABRICATORS, INC., petitioner, vs. COURT OF APPEALS, MOTORICH SALES CORPORATION, NENITA LEE
GRUENBERG, ACL DEVELOPMENT CORP. and JNM REALTY AND DEVELOPMENT CORP., respondents.
DECISION
PANGANIBAN, J.
Appellants contend that the certificate of liquidation is not a conveyance or transfer but merely a distribution of the assets of the
corporation which has ceased to exist for having been dissolved. This is apparent in the minutes for dissolution attached to the document.
Not being a conveyance the certificate need not contain a statement of the number of parcel of land involved in the distribution in the
acknowledgment appearing therein. Hence the amount of documentary stamps to be affixed thereon should only be P0.30 and not
P940.45, as required by the register of deeds. Neither is it correct to require appellants to pay the amount of P430.50 as registration fee.
The Commissioner of Land Registration, however, entertained a different opinion. He concurred in the view expressed by the register of
deed to the effect that the certificate of liquidation in question, though it involves a distribution of the corporation's assets, in the last
analysis represents a transfer of said assets from the corporation to the stockholders. Hence, in substance it is a transfer or conveyance.
We agree with the opinion of these two officials. A corporation is a juridical person distinct from the members composing it. Properties
registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock
constitute personal property they do not represent property of the corporation. The corporation has property of its own which consists
chiefly of real estate (Nelson v. Owen, 113 Ala., 372, 21 So. 75; Morrow v. Gould, 145 Iowa 1, 123 N.W. 743). A share of stock only typifies
an aliquot part of the corporation's property, or the right to share in its proceeds to that extent when distributed according to law and
equity (Hall & Faley v. Alabama Terminal, 173 Ala 398, 56 So., 235), but its holder is not the owner of any part of the capital of the
corporation (Bradley v. Bauder 36 Ohio St., 28). Nor is he entitled 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., 474). The stockholder is not a co-owner or tenant in common of the
corporate property (Halton v. Hohnston, 166 Ala 317, 51 So 992).
May a corporate treasurer, by herself and without any authorization from the board of directors, validly sell a parcel of land owned by the
corporation? May the veil of corporate fiction be pierced on the mere ground that almost all of the shares of stock of the corporation are
owned by said treasurer and her husband?
The Case
These questions are answered in the negative by this Court in resolving the Petition for Review on Certiorari before us, assailing the
March 18, 1997 Decision[1] of the Court of Appeals[2] in CA GR CV No. 46801 which, in turn, modified the July 18, 1994 Decision of the
Regional Trial Court of Makati, Metro Manila, Branch 63[3] in Civil Case No. 89-3511. The RTC dismissed both the Complaint and the
Counterclaim filed by the parties. On the other hand, the Court of Appeals ruled:
WHEREFORE, premises considered, the appealed decision is AFFIRMED WITH MODIFICATION ordering defendant-appellee Nenita Lee
Gruenberg to REFUND or return to plaintiff-appellant the downpayment of P100,000.00 which she received from plaintiff-appellant.
There is no pronouncement as to costs.*4+
The petition also challenges the June 10, 1997 CA Resolution denying reconsideration.[5]
On the basis of the foregoing authorities, it is clear that the act of liquidation made by the stockholders of the F. Guanzon and Sons, Inc. of
the latter's assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its
assets to the individual stockholders. Indeed, since the purpose of the liquidation, as well as the distribution of the assets of the
corporation, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, and this is in effect
the purpose which they seek to obtain from the Register of Deeds of Manila, that transfer cannot be effected without the
corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of
liquidation as one in the nature of a transfer or conveyance.
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The Facts
The facts as found by the Court of Appeals are as follows:
Plaintiff-appellant San Juan Structural and Steel Fabricators, Inc.s amended complaint alleged that on 14 February 1989, plaintiffappellant entered into an agreement with defendant-appellee Motorich Sales Corporation for the transfer to it of a parcel of land
identified as Lot 30, Block 1 of the Acropolis Greens Subdivision located in the District of Murphy, Quezon City, Metro Manila, containing
an area of Four Hundred Fourteen (414) square meters, covered by TCT No. (362909) 2876; that as stipulated in the Agreement of 14
February 1989, plaintiff-appellant paid the down payment in the sum of One Hundred Thousand (P100,000.00) Pesos, the balance to be
paid on or before March 2, 1989; that on March 1, 1989, Mr. Andres T. Co, president of plaintiff-appellant corporation, wrote a letter to
defendant-appellee Motorich Sales Corporation requesting for a computation of the balance to be paid; that said letter was coursed
through defendant-appellees broker, Linda Aduca, who wrote the computation of the balance; that on March 2, 1989, plaintiff-appellant
was ready with the amount corresponding to the balance, covered by Metrobank Cashiers Check No. 004223, payable to defendantappellee Motorich Sales Corporation; that plaintiff-appellant and defendant-appellee Motorich Sales Corporation were supposed to meet
in the office of plaintiff-appellant but defendant-appellees treasurer, Nenita Lee Gruenberg, did not appear; that defendant-appellee
Motorich Sales Corporation despite repeated demands and in utter disregard of its commitments had refused to execute the Transfer of
Rights/Deed of Assignment which is necessary to transfer the certificate of title; that defendant ACL Development Corp. is impleaded as a
necessary party since Transfer Certificate of Title No. (362909) 2876 is still in the name of said defendant; while defendant JNM Realty &
Development Corp. is likewise impleaded as a necessary party in view of the fact that it is the transferor of right in favor of defendantappellee Motorich Sales Corporation; that on April 6, 1989, defendant ACL Development Corporation and Motorich Sales Corporation
entered into a Deed of Absolute Sale whereby the former transferred to the latter the subject property; that by reason of said transfer,
the Registry of Deeds of Quezon City issued a new title in the name of Motorich Sales Corporation, represented by defendant-appellee
Nenita Lee Gruenberg and Reynaldo L. Gruenberg, under Transfer Certificate of Title No. 3571; that as a result of defendants-appellees
Nenita Lee Gruenberg and Motorich Sales Corporations bad faith in refusing to execute a formal Transfer of Rights/Deed of Assignment,
plaintiff-appellant suffered moral and nominal damages which may be assessed against defendants-appellees in the sum of Five Hundred
Thousand (500,000.00) Pesos; that as a result of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporations unjustified
and unwarranted failure to execute the required Transfer of Rights/Deed of Assignment or formal deed of sale in favor of plaintiffappellant, defendants-appellees should be assessed exemplary damages in the sum of One Hundred Thousand (P100,000.00) Pesos; that
by reason of defendants-appellees bad faith in refusing to execute a Transfer of Rights/Deed of Assignment in favor of plaintiff-appellant,
the latter lost the opportunity to construct a residential building in the sum of One Hundred Thousand (P100,000.00) Pesos; and that as a
consequence of defendants-appellees Nenita Lee Gruenberg and Motorich Sales Corporations bad faith in refusing to execute a deed of
sale in favor of plaintiff-appellant, it has been constrained to obtain the services of counsel at an agreed fee of One Hundred Thousand
(P100,000.00) Pesos plus appearance fee for every appearance in court hearings.
In its answer, defendants-appellees Motorich Sales Corporation and Nenita Lee Gruenberg interposed as affirmative defense that the
President and Chairman of Motorich did not sign the agreement adverted to in par. 3 of the amended complaint; that Mrs. Gruenbergs
signature on the agreement (ref: par. 3 of Amended Complaint) is inadequate to bind Motorich. The other signature, that of Mr. Reynaldo
Gruenberg, President and Chairman of Motorich, is required; that plaintiff knew this from the very beginning as it was presented a copy of
the Transfer of Rights (Annex B of amended complaint) at the time the Agreement (Annex B of amended complaint) was signed; that
plaintiff-appellant itself drafted the Agreement and insisted that Mrs. Gruenberg accept the P100,000.00 as earnest money; that granting,
without admitting, the enforceability of the agreement, plaintiff-appellant nonetheless failed to pay in legal tender within the stipulated
period (up to March 2, 1989); that it was the understanding between Mrs. Gruenberg and plaintiff-appellant that the Transfer of
Rights/Deed of Assignment will be signed only upon receipt of cash payment; thus they agreed that if the payment be in check, they will
meet at a bank designated by plaintiff-appellant where they will encash the check and sign the Transfer of Rights/Deed. However,
plaintiff-appellant informed Mrs. Gruenberg of the alleged availability of the check, by phone, only after banking hours.
On the basis of the evidence, the court a quo rendered the judgment appealed from*,+ dismissing plaintiff-appellants complaint, ruling
that:
'The issue to be resolved is: whether plaintiff had the right to compel defendants to execute a deed of absolute sale in accordance with
the agreement of February 14, 1989; and if so, whether plaintiff is entitled to damages.
As to the first question, there is no evidence to show that defendant Nenita Lee Gruenberg was indeed authorized by defendant
corporation, Motorich Sales, to dispose of that property covered by T.C.T. No. (362909) 2876. Since the property is clearly owned by the
corporation, Motorich Sales, then its disposition should be governed by the requirement laid down in Sec. 40, of the Corporation Code of
the Philippines, to wit:
Sec. 40, Sale or other disposition of assets. Subject to the provisions of existing laws on illegal combination and monopolies, a
corporation may by a majority vote of its board of directors xxx sell, lease, exchange, mortgage, pledge or otherwise dispose of all or
substantially all of its property and assets, including its goodwill xxx when authorized by the vote of the stockholders representing at least
two third (2/3) of the outstanding capital stock x x x.
No such vote was obtained by defendant Nenita Lee Gruenberg for that proposed sale*;+ neither was there evidence to show that the
supposed transaction was ratified by the corporation. Plaintiff should have been on the look out under these circumstances. More so,
plaintiff himself [owns] several corporations (tsn dated August 16, 1993, p. 3) which makes him knowledgeable on corporation matters.
Regarding the question of damages, the Court likewise, does not find substantial evidence to hold defendant Nenita Lee Gruenberg liable
considering that she did not in anyway misrepresent herself to be authorized by the corporation to sell the property to plaintiff (tsn dated
September 27, 1991, p. 8).
In the light of the foregoing, the Court hereby renders judgment DISMISSING the complaint at instance for lack of merit.
Defendants counterclaim is also DISMISSED for lack of basis. (Decision, pp. 7-8; Rollo, pp. 34-35)
For clarity, the Agreement dated February 14, 1989 is reproduced hereunder:
AGREEMENT
CMV
KNOW ALL MEN BY THESE PRESENTS:
2. That the monthly amortization for the month of February 1989 shall be for the account of the Transferor; and that the monthly
amortization starting March 21, 1989 shall be for the account of the Transferee;
This Agreement, made and entered into by and between:

The transferor warrants that he [sic] is the lawful owner of the above-described property and that there [are] no existing liens and/or
encumbrances of whatsoever nature;
MOTORICH SALES CORPORATION, a corporation duly organized and existing under and by virtue of Philippine Laws, with principal office
address at 5510 South Super Hi-way cor. Balderama St., Pio del Pilar, Makati, Metro Manila, represented herein by its Treasurer, NENITA
LEE GRUENBERG, hereinafter referred to as the TRANSFEROR;
In case of failure by the Transferee to pay the balance on the date specified on 1. (b), the earnest money shall be forfeited in favor of the
Transferor.
- and -That upon full payment of the balance, the TRANSFEROR agrees to execute a TRANSFER OF RIGHTS/DEED OF ASSIGNMENT in favor of the
TRANSFEREE.
SAN JUAN STRUCTURAL & STEEL FABRICATORS, a corporation duly organized and existing under and by virtue of the laws of the
Philippines, with principal office address at Sumulong Highway, Barrio Mambungan, Antipolo, Rizal, represented herein by its President,
ANDRES T. CO, hereinafter referred to as the TRANSFEREE.
IN WITNESS WHEREOF, the parties have hereunto set their hands this 14th day of February, 1989 at Greenhills, San Juan, Metro Manila,
Philippines.
WITNESSETH, That:
MOTORICH SALES CORPORATION
TRANSFEROR
SAN STRUCTURAL &

STEEL FABRICATORS
WHEREAS, the TRANSFEROR is the owner of a parcel of land identified as Lot 30 Block 1 of the ACROPOLIS GREENS SUBDIVISION located
at the District of Murphy, Quezon City, Metro Manila, containing an area of FOUR HUNDRED FOURTEEN (414) SQUARE METERS, covered
by a TRANSFER OF RIGHTS between JNM Realty & Dev. Corp. as the Transferor and Motorich Sales Corp. as the Transferee;
TRANSFEREE
[SGD.]
[SGD.]
NOW, THEREFORE, for and in consideration of the foregoing premises, the parties have agreed as follows:
By:
NENITA LEE GRUENBERG
By: ANDRES T. CO
Treasurer
President
1. That the purchase price shall be at FIVE THOUSAND TWO HUNDRED PESOS (P5,200.00) per square meter; subject to the following
terms:
Signed in the presence of:
a.
Earnest money amounting to ONE HUNDRED THOUSAND PESOS (P100,000.00), will be paid upon the execution of this agreement
and shall form part of the total purchase price;
[SGD.]
_________________________
b.
[SGD.]
_____________________*6+
Balance shall be payable on or before March 2, 1989;

In its recourse before the Court of Appeals, petitioner insisted:
CMV
1. Appellant is entitled to compel the appellees to execute a Deed of Absolute Sale in accordance with the Agreement of February 14,
1989,
2.
Plaintiff is entitled to damages.*7+
As stated earlier, the Court of Appeals debunked petitioners arguments and affirmed the Decision of the RTC with the modification that
Respondent Nenita Lee Gruenberg was ordered to refund P100,000 to petitioner, the amount remitted as downpayment or earnest
money. Hence, this petition before us.*8+
2. May the doctrine of piercing the veil of corporate fiction be applied to Motorich?
3. Is the alleged alteration of Gruenbergs testimony as recorded in the transcript of stenographic notes material to the disposition of this
case?
4. Are respondents liable for damages and attorneys fees?
The Courts Ruling

The Issues
The petition is devoid of merit.
Before this Court, petitioner raises the following issues:
First Issue: Validity of Agreement
I.
II.
Whether or not the doctrine of piercing the veil of corporate fiction is applicable in the instant case
Whether or not the appellate court may consider matters which the parties failed to raise in the lower court
Petitioner San Juan Structural and Steel Fabricators, Inc. alleges that on February 14, 1989, it entered through its president, Andres Co,
into the disputed Agreement with Respondent Motorich Sales Corporation, which was in turn allegedly represented by its treasurer,
Nenita Lee Gruenberg. Petitioner insists that *w+hen Gruenberg and Co affixed their signatures on the contract they both consented to
be bound by the terms thereof. Ergo, petitioner contends that the contract is binding on the two corporations. We do not agree.
III. Whether or not there is a valid and enforceable contract between the petitioner and the respondent corporation
True, Gruenberg and Co signed on February 14, 1989, the Agreement according to which a lot owned by Motorich Sales Corporation was
purportedly sold. Such contract, however, cannot bind Motorich, because it never authorized or ratified such sale.
IV. Whether or not the Court of Appeals erred in holding that there is a valid correction/substitution of answer in the transcript of
stenographic note[s]
V.
Whether or not respondents are liable for damages and attorneys fees*9+
The Court synthesized the foregoing and will thus discuss them seriatim as follows:
A corporation is a juridical person separate and distinct from its stockholders or members. Accordingly, the property of the corporation is
not the property of its stockholders or members and may not be sold by the stockholders or members without express authorization from
the corporations board of directors.*10+ Section 23 of BP 68, otherwise known as the Corporation Code of the Philippines, provides:
SEC. 23. The Board of Directors or Trustees. -- Unless otherwise provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all property of such corporations controlled and held by the board of
directors or trustees to be elected from among the holders of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year and until their successors are elected and qualified.
1. Was there a valid contract of sale between petitioner and Motorich?
CMV
Indubitably, a corporation may act only through its board of directors, or, when authorized either by its bylaws or by its board resolution,
through its officers or agents in the normal course of business. The general principles of agency govern the relation between the
corporation and its officers or agents, subject to the articles of incorporation, bylaws, or relevant provisions of law.[11] Thus, this Court
has held that a corporate officer or agent may represent and bind the corporation in transactions with third persons to the extent that
the authority to do so has been conferred upon him, and this includes powers which have been intentionally conferred, and also such
powers as, in the usual course of the particular business, are incidental to, or may be implied from, the powers intentionally conferred,
powers added by custom and usage, as usually pertaining to the particular officer or agent, and such apparent powers as the corporation
has caused persons dealing with the officer or agent to believe that it has conferred.*12+
Furthermore, the Court has also recognized the rule that persons dealing with an assumed agent, whether the assumed agency be a
general or special one, are bound at their peril, if they would hold the principal liable, to ascertain not only the fact of agency but also the
nature and extent of authority, and in case either is controverted, the burden of proof is upon them to establish it (Harry Keeler v.
Rodriguez, 4 Phil. 19).*13+ Unless duly authorized, a treasurer, whose powers are limited, cannot bind the corporation in a sale of its
assets.[14]
In the case at bar, Respondent Motorich categorically denies that it ever authorized Nenita Gruenberg, its treasurer, to sell the subject
parcel of land.[15] Consequently, petitioner had the burden of proving that Nenita Gruenberg was in fact authorized to represent and
bind Motorich in the transaction. Petitioner failed to discharge this burden. Its offer of evidence before the trial court contained no proof
of such authority.*16+ It has not shown any provision of said respondents articles of incorporation, bylaws or board resolution to prove
that Nenita Gruenberg possessed such power.
That Nenita Gruenberg is the treasurer of Motorich does not free petitioner from the responsibility of ascertaining the extent of her
authority to represent the corporation. Petitioner cannot assume that she, by virtue of her position, was authorized to sell the property
of the corporation. Selling is obviously foreign to a corporate treasurers function, which generally has been described as to receive and
keep the funds of the corporation, and to disburse them in accordance with the authority given him by the board or the properly
authorized officers.*17+
Neither was such real estate sale shown to be a normal business activity of Motorich. The primary purpose of Motorich is marketing,
distribution, export and import in relation to a general merchandising business.[18] Unmistakably, its treasurer is not cloaked with actual
or apparent authority to buy or sell real property, an activity which falls way beyond the scope of her general authority.
ART. 1878 Special powers of attorney are necessary in the following case:
xxx
xxx
xxx
(5) To enter any contract by which the ownership of an immovable is transmitted or acquired either gratuitously or for a valuable
consideration;
xxx
xxx
x x x.
Petitioner further contends that Respondent Motorich has ratified said contract of sale because of its acceptance of benefits, as
evidenced by the receipt issued by Respondent Gruenberg.[19] Petitioner is clutching at straws.
As a general rule, the acts of corporate officers within the scope of their authority are binding on the corporation. But when these officers
exceed their authority, their actions cannot bind the corporation, unless it has ratified such acts or is estopped from disclaiming
them.*20+
In this case, there is a clear absence of proof that Motorich ever authorized Nenita Gruenberg, or made it appear to any third person that
she had the authority, to sell its land or to receive the earnest money. Neither was there any proof that Motorich ratified, expressly or
impliedly, the contract. Petitioner rests its argument on the receipt, which, however, does not prove the fact of ratification. The
document is a hand-written one, not a corporate receipt, and it bears only Nenita Gruenbergs signature. Certainly, this document alone
does not prove that her acts were authorized or ratified by Motorich.
Article 1318 of the Civil Code lists the requisites of a valid and perfected contract: (1) consent of the contracting parties; (2) object
certain which is the subject matter of the contract; (3) cause of the obligation which is established. As found by the trial court[21] and
affirmed by the Court of Appeals,[22] there is no evidence that Gruenberg was authorized to enter into the contract of sale, or that the
said contract was ratified by Motorich. This factual finding of the two courts is binding on this Court.[23] As the consent of the seller was
not obtained, no contract to bind the obligor was perfected. Therefore, there can be no valid contract of sale between petitioner and
Motorich.
Articles 1874 and 1878 of the Civil Code of the Philippines provides:
ART. 1874. When a sale of a piece of land or any interest therein is through an agent, the authority of the latter shall be in writing;
otherwise, the sale shall be void.
CMV
Because Motorich had never given a written authorization to Respondent Gruenberg to sell its parcel of land, we hold that the February
14, 1989 Agreement entered into by the latter with petitioner is void under Article 1874 of the Civil Code. Being inexistent and void from
the beginning, said contract cannot be ratified.[24]
10
Second Issue:
Piercing the Corporate Veil Not Justified
Petitioner also argues that the veil of corporate fiction of Motorich should be pierced, because the latter is a close corporation. Since
Spouses Reynaldo L. Gruenberg and Nenita R. Gruenberg owned all or almost all or 99.866% to be accurate, of the subscribed capital
stock*25+ of Motorich, petitioner argues that Gruenberg needed no authorization from the board to enter into the subject contract.[26]
It adds that, being solely owned by the Spouses Gruenberg, the company can be treated as a close corporation which can be bound by the
acts of its principal stockholder who needs no specific authority. The Court is not persuaded.
First, petitioner itself concedes having raised the issue belatedly,[27] not having done so during the trial, but only when it filed its surrejoinder before the Court of Appeals.[28] Thus, this Court cannot entertain said issue at this late stage of the proceedings. It is wellsettled that points of law, theories and arguments not brought to the attention of the trial court need not be, and ordinarily will not be,
considered by a reviewing court, as they cannot be raised for the first time on appeal.[29] Allowing petitioner to change horses in
midstream, as it were, is to run roughshod over the basic principles of fair play, justice and due process.
Second, even if the above-mentioned argument were to be addressed at this time, the Court still finds no reason to uphold it. True, one
of the advantages of a corporate form of business organization is the limitation of an investors liability to the amount of the
investment.[30] This feature flows from the legal theory that a corporate entity is separate and distinct from its stockholders. However,
the statutorily granted privilege of a corporate veil may be used only for legitimate purposes.[31] On equitable considerations, the veil can
be disregarded when it is utilized as a shield to commit fraud, illegality or inequity; defeat public convenience; confuse legitimate issues;
or serve as a mere alter ego or business conduit of a person or an instrumentality, agency or adjunct of another corporation.[32]
Thus, the Court has consistently ruled that *w+hen the fiction is used as a means of perpetrating a fraud or an illegal act or as a vehicle for
the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who
compose it will be lifted to allow for its consideration merely as an aggregation of individuals.*33+
We stress that the corporate fiction should be set aside when it becomes a shield against liability for fraud, illegality or inequity
committed on third persons. The question of piercing the veil of corporate fiction is essentially, then, a matter of proof. In the present
case, however, the Court finds no reason to pierce the corporate veil of Respondent Motorich. Petitioner utterly failed to establish that
said corporation was formed, or that it is operated, for the purpose of shielding any alleged fraudulent or illegal activities of its officers or
stockholders; or that the said veil was used to conceal fraud, illegality or inequity at the expense of third persons, like petitioner.
SEC. 96.
Definition and Applicability of Title. -- A close corporation, within the meaning of this Code, is one whose articles of
incorporation provide that: (1) All of the corporations issued stock of all classes, exclusive of treasury shares, shall be held of record by
not more than a specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this Title; and (3) The corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed not a close corporation
when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code. xxx.
The articles of incorporation[34] of Motorich Sales Corporation does not contain any provision stating that (1) the number of stockholders
shall not exceed 20, or (2) a preemption of shares is restricted in favor of any stockholder or of the corporation, or (3) listing its stocks in
any stock exchange or making a public offering of such stocks is prohibited. From its articles, it is clear that Respondent Motorich is not a
close corporation.[35] Motorich does not become one either, just because Spouses Reynaldo and Nenita Gruenberg owned 99.866% of
its subscribed capital stock. The *m+ere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personalities.*36+ So too, a narrow
distribution of ownership does not, by itself, make a close corporation.
Petitioner cites Manuel R. Dulay Enterprises, Inc. v. Court of Appeals*37+ wherein the Court ruled that xxx petitioner corporation is
classified as a close corporation and, consequently, a board resolution authorizing the sale or mortgage of the subject property is not
necessary to bind the corporation for the action of its president.*38+ But the factual milieu in Dulay is not on all fours with the present
case. In Dulay, the sale of real property was contracted by the president of a close corporation with the knowledge and acquiescence of
its board of directors.[39] In the present case, Motorich is not a close corporation, as previously discussed, and the agreement was
entered into by the corporate treasurer without the knowledge of the board of directors.
The Court is not unaware that there are exceptional cases where an action by a director, who singly is the controlling stockholder, may
be considered as a binding corporate act and a board action as nothing more than a mere formality.*40+ The present case, however, is
not one of them.
As stated by petitioner, Spouses Reynaldo and Nenita Gruenberg own almost 99.866% of Respondent Motorich.*41+ Since Nenita is not
the sole controlling stockholder of Motorich, the aforementioned exception does not apply. Granting arguendo that the corporate veil of
Motorich is to be disregarded, the subject parcel of land would then be treated as conjugal property of Spouses Gruenberg, because the
same was acquired during their marriage. There being no indication that said spouses, who appear to have been married before the
effectivity of the Family Code, have agreed to a different property regime, their property relations would be governed by conjugal
partnership of gains.*42+ As a consequence, Nenita Gruenberg could not have effected a sale of the subject lot because *t+here is no coownership between the spouses in the properties of the conjugal partnership of gains. Hence, neither spouse can alienate in favor of
another his or her interest in the partnership or in any property belonging to it; neither spouse can ask for a partition of the properties
before the partnership has been legally dissolved.*43+
Petitioner claims that Motorich is a close corporation. We rule that it is not. Section 96 of the Corporation Code defines a close
corporation as follows:
CMV
11
Assuming further, for the sake of argument, that the spouses property regime is the absolute community of property, the sale would still
be invalid. Under this regime, alienation of community property must have the written consent of the other spouse or the authority of
the court without which the disposition or encumbrance is void.*44+ Both requirements are manifestly absent in the instant case.
But you also did not say that you were not authorized to sell the property, you did not tell that to Mr. Co, is that correct?
That was not asked of me.
Yes, just answer it.
Third Issue: Challenged Portion of TSN Immaterial
Petitioner calls our attention to the following excerpt of the transcript of stenographic notes(TSN):
A I just told them that I was the treasurer of the corporation and it [was] also the president who [was] also authorized to sign on behalf
of the corporation.
Q Did you ever represent to Mr. Co that you were authorized by the corporation to sell the property?
Q
A
You did not say that you were not authorized nor did you say that you were authorized?
Yes, sir.*45+
Petitioner claims that the answer Yes was crossed out, and, in its place was written a No with an initial scribbled above it.[46] This,
however, is insufficient to prove that Nenita Gruenberg was authorized to represent Respondent Motorich in the sale of its immovable
property. Said excerpt should be understood in the context of her whole testimony. During her cross-examination, Respondent
Gruenberg testified:
A Mr. Co was very interested to purchase the property and he offered to put up a P100,000.00 earnest money at that time. That was
our first meeting.*47+
Clearly then, Nenita Gruenberg did not testify that Motorich had authorized her to sell its property. On the other hand, her testimony
demonstrates that the president of Petitioner Corporation, in his great desire to buy the property, threw caution to the wind by offering
and paying the earnest money without first verifying Gruenbergs authority to sell the lot.
Q So, you signed in your capacity as the treasurer?

Fourth Issue:
[A] Yes, sir.
Even then you kn[e]w all along that you [were] not authorized?
Yes, sir.
You stated on direct examination that you did not represent that you were authorized to sell the property?
Yes, sir.
CMV
Damages and Attorneys Fees
Finally, petitioner prays for damages and attorneys fees, alleging that *i+n an utter display of malice and bad faith, *r+espondents
attempted and succeeded in impressing on the trial court and [the] Court of Appeals that Gruenberg did not represent herself as
authorized by Respondent Motorich despite the receipt issued by the former specifically indicating that she was signing on behalf of
Motorich Sales Corporation. Respondent Motorich likewise acted in bad faith when it claimed it did not authorize Respondent Gruenberg
and that the contract *was+ not binding, *insofar+ as it *was+ concerned, despite receipt and enjoyment of the proceeds of Gruenbergs
act.*48+ Assuming that Respondent Motorich was not a party to the alleged fraud, petitioner maintains that Respondent Gruenberg
should be held liable because she acted fraudulently and in bad faith *in+ representing herself as duly authorized by *R+espondent
*C+orporation.*49+
As already stated, we sustain the findings of both the trial and the appellate courts that the foregoing allegations lack factual bases.
Hence, an award of damages or attorneys fees cannot be justified. The amount paid as earnest money was not proven to have
12
redounded to the benefit of Respondent Motorich. Petitioner claims that said amount was deposited to the account of Respondent
Motorich, because it was deposited with the account of Aren Commercial c/o Motorich Sales Corporation.*50+ Respondent Gruenberg,
however, disputes the allegations of petitioner. She testified as follows:
G.R. No. 147402
January 14, 2004
ENGR. RANULFO C. FELICIANO, in his capacity as General Manager of the Leyte Metropolitan Water District (LMWD), Tacloban City,
petitioner,
Q You voluntarily accepted the P100,000.00, as a matter of fact, that was encashed, the check was encashed.
vs.
Yes, sir, the check was paid in my name and I deposit[ed] it . . .
COMMISSION ON AUDIT, Chairman CELSO D. GANGAN, Commissioners RAUL C. FLORES and EMMANUEL M. DALMAN, and Regional
Director of COA Region VIII, respondents.
DECISION
In your account?
CARPIO, J.:
The Case
Yes, sir. *51+
In any event, Gruenberg offered to return the amount to petitioner xxx since the sale did not push through.*52+
This is a petition for certiorari1 to annul the Commission on Audits ("COA") Resolution dated 3 January 2000 and the Decision dated 30
January 2001 denying the Motion for Reconsideration. The COA denied petitioner Ranulfo C. Felicianos request for COA to cease all audit
services, and to stop charging auditing fees, to Leyte Metropolitan Water District ("LMWD"). The COA also denied petitioners request for
COA to refund all auditing fees previously paid by LMWD.
Moreover, we note that Andres Co is not a neophyte in the world of corporate business. He has been the president of Petitioner
Corporation for more than ten years and has also served as chief executive of two other corporate entities.[53] Co cannot feign ignorance
of the scope of the authority of a corporate treasurer such as Gruenberg. Neither can he be oblivious to his duty to ascertain the scope of
Gruenbergs authorization to enter into a contract to sell a parcel of land belonging to Motorich.
Antecedent Facts
Indeed, petitioners claim of fraud and bad faith is unsubstantiated and fails to persuade the Court. Indubitably, petitioner appears to be
the victim of its own officers negligence in entering into a contract with and paying an unauthorized officer of another corporation.
A Special Audit Team from COA Regional Office No. VIII audited the accounts of LMWD. Subsequently, LMWD received a letter from COA
dated 19 July 1999 requesting payment of auditing fees. As General Manager of LMWD, petitioner sent a reply dated 12 October 1999
informing COAs Regional Director that the water district could not pay the auditing fees. Petitioner cited as basis for his action Sections 6
and 20 of Presidential Decree 198 ("PD 198")2, as well as Section 18 of Republic Act No. 6758 ("RA 6758"). The Regional Director referred
petitioners reply to the COA Chairman on 18 October 1999.
As correctly ruled by the Court of Appeals, however, Nenita Gruenberg should be ordered to return to petitioner the amount she received
as earnest money, as no one shall enrich himself at the expense of another,*54+ a principle embodied in Article 2154 of the Civil
Code.[55] Although there was no binding relation between them, petitioner paid Gruenberg on the mistaken belief that she had the
authority to sell the property of Motorich.*56+ Article 2155 of the Civil Code provides that *p+ayment by reason of a mistake in the
construction or application of a difficult question of law may come within the scope of the preceding article.
On 19 October 1999, petitioner wrote COA through the Regional Director asking for refund of all auditing fees LMWD previously paid to
COA.
On 16 March 2000, petitioner received COA Chairman Celso D. Gangans Resolution dated 3 January 2000 denying his requests. Petitioner
filed a motion for reconsideration on 31 March 2000, which COA denied on 30 January 2001.
WHEREFORE, the petition is hereby DENIED and the assailed Decision is AFFIRMED.
SO ORDERED.
CMV
On 13 March 2001, petitioner filed this instant petition. Attached to the petition were resolutions of the Visayas Association of Water
Districts (VAWD) and the Philippine Association of Water Districts (PAWD) supporting the petition.
13
The petition lacks merit.
The Ruling of the Commission on Audit
The COA ruled that this Court has already settled COAs audit jurisdiction over local water districts in Davao City Water District v. Civil
Service Commission and Commission on Audit,3 as follows:
The above-quoted provision *referring to Section 3(b) PD 198+ definitely sets to naught petitioners contention that they are private
corporations. It is clear therefrom that the power to appoint the members who will comprise the members of the Board of Directors
belong to the local executives of the local subdivision unit where such districts are located. In contrast, the members of the Board of
Directors or the trustees of a private corporation are elected from among members or stockholders thereof. It would not be amiss at this
point to emphasize that a private corporation is created for the private purpose, benefit, aim and end of its members or stockholders.
Necessarily, said members or stockholders should be given a free hand to choose who will compose the governing body of their
corporation. But this is not the case here and this clearly indicates that petitioners are not private corporations.
The Constitution and existing laws4 mandate COA to audit all government agencies, including government-owned and controlled
corporations ("GOCCs") with original charters. An LWD is a GOCC with an original charter. Section 2(1), Article IX-D of the Constitution
provides for COAs audit jurisdiction, as follows:
SECTION 2. (1) The Commission on Audit shall have the power, authority and duty to examine, audit, and settle all accounts pertaining to
the revenue and receipts of, and expenditures or uses of funds and property, owned or held in trust by, or pertaining to, the Government,
or any of its subdivisions, agencies, or instrumentalities, including government-owned and controlled corporations with original charters,
and on a post-audit basis: (a) constitutional bodies, commissions and offices that have been granted fiscal autonomy under this
Constitution; (b) autonomous state colleges and universities; (c) other government-owned or controlled corporations and their
subsidiaries; and (d) such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the government,
which are required by law or the granting institution to submit to such audit as a condition of subsidy or equity. However, where the
internal control system of the audited agencies is inadequate, the Commission may adopt such measures, including temporary or special
pre-audit, as are necessary and appropriate to correct the deficiencies. It shall keep the general accounts of the Government and, for such
period as may be provided by law, preserve the vouchers and other supporting papers pertaining thereto. (Emphasis supplied)
The COA also denied petitioners request for COA to stop charging auditing fees as well as petitioners request for COA to refund all
auditing fees already paid.
The COAs audit jurisdiction extends not only to government "agencies or instrumentalities," but also to "government-owned and
controlled corporations with original charters" as well as "other government-owned or controlled corporations" without original charters.
The Issues
Whether LWDs are Private or Government-Owned
Petitioner contends that COA committed grave abuse of discretion amounting to lack or excess of jurisdiction by auditing LMWD and
requiring it to pay auditing fees. Petitioner raises the following issues for resolution:
1. Whether a Local Water District ("LWD") created under PD 198, as amended, is a government-owned or controlled corporation subject
to the audit jurisdiction of COA;
and Controlled Corporations with Original Charters
Petitioner seeks to revive a well-settled issue. Petitioner asks for a re-examination of a doctrine backed by a long line of cases culminating
in Davao City Water District v. Civil Service Commission5 and just recently reiterated in De Jesus v. Commission on Audit.6 Petitioner
maintains that LWDs are not government-owned and controlled corporations with original charters. Petitioner even argues that LWDs are
private corporations. Petitioner asks the Court to consider certain interpretations of the applicable laws, which would give a "new
perspective to the issue of the true character of water districts."7
2. Whether Section 20 of PD 198, as amended, prohibits COAs certified public accountants from auditing local water districts; and
3. Whether Section 18 of RA 6758 prohibits the COA from charging government-owned and controlled corporations auditing fees.
The Ruling of the Court
CMV
Petitioner theorizes that what PD 198 created was the Local Waters Utilities Administration ("LWUA") and not the LWDs. Petitioner claims
that LWDs are created "pursuant to" and not created directly by PD 198. Thus, petitioner concludes that PD 198 is not an "original
charter" that would place LWDs within the audit jurisdiction of COA as defined in Section 2(1), Article IX-D of the Constitution. Petitioner
elaborates that PD 198 does not create LWDs since it does not expressly direct the creation of such entities, but only provides for their
formation on an optional or voluntary basis.8 Petitioner adds that the operative act that creates an LWD is the approval of the Sanggunian
Resolution as specified in PD 198.
14
Petitioners contention deserves scant consideration.
We begin by explaining the general framework under the fundamental law. The Constitution recognizes two classes of corporations. The
first refers to private corporations created under a general law. The second refers to government-owned or controlled corporations
created by special charters. Section 16, Article XII of the Constitution provides:
Sec. 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations.
Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and
subject to the test of economic viability.
The Constitution emphatically prohibits the creation of private corporations except by a general law applicable to all citizens.9 The
purpose of this constitutional provision is to ban private corporations created by special charters, which historically gave certain
individuals, families or groups special privileges denied to other citizens.10
In short, Congress cannot enact a law creating a private corporation with a special charter. Such legislation would be unconstitutional.
Private corporations may exist only under a general law. If the corporation is private, it must necessarily exist under a general law. Stated
differently, only corporations created under a general law can qualify as private corporations. Under existing laws, that general law is the
Corporation Code,11 except that the Cooperative Code governs the incorporation of cooperatives.12
The Constitution authorizes Congress to create government-owned or controlled corporations through special charters. Since private
corporations cannot have special charters, it follows that Congress can create corporations with special charters only if such corporations
are government-owned or controlled.
LWDs exist by virtue of PD 198, which constitutes their special charter. Since under the Constitution only government-owned or controlled
corporations may have special charters, LWDs can validly exist only if they are government-owned or controlled. To claim that LWDs are
private corporations with a special charter is to admit that their existence is constitutionally infirm.
Unlike private corporations, which derive their legal existence and power from the Corporation Code, LWDs derive their legal existence
and power from PD 198. Sections 6 and 25 of PD 19814 provide:
Section 6. Formation of District. This Act is the source of authorization and power to form and maintain a district. For purposes of this
Act, a district shall be considered as a quasi-public corporation performing public service and supplying public wants. As such, a district
shall exercise the powers, rights and privileges given to private corporations under existing laws, in addition to the powers granted in, and
subject to such restrictions imposed, under this Act.
(a) The name of the local water district, which shall include the name of the city, municipality, or province, or region thereof, served by
said system, followed by the words "Water District".
(b) A description of the boundary of the district. In the case of a city or municipality, such boundary may include all lands within the city or
municipality. A district may include one or more municipalities, cities or provinces, or portions thereof.
(c) A statement completely transferring any and all waterworks and/or sewerage facilities managed, operated by or under the control of
such city, municipality or province to such district upon the filing of resolution forming the district.
(d) A statement identifying the purpose for which the district is formed, which shall include those purposes outlined in Section 5 above.
Obviously, LWDs are not private corporations because they are not created under the Corporation Code. LWDs are not registered with the
Securities and Exchange Commission. Section 14 of the Corporation Code states that "[A]ll corporations organized under this code shall
file with the Securities and Exchange Commission articles of incorporation x x x." LWDs have no articles of incorporation, no incorporators
and no stockholders or members. There are no stockholders or members to elect the board directors of LWDs as in the case of all
corporations registered with the Securities and Exchange Commission. The local mayor or the provincial governor appoints the directors
of LWDs for a fixed term of office. This Court has ruled that LWDs are not created under the Corporation Code, thus:
From the foregoing pronouncement, it is clear that what has been excluded from the coverage of the CSC are those corporations created
pursuant to the Corporation Code. Significantly, petitioners are not created under the said code, but on the contrary, they were created
pursuant to a special law and are governed primarily by its provision.13 (Emphasis supplied)
(e) The names of the initial directors of the district with the date of expiration of term of office for each.
(f) A statement that the district may only be dissolved on the grounds and under the conditions set forth in Section 44 of this Title.
(g) A statement acknowledging the powers, rights and obligations as set forth in Section 36 of this Title.
Nothing in the resolution of formation shall state or infer that the local legislative body has the power to dissolve, alter or affect the
district beyond that specifically provided for in this Act.
CMV
15
MR. FOZ. Just one question, Mr. Presiding Officer. By the term "original charters," what exactly do we mean?
If two or more cities, municipalities or provinces, or any combination thereof, desire to form a single district, a similar resolution shall be
adopted in each city, municipality and province.
xxx
MR. ROMULO. We mean that they were created by law, by an act of Congress, or by special law.
MR. FOZ. And not under the general corporation law.
Sec. 25. Authorization. The district may exercise all the powers which are expressly granted by this Title or which are necessarily
implied from or incidental to the powers and purposes herein stated. For the purpose of carrying out the objectives of this Act, a district is
hereby granted the power of eminent domain, the exercise thereof shall, however, be subject to review by the Administration. (Emphasis
supplied)
MR. ROMULO. That is correct. Mr. Presiding Officer.
MR. FOZ. With that understanding and clarification, the Committee accepts the amendment.
Clearly, LWDs exist as corporations only by virtue of PD 198, which expressly confers on LWDs corporate powers. Section 6 of PD 198
provides that LWDs "shall exercise the powers, rights and privileges given to private corporations under existing laws." Without PD 198,
LWDs would have no corporate powers. Thus, PD 198 constitutes the special enabling charter of LWDs. The ineluctable conclusion is that
LWDs are government-owned and controlled corporations with a special charter.
MR. NATIVIDAD. Mr. Presiding Officer, so those created by the general corporation law are out.
MR. ROMULO. That is correct. (Emphasis supplied)

The phrase "government-owned and controlled corporations with original charters" means GOCCs created under special laws and not
under the general incorporation law. There is no difference between the term "original charters" and "special charters." The Court
clarified this in National Service Corporation v. NLRC15 by citing the deliberations in the Constitutional Commission, as follows:
Again, in Davao City Water District v. Civil Service Commission,16 the Court reiterated the meaning of the phrase "government-owned and
controlled corporations with original charters" in this wise:
THE PRESIDING OFFICER (Mr. Trenas). The session is resumed.
Commissioner Romulo is recognized.
MR. ROMULO. Mr. Presiding Officer, I am amending my original proposed amendment to now read as follows: "including governmentowned or controlled corporations WITH ORIGINAL CHARTERS." The purpose of this amendment is to indicate that government
corporations such as the GSIS and SSS, which have original charters, fall within the ambit of the civil service. However, corporations which
are subsidiaries of these chartered agencies such as the Philippine Airlines, Manila Hotel and Hyatt are excluded from the coverage of the
civil service.
By "government-owned or controlled corporation with original charter," We mean government owned or controlled corporation created
by a special law and not under the Corporation Code of the Philippines. Thus, in the case of Lumanta v. NLRC (G.R. No. 82819, February 8,
1989, 170 SCRA 79, 82), We held:
"The Court, in National Service Corporation (NASECO) v. National Labor Relations Commission, G.R. No. 69870, promulgated on 29
November 1988, quoting extensively from the deliberations of the 1986 Constitutional Commission in respect of the intent and meaning
of the new phrase with original charter, in effect held that government-owned and controlled corporations with original charter refer to
corporations chartered by special law as distinguished from corporations organized under our general incorporation statute the
Corporation Code. In NASECO, the company involved had been organized under the general incorporation statute and was a subsidiary of
the National Investment Development Corporation (NIDC) which in turn was a subsidiary of the Philippine National Bank, a bank chartered
by a special statute. Thus, government-owned or controlled corporations like NASECO are effectively, excluded from the scope of the Civil
Service." (Emphasis supplied)
THE PRESIDING OFFICER (Mr. Trenas). What does the Committee say?
CMV
16
Petitioners contention that the Sangguniang Bayan resolution creates the LWDs assumes that the Sangguniang Bayan has the power to
create corporations. This is a patently baseless assumption. The Local Government Code17 does not vest in the Sangguniang Bayan the
power to create corporations.18 What the Local Government Code empowers the Sangguniang Bayan to do is to provide for the
establishment of a waterworks system "subject to existing laws." Thus, Section 447(5)(vii) of the Local Government Code provides:
SECTION 447. Powers, Duties, Functions and Compensation. (a) The sangguniang bayan, as the legislative body of the municipality, shall
enact ordinances, approve resolutions and appropriate funds for the general welfare of the municipality and its inhabitants pursuant to
Section 16 of this Code and in the proper exercise of the corporate powers of the municipality as provided for under Section 22 of this
Code, and shall:
xxx
(vii) Subject to existing laws, provide for the establishment, operation, maintenance, and repair of an efficient waterworks system to
supply water for the inhabitants; regulate the construction, maintenance, repair and use of hydrants, pumps, cisterns and reservoirs;
protect the purity and quantity of the water supply of the municipality and, for this purpose, extend the coverage of appropriate
ordinances over all territory within the drainage area of said water supply and within one hundred (100) meters of the reservoir, conduit,
canal, aqueduct, pumping station, or watershed used in connection with the water service; and regulate the consumption, use or wastage
of water;
x x x. (Emphasis supplied)
The Sangguniang Bayan may establish a waterworks system only in accordance with the provisions of PD 198. The Sangguniang Bayan has
no power to create a corporate entity that will operate its waterworks system. However, the Sangguniang Bayan may avail of existing
enabling laws, like PD 198, to form and incorporate a water district. Besides, even assuming for the sake of argument that the
Sangguniang Bayan has the power to create corporations, the LWDs would remain government-owned or controlled corporations subject
to COAs audit jurisdiction. The resolution of the Sangguniang Bayan would constitute an LWDs special charter, making the LWD a
government-owned and controlled corporation with an original charter. In any event, the Court has already ruled in Baguio Water District
v. Trajano19 that the Sangguniang Bayan resolution is not the special charter of LWDs, thus:
While it is true that a resolution of a local sanggunian is still necessary for the final creation of a district, this Court is of the opinion that
said resolution cannot be considered as its charter, the same being intended only to implement the provisions of said decree.
Petitioner further contends that a law must create directly and explicitly a GOCC in order that it may have an original charter. In short,
petitioner argues that one special law cannot serve as enabling law for several GOCCs but only for one GOCC. Section 16, Article XII of the
Constitution mandates that "Congress shall not, except by general law,"20 provide for the creation of private corporations. Thus, the
Constitution prohibits one special law to create one private corporation, requiring instead a "general law" to create private corporations.
CMV
In contrast, the same Section 16 states that "Government-owned or controlled corporations may be created or established by special
charters." Thus, the Constitution permits Congress to create a GOCC with a special charter. There is, however, no prohibition on Congress
to create several GOCCs of the same class under one special enabling charter.
The rationale behind the prohibition on private corporations having special charters does not apply to GOCCs. There is no danger of
creating special privileges to certain individuals, families or groups if there is one special law creating each GOCC. Certainly, such danger
will not exist whether one special law creates one GOCC, or one special enabling law creates several GOCCs. Thus, Congress may create
GOCCs either by special charters specific to each GOCC, or by one special enabling charter applicable to a class of GOCCs, like PD 198
which applies only to LWDs.
Petitioner also contends that LWDs are private corporations because Section 6 of PD 19821 declares that LWDs "shall be considered
quasi-public" in nature. Petitioners rationale is that only private corporations may be deemed "quasi-public" and not public corporations.
Put differently, petitioner rationalizes that a public corporation cannot be deemed "quasi-public" because such corporation is already
public. Petitioner concludes that the term "quasi-public" can only apply to private corporations. Petitioners argument is inconsequential.
Petitioner forgets that the constitutional criterion on the exercise of COAs audit jurisdiction depends on the governments ownership or
control of a corporation. The nature of the corporation, whether it is private, quasi-public, or public is immaterial.
The Constitution vests in the COA audit jurisdiction over "government-owned and controlled corporations with original charters," as well
as "government-owned or controlled corporations" without original charters. GOCCs with original charters are subject to COA pre-audit,
while GOCCs without original charters are subject to COA post-audit. GOCCs without original charters refer to corporations created under
the Corporation Code but are owned or controlled by the government. The nature or purpose of the corporation is not material in
determining COAs audit jurisdiction. Neither is the manner of creation of a corporation, whether under a general or special law.
The determining factor of COAs audit jurisdiction is government ownership or control of the corporation. In Philippine Veterans Bank
Employees Union-NUBE v. Philippine Veterans Bank,22 the Court even ruled that the criterion of ownership and control is more important
than the issue of original charter, thus:
This point is important because the Constitution provides in its Article IX-B, Section 2(1) that "the Civil Service embraces all branches,
subdivisions, instrumentalities, and agencies of the Government, including government-owned or controlled corporations with original
charters." As the Bank is not owned or controlled by the Government although it does have an original charter in the form of R.A. No.
3518,23 it clearly does not fall under the Civil Service and should be regarded as an ordinary commercial corporation. Section 28 of the
said law so provides. The consequence is that the relations of the Bank with its employees should be governed by the labor laws, under
which in fact they have already been paid some of their claims. (Emphasis supplied)
17
Certainly, the government owns and controls LWDs. The government organizes LWDs in accordance with a specific law, PD 198. There is
no private party involved as co-owner in the creation of an LWD. Just prior to the creation of LWDs, the national or local government
owns and controls all their assets. The government controls LWDs because under PD 198 the municipal or city mayor, or the provincial
governor, appoints all the board directors of an LWD for a fixed term of six years.24 The board directors of LWDs are not co-owners of the
LWDs. LWDs have no private stockholders or members. The board directors and other personnel of LWDs are government employees
subject to civil service laws25 and anti-graft laws.26
Sec. 20. System of Business Administration. The Board shall, as soon as practicable, prescribe and define by resolution a system of
business administration and accounting for the district, which shall be patterned upon and conform to the standards established by the
Administration. Auditing shall be performed by a certified public accountant not in the government service. The Administration may,
however, conduct annual audits of the fiscal operations of the district to be performed by an auditor retained by the Administration.
Expenses incurred in connection therewith shall be borne equally by the water district concerned and the Administration.35 (Emphasis
supplied)
While Section 8 of PD 198 states that "[N]o public official shall serve as director" of an LWD, it only means that the appointees to the
board of directors of LWDs shall come from the private sector. Once such private sector representatives assume office as directors, they
become public officials governed by the civil service law and anti-graft laws. Otherwise, Section 8 of PD 198 would contravene Section
2(1), Article IX-B of the Constitution declaring that the civil service includes "government-owned or controlled corporations with original
charters."
Petitioner argues that PD 198 expressly prohibits COA auditors, or any government auditor for that matter, from auditing LWDs.
Petitioner asserts that this is the import of the second sentence of Section 20 of PD 198 when it states that "[A]uditing shall be performed
by a certified public accountant not in the government service."36
PD 198 cannot prevail over the Constitution. No amount of clever legislation can exclude GOCCs like LWDs from COAs audit jurisdiction.
Section 3, Article IX-C of the Constitution outlaws any scheme or devise to escape COAs audit jurisdiction, thus:
If LWDs are neither GOCCs with original charters nor GOCCs without original charters, then they would fall under the term "agencies or
instrumentalities" of the government and thus still subject to COAs audit jurisdiction. However, the stark and undeniable fact is that the
government owns LWDs. Section 4527 of PD 198 recognizes government ownership of LWDs when Section 45 states that the board of
directors may dissolve an LWD only on the condition that "another public entity has acquired the assets of the district and has assumed all
obligations and liabilities attached thereto." The implication is clear that an LWD is a public and not a private entity.
Petitioner does not allege that some entity other than the government owns or controls LWDs. Instead, petitioner advances the theory
that the "Water Districts owner is the District itself."28 Assuming for the sake of argument that an LWD is "self-owned,"29 as petitioner
describes an LWD, the government in any event controls all LWDs. First, government officials appoint all LWD directors to a fixed term of
office. Second, any per diem of LWD directors in excess of P50 is subject to the approval of the Local Water Utilities Administration, and
directors can receive no other compensation for their services to the LWD.30 Third, the Local Water Utilities Administration can require
LWDs to merge or consolidate their facilities or operations.31 This element of government control subjects LWDs to COAs audit
jurisdiction.
Petitioner argues that upon the enactment of PD 198, LWDs became private entities through the transfer of ownership of water facilities
from local government units to their respective water districts as mandated by PD 198. Petitioner is grasping at straws. Privatization
involves the transfer of government assets to a private entity. Petitioner concedes that the owner of the assets transferred under Section
6 (c) of PD 198 is no other than the LWD itself.32 The transfer of assets mandated by PD 198 is a transfer of the water systems facilities
"managed, operated by or under the control of such city, municipality or province to such (water) district."33 In short, the transfer is from
one government entity to another government entity. PD 198 is bereft of any indication that the transfer is to privatize the operation and
control of water systems.
Finally, petitioner claims that even on the assumption that the government owns and controls LWDs, Section 20 of PD 198 prevents COA
from auditing LWDs. 34 Section 20 of PD 198 provides:
CMV
Sec. 3. No law shall be passed exempting any entity of the Government or its subsidiary in any guise whatever, or any investment of public
funds, from the jurisdiction of the Commission on Audit. (Emphasis supplied)
The framers of the Constitution added Section 3, Article IX-D of the Constitution precisely to annul provisions of Presidential Decrees, like
that of Section 20 of PD 198, that exempt GOCCs from COA audit. The following exchange in the deliberations of the Constitutional
Commission elucidates this intent of the framers:
MR. OPLE: I propose to add a new section on line 9, page 2 of the amended committee report which reads: NO LAW SHALL BE PASSED
EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS,
FROM THE JURISDICTION OF THE COMMISSION ON AUDIT.
May I explain my reasons on record.
We know that a number of entities of the government took advantage of the absence of a legislature in the past to obtain presidential
decrees exempting themselves from the jurisdiction of the Commission on Audit, one notable example of which is the Philippine National
Oil Company which is really an empty shell. It is a holding corporation by itself, and strictly on its own account. Its funds were not very
impressive in quantity but underneath that shell there were billions of pesos in a multiplicity of companies. The PNOC the empty shell
under a presidential decree was covered by the jurisdiction of the Commission on Audit, but the billions of pesos invested in different
corporations underneath it were exempted from the coverage of the Commission on Audit.
18
Another example is the United Coconut Planters Bank. The Commission on Audit has determined that the coconut levy is a form of
taxation; and that, therefore, these funds attributed to the shares of 1,400,000 coconut farmers are, in effect, public funds. And that was,
I think, the basis of the PCGG in undertaking that last major sequestration of up to 94 percent of all the shares in the United Coconut
Planters Bank. The charter of the UCPB, through a presidential decree, exempted it from the jurisdiction of the Commission on Audit, it
being a private organization.
So these are the fetuses of future abuse that we are slaying right here with this additional section.
May I repeat the amendment, Madam President: NO LAW SHALL BE PASSED EXEMPTING ANY ENTITY OF THE GOVERNMENT OR ITS
SUBSIDIARY IN ANY GUISE WHATEVER, OR ANY INVESTMENTS OF PUBLIC FUNDS, FROM THE JURISDICTION OF THE COMMISSION ON
AUDIT.
MR. MONSOD: Madam President, since this has been accepted, we would like to reply to the point raised by Commissioner de Castro.
THE PRESIDENT: Commissioner Monsod will please proceed.
MR. MONSOD: I think the Commissioner is trying to avoid the situation that happened in the past, because the same provision was in the
1973 Constitution and yet somehow a law or a decree was passed where certain institutions were exempted from audit. We are just
reaffirming, emphasizing, the role of the Commission on Audit so that this problem will never arise in the future.37
There is an irreconcilable conflict between the second sentence of Section 20 of PD 198 prohibiting COA auditors from auditing LWDs and
Sections 2(1) and 3, Article IX-D of the Constitution vesting in COA the power to audit all GOCCs. We rule that the second sentence of
Section 20 of PD 198 is unconstitutional since it violates Sections 2(1) and 3, Article IX-D of the Constitution.
THE PRESIDENT: May we know the position of the Committee on the proposed amendment of Commissioner Ople?
On the Legality of COAs
MR. JAMIR: If the honorable Commissioner will change the number of the section to 4, we will accept the amendment.
Practice of Charging Auditing Fees
MR. OPLE: Gladly, Madam President. Thank you.
Petitioner claims that the auditing fees COA charges LWDs for audit services violate the prohibition in Section 18 of RA 6758,38 which
states:
MR. DE CASTRO: Madam President, point of inquiry on the new amendment.
THE PRESIDENT: Commissioner de Castro is recognized.
MR. DE CASTRO: Thank you. May I just ask a few questions of Commissioner Ople.
Is that not included in Section 2 (1) where it states: "(c) government-owned or controlled corporations and their subsidiaries"? So that if
these government-owned and controlled corporations and their subsidiaries are subjected to the audit of the COA, any law exempting
certain government corporations or subsidiaries will be already unconstitutional.
Sec. 18. Additional Compensation of Commission on Audit Personnel and of other Agencies. In order to preserve the independence and
integrity of the Commission on Audit (COA), its officials and employees are prohibited from receiving salaries, honoraria, bonuses,
allowances or other emoluments from any government entity, local government unit, government-owned or controlled corporations, and
government financial institutions, except those compensation paid directly by COA out of its appropriations and contributions.
Government entities, including government-owned or controlled corporations including financial institutions and local government units
are hereby prohibited from assessing or billing other government entities, including government-owned or controlled corporations
including financial institutions or local government units for services rendered by its officials and employees as part of their regular
functions for purposes of paying additional compensation to said officials and employees. (Emphasis supplied)
Claiming that Section 18 is "absolute and leaves no doubt,"39 petitioner asks COA to discontinue its practice of charging auditing fees to
LWDs since such practice allegedly violates the law.
So I believe, Madam President, that the proposed amendment is unnecessary.
Petitioners claim has no basis.
CMV
19
Section 18 of RA 6758 prohibits COA personnel from receiving any kind of compensation from any government entity except
"compensation paid directly by COA out of its appropriations and contributions." Thus, RA 6758 itself recognizes an exception to the
statutory ban on COA personnel receiving compensation from GOCCs. In Tejada v. Domingo,40 the Court declared:
WHEREFORE, the Resolution of the Commission on Audit dated 3 January 2000 and the Decision dated 30 January 2001 denying
petitioners Motion for Reconsideration are AFFIRMED. The second sentence of Section 20 of Presidential Decree No. 198 is declared VOID
for being inconsistent with Sections 2 (1) and 3, Article IX-D of the Constitution. No costs.
SO ORDERED.
There can be no question that Section 18 of Republic Act No. 6758 is designed to strengthen further the policy x x x to preserve the
independence and integrity of the COA, by explicitly PROHIBITING: (1) COA officials and employees from receiving salaries, honoraria,
bonuses, allowances or other emoluments from any government entity, local government unit, GOCCs and government financial
institutions, except such compensation paid directly by the COA out of its appropriations and contributions, and (2) government entities,
including GOCCs, government financial institutions and local government units from assessing or billing other government entities, GOCCs,
government financial institutions or local government units for services rendered by the latters officials and employees as part of their
regular functions for purposes of paying additional compensation to said officials and employees.
G.R. No. L-31061
August 17, 1976
SULO NG BAYAN INC., plaintiff-appellant,

vs.
GREGORIO ARANETA, INC., PARADISE FARMS, INC., NATIONAL WATERWORKS & SEWERAGE AUTHORITY, HACIENDA CARETAS, INC, and
REGISTER OF DEEDS OF BULACAN, defendants-appellees.
xxx
Hill & Associates Law Offices for appellant.
The first aspect of the strategy is directed to the COA itself, while the second aspect is addressed directly against the GOCCs and
government financial institutions. Under the first, COA personnel assigned to auditing units of GOCCs or government financial institutions
can receive only such salaries, allowances or fringe benefits paid directly by the COA out of its appropriations and contributions. The
contributions referred to are the cost of audit services earlier mentioned which cannot include the extra emoluments or benefits now
claimed by petitioners. The COA is further barred from assessing or billing GOCCs and government financial institutions for services
rendered by its personnel as part of their regular audit functions for purposes of paying additional compensation to such personnel. x x x.
(Emphasis supplied)
In Tejada, the Court explained the meaning of the word "contributions" in Section 18 of RA 6758, which allows COA to charge GOCCs the
cost of its audit services:
x x x the contributions from the GOCCs are limited to the cost of audit services which are based on the actual cost of the audit function in
the corporation concerned plus a reasonable rate to cover overhead expenses. The actual audit cost shall include personnel services,
maintenance and other operating expenses, depreciation on capital and equipment and out-of-pocket expenses. In respect to the
allowances and fringe benefits granted by the GOCCs to the COA personnel assigned to the formers auditing units, the same shall be
directly defrayed by COA from its own appropriations x x x. 41
Araneta, Mendoza & Papa for appellee Gregorio Araneta, Inc.
Carlos, Madarang, Carballo & Valdez for Paradise Farms, Inc.
Leopoldo M. Abellera, Arsenio J. Magpale & Raul G. Bernardo, Office of the Government Corporate Counsel for appellee National
Waterworks & Sewerage Authority.
Candido G. del Rosario for appellee Hacienda Caretas, Inc.
ANTONIO, J.:
COA may charge GOCCs "actual audit cost" but GOCCs must pay the same directly to COA and not to COA auditors. Petitioner has not
alleged that COA charges LWDs auditing fees in excess of COAs "actual audit cost." Neither has petitioner alleged that the auditing fees
are paid by LWDs directly to individual COA auditors. Thus, petitioners contention must fail.
CMV
The issue posed in this appeal is whether or not plaintiff corporation (non- stock may institute an action in behalf of its individual
members for the recovery of certain parcels of land allegedly owned by said members; for the nullification of the transfer certificates of
20
title issued in favor of defendants appellees covering the aforesaid parcels of land; for a declaration of "plaintiff's members as absolute
owners of the property" and the issuance of the corresponding certificate of title; and for damages.
On April 26, 1966, plaintiff-appellant Sulo ng Bayan, Inc. filed an accion de revindicacion with the Court of First Instance of Bulacan, Fifth
Judicial District, Valenzuela, Bulacan, against defendants-appellees to recover the ownership and possession of a large tract of land in San
Jose del Monte, Bulacan, containing an area of 27,982,250 square meters, more or less, registered under the Torrens System in the name
of defendants-appellees' predecessors-in-interest. 1 The complaint, as amended on June 13, 1966, specifically alleged that plaintiff is a
corporation organized and existing under the laws of the Philippines, with its principal office and place of business at San Jose del Monte,
Bulacan; that its membership is composed of natural persons residing at San Jose del Monte, Bulacan; that the members of the plaintiff
corporation, through themselves and their predecessors-in-interest, had pioneered in the clearing of the fore-mentioned tract of land,
cultivated the same since the Spanish regime and continuously possessed the said property openly and public under concept of ownership
adverse against the whole world; that defendant-appellee Gregorio Araneta, Inc., sometime in the year 1958, through force and
intimidation, ejected the members of the plaintiff corporation fro their possession of the aforementioned vast tract of land; that upon
investigation conducted by the members and officers of plaintiff corporation, they found out for the first time in the year 1961 that the
land in question "had been either fraudelently or erroneously included, by direct or constructive fraud, in Original Certificate of Title No.
466 of the Land of Records of the province of Bulacan", issued on May 11, 1916, which title is fictitious, non-existent and devoid of legal
efficacy due to the fact that "no original survey nor plan whatsoever" appears to have been submitted as a basis thereof and that the
Court of First Instance of Bulacan which issued the decree of registration did not acquire jurisdiction over the land registration case
because no notice of such proceeding was given to the members of the plaintiff corporation who were then in actual possession of said
properties; that as a consequence of the nullity of the original title, all subsequent titles derived therefrom, such as Transfer Certificate of
Title No. 4903 issued in favor of Gregorio Araneta and Carmen Zaragoza, which was subsequently cancelled by Transfer Certificate of Title
No. 7573 in the name of Gregorio Araneta, Inc., Transfer Certificate of Title No. 4988 issued in the name of, the National Waterworks &
Sewerage Authority (NWSA), Transfer Certificate of Title No. 4986 issued in the name of Hacienda Caretas, Inc., and another transfer
certificate of title in the name of Paradise Farms, Inc., are therefore void. Plaintiff-appellant consequently prayed (1) that Original
Certificate of Title No. 466, as well as all transfer certificates of title issued and derived therefrom, be nullified; (2) that "plaintiff's
members" be declared as absolute owners in common of said property and that the corresponding certificate of title be issued to plaintiff;
and (3) that defendant-appellee Gregorio Araneta, Inc. be ordered to pay to plaintiff the damages therein specified.
On September 2, 1966, defendant-appellee Gregorio Araneta, Inc. filed a motion to dismiss the amended complaint on the grounds that
(1) the complaint states no cause of action; and (2) the cause of action, if any, is barred by prescription and laches. Paradise Farms, Inc.
and Hacienda Caretas, Inc. filed motions to dismiss based on the same grounds. Appellee National Waterworks & Sewerage Authority did
not file any motion to dismiss. However, it pleaded in its answer as special and affirmative defenses lack of cause of action by the plaintiffappellant and the barring of such action by prescription and laches.
During the pendency of the motion to dismiss, plaintiff-appellant filed a motion, dated October 7, 1966, praying that the case be
transferred to another branch of the Court of First Instance sitting at Malolos, Bulacan, According to defendants-appellees, they were not
furnished a copy of said motion, hence, on October 14, 1966, the lower court issued an Order requiring plaintiff-appellant to furnish the
appellees copy of said motion, hence, on October 14, 1966, defendant-appellant's motion dated October 7, 1966 and, consequently,
prayed that the said motion be denied for lack of notice and for failure of the plaintiff-appellant to comply with the Order of October 14,
1966. Similarly, defendant-appellee paradise Farms, Inc. filed, on December 2, 1966, a manifestation information the court that it also did
not receive a copy of the afore-mentioned of appellant. On January 24, 1967, the trial court issued an Order dismissing the amended
complaint.
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On February 14, 1967, appellant filed a motion to reconsider the Order of dismissal on the grounds that the court had no jurisdiction to
issue the Order of dismissal, because its request for the transfer of the case from the Valenzuela Branch of the Court of First Instance to
the Malolos Branch of the said court has been approved by the Department of Justice; that the complaint states a sufficient cause of
action because the subject matter of the controversy in one of common interest to the members of the corporation who are so numerous
that the present complaint should be treated as a class suit; and that the action is not barred by the statute of limitations because (a) an
action for the reconveyance of property registered through fraud does not prescribe, and (b) an action to impugn a void judgment may be
brought any time. This motion was denied by the trial court in its Order dated February 22, 1967. From the afore-mentioned Order of
dismissal and the Order denying its motion for reconsideration, plaintiff-appellant appealed to the Court of Appeals.
On September 3, 1969, the Court of Appeals, upon finding that no question of fact was involved in the appeal but only questions of law
and jurisdiction, certified this case to this Court for resolution of the legal issues involved in the controversy.
Appellant contends, as a first assignment of error, that the trial court acted without authority and jurisdiction in dismissing the amended
complaint when the Secretary of Justice had already approved the transfer of the case to any one of the two branches of the Court of First
Instance of Malolos, Bulacan.
Appellant confuses the jurisdiction of a court and the venue of cases with the assignment of cases in the different branches of the same
Court of First Instance. Jurisdiction implies the power of the court to decide a case, while venue the place of action. There is no question
that respondent court has jurisdiction over the case. The venue of actions in the Court of First Instance is prescribed in Section 2, Rule 4 of
the Revised Rules of Court. The laying of venue is not left to the caprice of plaintiff, but must be in accordance with the aforesaid provision
of the rules. 2 The mere fact that a request for the transfer of a case to another branch of the same court has been approved by the
Secretary of Justice does not divest the court originally taking cognizance thereof of its jurisdiction, much less does it change the venue of
the action. As correctly observed by the trial court, the indorsement of the Undersecretary of Justice did not order the transfer of the case
to the Malolos Branch of the Bulacan Court of First Instance, but only "authorized" it for the reason given by plaintiff's counsel that the
transfer would be convenient for the parties. The trial court is not without power to either grant or deny the motion, especially in the light
of a strong opposition thereto filed by the defendant. We hold that the court a quo acted within its authority in denying the motion for
the transfer the case to Malolos notwithstanding the authorization" of the same by the Secretary of Justice.
II
Let us now consider the substantive aspect of the Order of dismissal.
21
In dismissing the amended complaint, the court a quo said:
The issue of lack of cause of action raised in the motions to dismiss refer to the lack of personality of plaintiff to file the instant action.
Essentially, the term 'cause of action' is composed of two elements: (1) the right of the plaintiff and (2) the violation of such right by the
defendant. (Moran, Vol. 1, p. 111). For these reasons, the rules require that every action must be prosecuted and defended in the name of
the real party in interest and that all persons having an interest in the subject of the action and in obtaining the relief demanded shall be
joined as plaintiffs (Sec. 2, Rule 3). In the amended complaint, the people whose rights were alleged to have been violated by being
deprived and dispossessed of their land are the members of the corporation and not the corporation itself. The corporation has a
separate. and distinct personality from its members, and this is not a mere technicality but a matter of substantive law. There is no
allegation that the members have assigned their rights to the corporation or any showing that the corporation has in any way or manner
succeeded to such rights. The corporation evidently did not have any rights violated by the defendants for which it could seek redress.
Even if the Court should find against the defendants, therefore, the plaintiff corporation would not be entitled to the reliefs prayed for,
which are recoveries of ownership and possession of the land, issuance of the corresponding title in its name, and payment of damages.
Neither can such reliefs be awarded to the members allegedly deprived of their land, since they are not parties to the suit. It appearing
clearly that the action has not been filed in the names of the real parties in interest, the complaint must be dismissed on the ground of
lack of cause of action. 3
Viewed in the light of existing law and jurisprudence, We find that the trial court correctly dismissed the amended complaint.
is intended only as a blind, or an alter ego or business conduit for the sole benefit of the stockholders. 12 This doctrine of disregarding the
distinct personality of the corporation has been applied by the courts in those cases when the corporate entity is used for the evasion of
taxes 13 or when the veil of corporate fiction is used to confuse legitimate issue of employer-employee relationship, 14 or when
necessary for the protection of creditors, in which case the veil of corporate fiction may be pierced and the funds of the corporation may
be garnished to satisfy the debts of a principal stockholder. 15 The aforecited principle is resorted to by the courts as a measure
protection for third parties to prevent fraud, illegality or injustice. 16
It has not been claimed that the members have assigned or transferred whatever rights they may have on the land in question to the
plaintiff corporation. Absent any showing of interest, therefore, a corporation, like plaintiff-appellant herein, has no personality to bring
an action for and in behalf of its stockholders or members for the purpose of recovering property which belongs to said stockholders or
members in their personal capacities.
It is fundamental that there cannot be a cause of action 'without an antecedent primary legal right conferred' by law upon a person. 17
Evidently, there can be no wrong without a corresponding right, and no breach of duty by one person without a corresponding right
belonging to some other person. 18 Thus, the essential elements of a cause of action are legal right of the plaintiff, correlative obligation
of the defendant, an act or omission of the defendant in violation of the aforesaid legal right. 19 Clearly, no right of action exists in favor
of plaintiff corporation, for as shown heretofore it does not have any interest in the subject matter of the case which is material and,
direct so as to entitle it to file the suit as a real party in interest.
It is a doctrine well-established and obtains both at law and in equity that a corporation is a distinct legal entity to be considered as
separate and apart from the individual stockholders or members who compose it, and is not affected by the personal rights, obligations
and transactions of its stockholders or members. 4 The property of the corporation is its property and not that of the stockholders, as
owners, although they have equities in it. Properties registered in the name of the corporation are owned by it as an entity separate and
distinct from its members. 5 Conversely, a corporation ordinarily has no interest in the individual property of its stockholders unless
transferred to the corporation, "even in the case of a one-man corporation. 6 The mere fact that one is president of a corporation does
not render the property which he owns or possesses the property of the corporation, since the president, as individual, and the
corporation are separate similarities. 7 Similarly, stockholders in a corporation engaged in buying and dealing in real estate whose
certificates of stock entitled the holder thereof to an allotment in the distribution of the land of the corporation upon surrender of their
stock certificates were considered not to have such legal or equitable title or interest in the land, as would support a suit for title,
especially against parties other than the corporation. 8
III
It must be noted, however, that the juridical personality of the corporation, as separate and distinct from the persons composing it, is but
a legal fiction introduced for the purpose of convenience and to subserve the ends of justice. 9 This separate personality of the
corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality,
or to work -an injustice, or where necessary to achieve equity. 10
Under the first requisite, the person who sues must have an interest in the controversy, common with those for whom he sues, and there
must be that unity of interest between him and all such other persons which would entitle them to maintain the action if suit was brought
by them jointly. 21
Appellant maintains, however, that the amended complaint may be treated as a class suit, pursuant to Section 12 of Rule 3 of the Revised
Rules of Court.
In order that a class suit may prosper, the following requisites must be present: (1) that the subject matter of the controversy is one of
common or general interest to many persons; and (2) that the parties are so numerous that it is impracticable to bring them all before the
court. 20
As to what constitutes common interest in the subject matter of the controversy, it has been explained in Scott v. Donald 22 thus:
Thus, when "the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, ... the law will
regard the corporation as an association of persons, or in the case of two corporations, merge them into one, the one being merely
regarded as part or instrumentality of the other. 11 The same is true where a corporation is a dummy and serves no business purpose and
CMV
22
The interest that will allow parties to join in a bill of complaint, or that will enable the court to dispense with the presence of all the
parties, when numerous, except a determinate number, is not only an interest in the question, but one in common in the subject Matter
of the suit; ... a community of interest growing out of the nature and condition of the right in dispute; for, although there may not be any
privity between the numerous parties, there is a common title out of which the question arises, and which lies at the foundation of the
proceedings ... [here] the only matter in common among the plaintiffs, or between them and the defendants, is an interest in the
Question involved which alone cannot lay a foundation for the joinder of parties. There is scarcely a suit at law, or in equity which settles a
Principle or applies a principle to a given state of facts, or in which a general statute is interpreted, that does not involved a Question in
which other parties are interested. ... (Emphasis supplied )
Here, there is only one party plaintiff, and the plaintiff corporation does not even have an interest in the subject matter of the
controversy, and cannot, therefore, represent its members or stockholders who claim to own in their individual capacities ownership of
the said property. Moreover, as correctly stated by the appellees, a class suit does not lie in actions for the recovery of property where
several persons claim Partnership of their respective portions of the property, as each one could alleged and prove his respective right in a
different way for each portion of the land, so that they cannot all be held to have Identical title through acquisition prescription. 23
Having shown that no cause of action in favor of the plaintiff exists and that the action in the lower court cannot be considered as a class
suit, it would be unnecessary and an Idle exercise for this Court to resolve the remaining issue of whether or not the plaintiffs action for
reconveyance of real property based upon constructive or implied trust had already prescribed.
As culled from the record, the facts are as follows:
Petitioner Aida M. Posadas and her two (2) minor children co-owned a 1.6 hectare property in Sucat, Muntinlupa, which was occupied by
squatters. Petitioner Posadas entered into negotiations with private respondent Jaime T. Bravo regarding the development of the said
property into a residential subdivision. On May 3, 1989, she authorized private respondent to negotiate with the squatters to leave the
said property. With a written authorization, respondent Bravo buckled down to work and started negotiations with the squatters.
Meanwhile, some seven (7) months later, on December 11, 1989, petitioner Posadas and her two (2) children, through a Deed of
Assignment, assigned the said property to petitioner Luxuria Homes, Inc., purportedly for organizational and tax avoidance purposes.
Respondent Bravo signed as one of the witnesses to the execution of the Deed of Assignment and the Articles of Incorporation of
petitioner Luxuria Homes, Inc.
Then sometime in 1992, the harmonious and congenial relationship of petitioner Posadas and respondent Bravo turned sour when the
former supposedly could not accept the management contracts to develop the 1.6 hectare property into a residential subdivision, the
latter was proposing. In retaliation, respondent Bravo demanded payment for services rendered in connection with the development of
the land. In his statement of account dated 21 August 1991 2 respondent demanded the payment of P1,708,489.00 for various services
rendered, i.e., relocation of squatters, preparation of the architectural design and site development plan, survey and fencing.
ACCORDINGLY, the instant appeal is hereby DISMISSED with costs against the plaintiff-appellant.
G.R. No. 125986
January 28, 1999
LUXURIA HOMES, INC., and/or AIDA M. POSADAS, petitioners,

vs.
HONORABLE COURT OF APPEALS, JAMES BUILDER CONSTRUCTION and/or JAIME T. BRAVO, respondents.
Petitioner Posadas refused to pay the amount demanded. Thus, in September 1992, private respondents James Builder Construction and
Jaime T. Bravo instituted a complaint for specific performance before the trial court against petitioners Posadas and Luxuria Homes, Inc.
Private respondents alleged therein that petitioner Posadas asked them to clear the subject parcel of land of squatters for a fee of
P1,100,000.00 for which they were partially paid the amount of P461,511.50, leaving a balance of P638,488.50. They were also
supposedly asked to prepare a site development plan and an architectural design for a contract price of P450,000.00 for which they were
partially paid the amount of P25,000.00, leaving a balance of P425,000.00. And in anticipation of the signing of the land development
contract, they had to construct a bunkhouse and warehouse on the property which amounted to P300,000.00, and a hollow blocks factory
for P60,000.00. Private respondents also claimed that petitioner Posadas agreed that private respondents will develop the land into a first
class subdivision thru a management contract and that petitioner Posadas is unjustly refusing to comply with her obligation to finalize the
said management contract.
The prayer in the complaint of the private respondents before the trial court reads as follows:
MARTINEZ, J.:
This petition for review assails the decision of the respondent Court of Appeals dated March 15, 1996, 1 which affirmed with modification
the judgment of default rendered by the Regional Trial Court of Muntinlupa, Branch 276, in Civil Case No. 92-2592 granting all the reliefs
prayed for in the complaint of private respondents James Builder Construction and/or Jaime T. Bravo.
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WHEREFORE, premises considered, it is respectfully prayed of this Honorable Court that after hearing/trial judgment be rendered ordering
defendant to:
23
a)
Comply with its obligation to deliver/finalize Management Contract of its land in Sucat, Muntinlupa, Metro Manila and to pay
plaintiff its balance in the amount of P1,708,489.00:
Defendant Aida Posadas as the Representative of the Corporation Luxuria Homes, Incorporated, is further directed to execute the
management contract she committed to do, also in consideration of the various undertakings that Plaintiff rendered for her. 4
b)
Aggrieved by the aforecited decision, petitioners appealed to respondent Court of Appeals, which, as aforestated, affirmed with
modification the decision of the trial court. The appellate court deleted the award of moral damages on the ground that respondent
James Builder Construction is a corporation and hence could not experience physical suffering and mental anguish. It also reduced the
award of exemplary damages. The dispositive portion of the decision reads:
Pay plaintiff moral and exemplary damages in the amount of P500.000.00;
c)
Pay plaintiff actual damages in the amount of P500.000.00 (Bunkhouse/warehouse- P300.000.00, Hollow-block factoryP60.000.00, lumber, cement, etc., P120.000.00, guard-P20.000.00);
d)
Pay plaintiff attorney's fee of P50.000 plus P700 per appearance in court and 5% of that which may be awarded by the court to
plaintiff re its monetary claims:
WHEREFORE, the decision appealed from is hereby AFFIRMED with the modification that the award of moral damages is ordered deleted
and the award of exemplary damages to the plaintiff's-appellee should only be in the amount of FIFTY THOUSAND (P50,000.00) PESOS. 5
Petitioners' motion for reconsideration was denied, prompting the filing of this petition for review before this Court.
e)
Pay cost of this suit. 3
On September 27, 1993, the trial court declared petitioner Posadas in default and allowed the private respondents to present their
evidence ex-parte. On March 8, 1994, it ordered petitioner Posadas, jointly and in solidum with petitioner Luxuria Homes, Inc., to pay
private respondents as follows:
1.
. . . the balance of the payment for the various services performed by Plaintiff with respect to the land covered by TCT NO.
167895 previously No. 158290 in the total amount of P1,708,489.00.
On January 15, 1997, the Third Division of this Court denied due course to this petition for failing to show convincingly any reversible error
on the part of the Court of Appeals. This Court however deleted the grant of exemplary damages and attorney's fees. The Court also
reduced the trial court's award of actual damages from P1,500,000.00 to P500,000.00 reasoning that the grant should not exceed the
amount prayed for in the complaint. In the prayer in the complaint respondents asked for actual damages in the amount of P500,000.00
only.
Still feeling aggrieved with the resolution of this Court, petitioners filed a motion for reconsideration. On March 17, 1997, this Court found
merit in the petitioners' motion for reconsideration and reinstated this petition for review.
2.
. . . actual damages incurred for the construction of the warehouse/bunks, and for the material used in the total sum of
P1,500.000.00.
From their petition for review and motion for reconsideration before this Court, we now synthesize the issues as follows:
3.
Moral and exemplary damages of P500.000.00.
1.
Were private respondents able to present ex-parte sufficient evidence to substantiate the allegations in their complaint and
entitle them to their prayers?
4.
Attorney's fee of P50,000.00.
5.
And cost of this proceedings.
2.
Can petitioner Luxuria Homes, Inc., be held liable to private respondents for the transactions supposedly entered into between
petitioner Posadas and private respondents?
3.
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Can petitioners be compelled to enter into a management contract with private respondents?
24
Petitioners who were declared in default assert that the private respondents who presented their evidence ex-parte nonetheless utterly
failed to substantiate the allegations in their complaint and as such cannot be entitled to the reliefs prayed for.
A perusal of the record shows that petitioner Posadas contracted respondent Bravo to render various services for the initial development
of the property as shown by vouchers evidencing payments made by petitioner Posadas to respondent Bravo for squatter relocation,
architectural design, survey and fencing.
Respondents prepared the architectural design, site development plan and survey in connection with petitioner Posadas' application with
the Housing and Land Use Regulatory Board (HLURB) for the issuance of the Development Permit, Preliminary Approval and Locational
Clearance. 6 Petitioner benefited from said services as the Development Permit and the Locational Clearance were eventually issued by
the HLURB in her favor. Petitioner Posadas is therefore liable to pay for these services rendered by respondents. The contract price for the
survey of the land is P140,000.00. Petitioner made partial payments totaling P130,000.00 leaving a payable balance of P10,000.00.
In his testimony, 7 he alleged that the agreed price for the preparation of the site development plan is P500,000.00 and that the
preparation of the architectural designs is for P450,000, or a total of P950,000.00 for the two contracts. In his complaint however,
respondent Bravo alleged that he was asked "to prepare the site development plan and the architectural designs . . . for a contract price
of P450,000.00 . . . " 8 The discrepancy or inconsistency was never reconciled and clarified.
We reiterate that we cannot award an amount higher than what was claimed in the complaint. Consequently for the preparation of both
the architectural design and site development plan, respondent is entitled to the amount of P450,000.00 less partial payments made in
the amount of P25,000.00. In Policarpio v. RTC of Quezon City, 9 it was held that a court is bereft of jurisdiction to award, in a judgment by
default, a relief other than that specifically prayed for in the complaint.
As regards the contracts for the ejectment of squatters and fencing, we believe however that respondents failed to show proof that they
actually fulfilled their commitments therein. Aside from the bare testimony of respondent Bravo, no other evidence was presented to
show that all the squatters were ejected from the property. Respondent Bravo failed to show how many shanties or structures were
actually occupying the property before he entered the same, to serve as basis for concluding whether the task was finished or not. His
testimony alone that he successfully negotiated for the ejectment of all the squatters from the property will not suffice.
Likewise, in the case of fencing, there is no proof that it was accomplished as alleged. Respondent Bravo claims that he finished sixty
percent (60%) of the fencing project but he failed to present evidence showing the area sought to be fenced and the actual area fenced by
him. We therefore have no basis to determining the veracity respondent's allegations. We cannot assume that the said services rendered
for it will be unfair to require petitioner to pay the full amount claimed in case the respondents obligations were not completely fulfilled.
For respondents' failure to show proof of accomplishment of the aforesaid services, their claims cannot be granted. In P.T. Cerna Corp. v.
Court of Appeals, 10 we ruled that in civil cases, the burden of proof rests upon the party who, as determined by the pleadings or the
CMV
nature of the case, asserts the affirmative of an issue. In this case the burden lies on the complainant, who is duty bound to prove the
allegations in the complaint. As this Court has held, he who alleges a fact has the burden of proving it and A MERE ALLEGATION IS NOT
EVIDENCE.
And the rules do not change even if the defendant is declared in default. In the leading case of Lopez v. Mendezona, 11 this Court ruled
that after entry of judgment in default against a defendant who has neither appeared nor answered, and before final judgment in favor of
the plaintiff, the latter must establish by competent evidence all the material allegations of his complaint upon which he bases his prayer
for relief. In De los Santos v. De la Cruz, 12 this Court declared that a judgement by default against a defendant does not imply a waiver of
rights except that of being heard and of presenting evidence in his favor. It does not imply admission by the defendant of the facts and
causes of action of the plaintiff, because the codal section requires the latter to adduce his evidence in support of his allegations as an
indispensable condition before final judgment could be given in his favor. Nor could it be interpreted as an admission by the defendant
that the plaintiff's causes of action finds support in the law or that the latter is entitled to the relief prayed for.
We explained the rule in judgments by default in Pascua v. Florendo, 13 where we said that nowhere is it stated that the complainants are
automatically entitled to the relief prayed for, once the defendants are declared in default. Favorable relief can be granted only after the
court has ascertained that the evidence offered and the facts proven by the presenting party warrant the grant of the same. Otherwise it
would be meaningless to require presentation of evidence if everytime the other party is declared in default, a decision would
automatically be rendered in favor of the non-defaulting party and exactly according to the tenor of his prayer. In Lim Tanhu v. Ramolete
14 we elaborated and said that a defaulted defendant is not actually thrown out of court. The rules see to it that any judgment against
him must be in accordance with law. The evidence to support the plaintiff's cause is, of course, presented in his absence, but the court is
not supposed to admit that which is basically incompetent. Although the defendant would not be in a position to object, elementary
justice requires that only legal evidence should be considered against him. If the evidence presented should not be sufficient to justify a
judgment for the plaintiff, the complaint must be dismissed. And if an unfavorable judgment should be justifiable, it cannot exceed the
amount or be different in kind from what is prayed for in the complaint.
The prayer for actual damages in the amount of P500,000.00, supposedly for the bunkhouse/warehouse, hollow-block factory, lumber,
cement, guard, etc., which the trial court granted and even increased to P1,500,000.00, and which this Court would have rightly reduced
to the amount prayed for in the complaint, was not established, as shown upon further review of the record. No receipts or vouchers
were presented by private respondents to show that they actually spent the amount. In Salas v. Court of Appeals, 15 we said that the
burden of proof of the damages suffered is on the party claiming the same. It his duty to present evidence to support his claim for actual
damages. If he failed to do so, he has only himself to blame if no award for actual damages is handed down.
In fine, as we declared in PNOC Shipping & Transport Corp. v. Court of Appeals, 16 basic is the rule that to recover actual damages, the
amount of loss must not only be capable of proof but must actually be proven with reasonable degree of certainty, premised upon
competent proof or best evidence obtainable of the actual amount thereof.
We go to the second issue of whether Luxuria Homes, Inc., was a party to the transactions entered into by petitioner Posadas and private
respondents and thus could be held jointly and severally with petitioner Posadas. Private respondents contend that petitioner Posadas
25
surreptitiously formed Luxuria Homes, Inc., and transferred the subject parcel of land to it to evade payment and defraud creditors,
including private respondents. This allegation does not find support in the evidence on record.
On the contrary we hold that respondent Court of Appeals committed a reversible error when it upheld the factual finding of the trial
court that petitioners' liability was aggravated by the fact that Luxuria Homes, Inc., was formed by petitioner Posadas after demand for
payment had been made, evidently for her to evade payment of her obligation, thereby showing that the transfer of her property to
Luxuria Homes, Inc., was in fraud of creditors.
We easily glean from the record that private respondents sent demand letters on 21 August 1991 and 14 September 1991, or more than a
year and a half after the execution of the Deed of Assignment on 11 December 1989, and the issuance of the Articles of Incorporation of
petitioner Luxuria Homes on 26 January 1990. And, the transfer was made at the time the relationship between petitioner Posadas and
private respondents was supposedly very pleasant. In fact the Deed of Assignment dated 11 December 1989 and the Articles of
Incorporation of Luxuria Homes, Inc., issued 26 January 1990 were both signed by respondent Bravo himself as witness. It cannot be said
then that the incorporation of petitioner Luxuria Homes and the eventual transfer of the subject property to it were in fraud of private
respondents as such were done with the full knowledge of respondent Bravo himself.
Besides petitioner Posadas is not the majority stockholder of petitioner Luxuria Homes, Inc., as erroneously stated by the lower court. The
Articles of Incorporation of petitioner Luxuria Homes, Inc., clearly show that petitioner Posadas owns approximately 33% only of the
capital stock. Hence petitioner Posadas cannot be considered as an alter ego of petitioner Luxuria Homes, Inc.
To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be
presumed. This is elementary. Thus in Bayer-Roxas v. Court of Appeals, 17 we said that the separate personality of the corporation may be
disregarded only when the corporation is used as a cloak or cover for fraud or illegality, or to work injustice, or where necessary for the
protection of the creditors. Accordingly in Del Roscrrio v. NLRC, 18 where the Philsa International Placement and Services Corp. was
organized and registered with the POEA in 1981, several years before the complainant was filed a case in 1985, we held that this cannot
imply fraud.
Obviously in the instant case, private respondents failed to show proof that petitioner Posadas acted in bad faith. Consequently since
private respondents failed to show that petitioner Luxuria Homes, Inc., was a party to any of the supposed transactions, not even to the
agreement to negotiate with and relocate the squatters, it cannot be held liable, nay jointly and in solidum, to pay private respondents. In
this case since it was petitioner Aida M. Posadas who contracted respondent Bravo to render the subject services, only she is liable to pay
the amounts adjudged herein.
I hereby certify that we have duly authorized the bearer, Engineer Bravo to negotiate, in our behalf, the ejectment of squatters from our
property of 1.6 hectares, more or less, in Sucat Muntinlupa. This authority is extended to him as the representative of the Managers;
under our agreement for them to undertake the development of said area and the construction of housing units intended to convert the
land into a first class subdivision.
The aforecited document is nothing more than a "to-whom-it-may-concern" authorization letter to negotiate with the squatters. Although
it appears that there was an agreement for the development of the area, there is no showing that same was ever perfected and finalized.
Private respondents presented in evidence only drafts of a proposed management contract with petitioner's handwritten marginal notes
but the management contract was not put in its final form. The reason why there was no final uncorrected draft was because the parties
could not agree on the stipulations of said contract, which even private respondents admitted as found by the trial court. 19 As a
consequence the management drafts submitted by the private respondents should at best be considered as mere unaccepted offers. We
find no cogent reason, considering that the parties no longer are in a harmonious relationship, for the execution of a contract to develop a
subdivision.
It is fundamental that there can be no contract in the true sense in the absence of the element of agreement, or of mutual assent of the
parties. To compel petitioner Posadas, whether as representative of petitioner Luxuria Homes or in her personal capacity, to execute a
management contract under the terms and conditions of private respondents would be to violate the principle of consensuality of
contracts. In Philippine National Bank v. Court of Appeals, 20 we held that if the assent is wanting on the part of one who contracts, his act
has no more efficacy than if it had been done under duress or by a person of unsound mind. In ordering petitioner Posadas to execute a
management contract with private respondents, the trial court in effect is putting her under duress.
The parties are bound to fulfill the stipulations in a contract only upon its perfection. At anytime prior to the perfection of a contract,
unaccepted offers and proposals remain as such and cannot be considered as binding commitments; hence not demandable.
WHEREFORE, the petition is PARTIALLY GRANTED. The assailed decision dated March 15, 1996, of respondent Honorable Court of Appeals
and its Resolution dated August 12, 1996, are MODIFIED ordering PETITIONER AIDA M. POSADAS to pay PRIVATE RESPONDENTS the
amount of P435,000.00 as balance for the preparation of the architectural design, site development plan and survey. All other claims of
respondents are hereby DENIED for lack of merit.1wphi1.nt
SO ORDERED.
We now resolve the third and final issue. Private respondents urge the court to compel petitioners to execute a management contract
with them on the basis of the authorization letter dated May 3, 1989. The full text of Exh. "D" reads:
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26
G.R. No. 108734
May 29, 1996
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.
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.
Aggrieved, private respondents filed a complaint for illegal dismissal, unfair labor practice and non-payment of their legal holiday pay,
overtime pay and thirteenth-month pay against petitioner.
On December 19, 1984, the Labor Arbiter rendered judgment 1 ordering petitioner to reinstate private respondents and to pay them back
wages equivalent to one year or three hundred working days.
On November 27, 1985, the National Labor Relations Commission (NLRC) dismissed the motion for reconsideration filed by petitioner on
the ground that the said decision had already become final and executory. 2
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.
On October 16, 1986, the NLRC Research and Information Department made the finding that private respondents' back wages amounted
to P199,800.00. 3
On October 29, 1986, the Labor Arbiter issued a writ of execution directing the sheriff to execute the Decision, dated December 19, 1984.
The writ was partially satisfied through garnishment of sums from petitioner's debtor, the Metropolitan Waterworks and Sewerage
Authority, in the amount of P81,385.34. Said amount was turned over to the cashier of the NLRC.
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.
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.
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.
CMV
On July 13, 1989, the sheriff issued a report stating that he tried to serve the alias writ of execution on petitioner through the security
guard on duty but the service was refused on the ground that petitioner no longer occupied the premises.
On September 26, 1986, upon motion of private respondents, the Labor Arbiter issued a second alias writ of execution.
The said writ had not been enforced by the special sheriff because, as stated in his progress report, dated November 2, 1989:
27
1.
All the employees inside petitioner's premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed that they were
employees of Hydro Pipes Philippines, Inc. (HPPI) and not by respondent;
Antonio W. Lim
2,900,000.00
Dennis S. Cuyegkeng 300.00

2.
Levy was made upon personal properties he found in the premises;
3.
Security guards with high-powered guns prevented him from removing the properties he had levied upon. 4
Elisa C. Lim
100,000.00
Teodulo R. Dino
100.00
Virgilio O. Casino
100.00
The said special sheriff recommended that a "break-open order" be issued to enable him to enter petitioner's premises so that he could
proceed with the public auction sale of the aforesaid personal properties on November 7, 1989.
On November 6, 1989, a certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that the properties sought to be
levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President.
On November 23, 1989, private respondents filed a "Motion for Issuance of a Break-Open Order," alleging that HPPI and petitioner
corporation were owned by the same incorporator/stockholders. They also alleged that petitioner temporarily suspended its business
operations in order to evade its legal obligations to them and that private respondents were willing to post an indemnity bond to answer
for any damages which petitioner and HPPI may suffer because of the issuance of the break-open order.
2.
Board of Directors
Antonio W. Lim
Chairman
Dennis S. Cuyegkeng Member

In support of their claim against HPPI, private respondents presented duly certified copies of the General Informations Sheet, dated May
15, 1987, submitted by petitioner to the Securities Exchange Commission (SEC) and the General Information Sheet, dated May 25, 1987,
submitted by HPPI to the Securities and Exchange Commission.
Elisa C. Lim
Member
Teodulo R. Dino
Member
Virgilio O. Casino
Member
The General Information Sheet submitted by the petitioner revealed the following:
1.
Breakdown of Subscribed Capital

3.
Corporate Officers
Name of Stockholder Amount Subscribed

Antonio W. Lim
HPPI
CMV
President
6,999,500.00
28
Dennis S. Cuyegkeng Assistant to the President
Teodulo R. Dino
100.00
Elisa O. Lim
Treasurer
Virgilio O. Casino
100.00
Virgilio O. Casino
Corporate Secretary
2.
4.
Principal Office
Board of Directors
Antonio W. Lim
Chairman
355 Maysan Road
Elisa C. Lim
Member
Valenzuela, Metro Manila. 5
Dennis S. Cuyegkeng Member
On the other hand, the General Information Sheet of HPPI revealed the following:
Virgilio O. Casino
Member
1.
Teodulo R. Dino
Member
Breakdown of Subscribed Capital
Name of Stockholder Amount Subscribed
3.
Antonio W. Lim
Antonio W. Lim
Elisa C. Lim
57,700.00
Dennis S. Cuyegkeng Assistant to the President
AWL Trading
455,000.00
Elisa C. Lim
Treasurer
Virgilio O. Casino
Corporate Secretary
Dennis S. Cuyegkeng 40,100.00
CMV
400,000.00
Corporate Officers
President
29
4.
Principal Office
355 Maysan Road, Valenzuela, Metro Manila. 6
On February 1, 1990, HPPI filed an Opposition to private respondents' motion for issuance of a break-open order, contending that HPPI is
a corporation which is separate and distinct from petitioner. HPPI also alleged that the two corporations are engaged in two different
kinds of businesses, i.e., HPPI is a manufacturing firm while petitioner was then engaged in construction.
The conditions under which the juridical entity may be disregarded vary according to the peculiar facts and circumstances of each case.
No hard and fast rule can be accurately laid down, but certainly, there are some probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, to wit:
1.
Stock ownership by one or common ownership of both corporations.
2.
Identity of directors and officers.
3.
The manner of keeping corporate books and records.
4.
Methods of conducting the business. 13
On March 2, 1990, the Labor Arbiter issued an Order which denied private respondents' motion for break-open order.
Private respondents then appealed to the NLRC. On April 23, 1992, the NLRC set aside the order of the Labor Arbiter, issued a break-open
order and directed private respondents to file a bond. Thereafter, it directed the sheriff to proceed with the auction sale of the properties
already levied upon. It dismissed the third-party claim for lack of merit.
Petitioner moved for reconsideration but the motion was denied by the NLRC in a Resolution, dated December 3, 1992.
Hence, the resort to the present petition.
Petitioner alleges that the NLRC committed grave abuse of discretion when it ordered the execution of its decision despite a third-party
claim on the levied property. Petitioner further contends, that the doctrine of piercing the corporate veil should not have been applied, in
this case, in the absence of any showing that it created HPPI in order to evade its liability to private respondents. It also contends that
HPPI is engaged in the manufacture and sale of steel, concrete and iron pipes, a business which is distinct and separate from petitioner's
construction business. Hence, it is of no consequence that petitioner and HPPI shared the same premises, the same President and the
same set of officers and subscribers. 7
We find petitioner's contention to be unmeritorious.
It is a fundamental principle of corporation law that a corporation is an entity separate and distinct from its stockholders and from other
corporations to which it may be connected. 8 But, this separate and distinct personality of a corporation is merely a fiction created by law
for convenience and to promote justice. 9 So, when the notion of separate juridical personality is used to defeat public convenience,
justify wrong, protect fraud or defend crime, or is used as a device to defeat the labor laws, 10 this separate personality of the corporation
may be disregarded or the veil of corporate fiction pierced. 11 This is true likewise when the corporation is merely an adjunct, a business
conduit or an alter ego of another corporation. 12
CMV
The SEC en banc explained the "instrumentality rule" which the courts have applied in disregarding the separate juridical personality of
corporations as follows:
Where one corporation is so organized and controlled and its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct
of the other, the fiction of the corporate entity of the "instrumentality" may be disregarded. The control necessary to invoke the rule is
not majority or even complete stock control but such domination of instances, policies and practices that the controlled corporation has,
so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal. It must be kept in mind that the control
must be shown to have been exercised at the time the acts complained of took place. Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for which the complaint is made.
The test in determining the applicability of the doctrine of piercing the veil of corporate fiction is as follows:
1.
Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;
2.
Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or
other positive legal duty or dishonest and unjust act in contravention of plaintiff's legal rights; and
30
3.
The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality" or "alter ego" doctrine,
the courts are concerned with reality and not form, with how the corporation operated and the individual defendant's relationship to that
operation. 14
Thus the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation, a sham or a subterfuge is purely one
of fact. 15
In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations on April 29, 1986, it filed an Information
Sheet with the Securities and Exchange Commission on May 15, 1987, stating that its office address is at 355 Maysan Road, Valenzuela,
Metro Manila. On the other hand, HPPI, the third-party claimant, submitted on the same day, a similar information sheet stating that its
office address is at 355 Maysan Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casio as the corporate secretary of both corporations. It would also not be
amiss to note that both corporations had the same president, the same board of directors, the same corporate officers, and substantially
the same subscribers.
Respondent court's findings that indeed the Claparols Steel and Nail Plant, which ceased operation of June 30, 1957, was SUCCEEDED by
the Claparols Steel Corporation effective the next day, July 1, 1957, up to December 7, 1962, when the latter finally ceased to operate,
were not disputed by petitioner. It is very clear that the latter corporation was a continuation and successor of the first entity . . . . Both
predecessors and successor were owned and controlled by petitioner Eduardo Claparols and there was no break in the succession and
continuity of the same business. This "avoiding-the-liability" scheme is very patent, considering that 90% of the subscribed shares of stock
of the Claparols Steel Corporation (the second corporation) was owned by respondent . . . Claparols himself, and all the assets of the
dissolved Claparols Steel and Nail plant were turned over to the emerging Claparols Steel Corporation.
It is very obvious that the second corporation seeks the protective shield of a corporate fiction whose veil in the present case could, and
should, be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees.
In view of the failure of the sheriff, in the case at bar, to effect a levy upon the property subject of the execution, private respondents had
no other recourse but to apply for a break-open order after the third-party claim of HPPI was dismissed for lack of merit by the NLRC. This
is in consonance with Section 3, Rule VII of the NLRC Manual of Execution of Judgment which provides that:
Should the losing party, his agent or representative, refuse or prohibit the Sheriff or his representative entry to the place where the
property subject of execution is located or kept, the judgment creditor may apply to the Commission or Labor Arbiter concerned for a
break-open order.
Furthermore, our perusal of the records shows that the twin requirements of due notice and hearing were complied with. Petitioner and
the third-party claimant were given the opportunity to submit evidence in support of their claim.
Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open order issued by the Labor Arbiter.
From the foregoing, it appears that, among other things, the respondent (herein petitioner) and the third-party claimant shared the same
address and/or premises. Under this circumstances, (sic) it cannot be said that the property levied upon by the sheriff were not of
respondents. 16
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
Clearly, petitioner ceased its business operations in order to evade the payment to private respondents of back wages and to bar their
reinstatement to their former positions. HPPI is obviously a business conduit of petitioner corporation and its emergence was skillfully
orchestrated to avoid the financial liability that already attached to petitioner corporation.
WHEREFORE, the petition is DISMISSED and the assailed resolutions of the NLRC, dated April 23, 1992 and December 3, 1992, are
AFFIRMED.
The facts in this case are analogous to Claparols v. Court of Industrial Relations, 17 where we had the occasion to rule:
SO ORDERED.
G.R. No. L-23893
CMV
October 29, 1968
31
VILLA REY TRANSIT, INC., plaintiff-appellant,
vs.
EUSEBIO E. FERRER, PANGASINAN TRANSPORTATION CO., INC. and PUBLIC SERVICE COMMISSION, defendants.
Barely three months thereafter, or on March 6, 1959: a corporation called Villa Rey Transit, Inc. (which shall be referred to hereafter as
the Corporation) was organized with a capital stock of P500,000.00 divided into 5,000 shares of the par value of P100.00 each;
P200,000.00 was the subscribed stock; Natividad R. Villarama (wife of Jose M. Villarama) was one of the incorporators, and she subscribed
for P1,000.00; the balance of P199,000.00 was subscribed by the brother and sister-in-law of Jose M. Villarama; of the subscribed capital
stock, P105,000.00 was paid to the treasurer of the corporation, who was Natividad R. Villarama.
EUSEBIO E. FERRER and PANGASINAN TRANSPORTATION CO., INC., defendants-appellants.
PANGASINAN TRANSPORTATION CO., INC., third-party plaintiff-appellant,

vs.
In less than a month after its registration with the Securities and Exchange Commission (March 10, 1959), the Corporation, on April 7,
1959, bought five certificates of public convenience, forty-nine buses, tools and equipment from one Valentin Fernando, for the sum of
P249,000.00, of which P100,000.00 was paid upon the signing of the contract; P50,000.00 was payable upon the final approval of the sale
by the PSC; P49,500.00 one year after the final approval of the sale; and the balance of P50,000.00 "shall be paid by the BUYER to the
different suppliers of the SELLER."
JOSE M. VILLARAMA, third-party defendant-appellee.
Chuidian Law Office for plaintiff-appellant.

Bengzon, Zarraga & Villegas for defendant-appellant / third-party plaintiff-appellant.
Laurea & Pison for third-party defendant-appellee.
ANGELES, J.:
This is a tri-party appeal from the decision of the Court of First Instance of Manila, Civil Case No. 41845, declaring null and void the
sheriff's sale of two certificates of public convenience in favor of defendant Eusebio E. Ferrer and the subsequent sale thereof by the
latter to defendant Pangasinan Transportation Co., Inc.; declaring the plaintiff Villa Rey Transit, Inc., to be the lawful owner of the said
certificates of public convenience; and ordering the private defendants, jointly and severally, to pay to the plaintiff, the sum of P5,000.00
as and for attorney's fees. The case against the PSC was dismissed.
The rather ramified circumstances of the instant case can best be understood by a chronological narration of the essential facts, to wit:
Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the business name of Villa Rey Transit, pursuant to
certificates of public convenience granted him by the Public Service Commission (PSC, for short) in Cases Nos. 44213 and 104651, which
authorized him to operate a total of thirty-two (32) units on various routes or lines from Pangasinan to Manila, and vice-versa. On January
8, 1959, he sold the aforementioned two certificates of public convenience to the Pangasinan Transportation Company, Inc. (otherwise
known as Pantranco), for P350,000.00 with the condition, among others, that the seller (Villarama) "shall not for a period of 10 years from
the date of this sale, apply for any TPU service identical or competing with the buyer."
CMV
The very same day that the aforementioned contract of sale was executed, the parties thereto immediately applied with the PSC for its
approval, with a prayer for the issuance of a provisional authority in favor of the vendee Corporation to operate the service therein
involved.1 On May 19, 1959, the PSC granted the provisional permit prayed for, upon the condition that "it may be modified or revoked
by the Commission at any time, shall be subject to whatever action that may be taken on the basic application and shall be valid only
during the pendency of said application." Before the PSC could take final action on said application for approval of sale, however, the
Sheriff of Manila, on July 7, 1959, levied on two of the five certificates of public convenience involved therein, namely, those issued under
PSC cases Nos. 59494 and 63780, pursuant to a writ of execution issued by the Court of First Instance of Pangasinan in Civil Case No.
13798, in favor of Eusebio Ferrer, plaintiff, judgment creditor, against Valentin Fernando, defendant, judgment debtor. The Sheriff made
and entered the levy in the records of the PSC. On July 16, 1959, a public sale was conducted by the Sheriff of the said two certificates of
public convenience. Ferrer was the highest bidder, and a certificate of sale was issued in his name.
Thereafter, Ferrer sold the two certificates of public convenience to Pantranco, and jointly submitted for approval their corresponding
contract of sale to the PSC.2 Pantranco therein prayed that it be authorized provisionally to operate the service involved in the said two
certificates.
The applications for approval of sale, filed before the PSC, by Fernando and the Corporation, Case No. 124057, and that of Ferrer and
Pantranco, Case No. 126278, were scheduled for a joint hearing. In the meantime, to wit, on July 22, 1959, the PSC issued an order
disposing that during the pendency of the cases and before a final resolution on the aforesaid applications, the Pantranco shall be the one
to operate provisionally the service under the two certificates embraced in the contract between Ferrer and Pantranco. The Corporation
took issue with this particular ruling of the PSC and elevated the matter to the Supreme Court,3 which decreed, after deliberation, that
until the issue on the ownership of the disputed certificates shall have been finally settled by the proper court, the Corporation should be
the one to operate the lines provisionally.
On November 4, 1959, the Corporation filed in the Court of First Instance of Manila, a complaint for the annulment of the sheriff's sale of
the aforesaid two certificates of public convenience (PSC Cases Nos. 59494 and 63780) in favor of the defendant Ferrer, and the
subsequent sale thereof by the latter to Pantranco, against Ferrer, Pantranco and the PSC. The plaintiff Corporation prayed therein that all
the orders of the PSC relative to the parties' dispute over the said certificates be annulled.
32
For convenience, We propose to discuss the foregoing issues by starting with the last proposition.
In separate answers, the defendants Ferrer and Pantranco averred that the plaintiff Corporation had no valid title to the certificates in
question because the contract pursuant to which it acquired them from Fernando was subject to a suspensive condition the approval
of the PSC which has not yet been fulfilled, and, therefore, the Sheriff's levy and the consequent sale at public auction of the
certificates referred to, as well as the sale of the same by Ferrer to Pantranco, were valid and regular, and vested unto Pantranco, a
superior right thereto.
Pantranco, on its part, filed a third-party complaint against Jose M. Villarama, alleging that Villarama and the Corporation, are one and the
same; that Villarama and/or the Corporation was disqualified from operating the two certificates in question by virtue of the
aforementioned agreement between said Villarama and Pantranco, which stipulated that Villarama "shall not for a period of 10 years
from the date of this sale, apply for any TPU service identical or competing with the buyer."
Upon the joinder of the issues in both the complaint and third-party complaint, the case was tried, and thereafter decision was rendered
in the terms, as above stated.
The evidence has disclosed that Villarama, albeit was not an incorporator or stockholder of the Corporation, alleging that he did not
become such, because he did not have sufficient funds to invest, his wife, however, was an incorporator with the least subscribed number
of shares, and was elected treasurer of the Corporation. The finances of the Corporation which, under all concepts in the law, are
supposed to be under the control and administration of the treasurer keeping them as trust fund for the Corporation, were, nonetheless,
manipulated and disbursed as if they were the private funds of Villarama, in such a way and extent that Villarama appeared to be the
actual owner-treasurer of the business without regard to the rights of the stockholders. The following testimony of Villarama,4 together
with the other evidence on record, attests to that effect:
Q.
Doctor, I want to go back again to the incorporation of the Villa Rey Transit, Inc. You heard the testimony presented here by the
bank regarding the initial opening deposit of ONE HUNDRED FIVE THOUSAND PESOS, of which amount Eighty-Five Thousand Pesos was a
check drawn by yourself personally. In the direct examination you told the Court that the reason you drew a check for Eighty-Five
Thousand Pesos was because you and your wife, or your wife, had spent the money of the stockholders given to her for incorporation.
Will you please tell the Honorable Court if you knew at the time your wife was spending the money to pay debts, you personally knew she
was spending the money of the incorporators?
As stated at the beginning, all the parties involved have appealed from the decision. They submitted a joint record on appeal.
A.
Pantranco disputes the correctness of the decision insofar as it holds that Villa Rey Transit, Inc. (Corporation) is a distinct and separate
entity from Jose M. Villarama; that the restriction clause in the contract of January 8, 1959 between Pantranco and Villarama is null and
void; that the Sheriff's sale of July 16, 1959, is likewise null and void; and the failure to award damages in its favor and against Villarama.
Ferrer, for his part, challenges the decision insofar as it holds that the sheriff's sale is null and void; and the sale of the two certificates in
question by Valentin Fernando to the Corporation, is valid. He also assails the award of P5,000.00 as attorney's fees in favor of the
Corporation, and the failure to award moral damages to him as prayed for in his counterclaim.
The Corporation, on the other hand, prays for a review of that portion of the decision awarding only P5,000.00 as attorney's fees, and
insisting that it is entitled to an award of P100,000.00 by way of exemplary damages.
After a careful study of the facts obtaining in the case, the vital issues to be resolved are: (1) Does the stipulation between Villarama and
Pantranco, as contained in the deed of sale, that the former "SHALL NOT FOR A PERIOD OF 10 YEARS FROM THE DATE OF THIS SALE,
APPLY FOR ANY TPU SERVICE IDENTICAL OR COMPETING WITH THE BUYER," apply to new lines only or does it include existing lines?; (2)
Assuming that said stipulation covers all kinds of lines, is such stipulation valid and enforceable?; (3) In the affirmative, that said
stipulation is valid, did it bind the Corporation?
CMV
You know my money and my wife's money are one. We never talk about those things.
Q.
Doctor, your answer then is that since your money and your wife's money are one money and you did not know when your wife
was paying debts with the incorporator's money?
A.
Because sometimes she uses my money, and sometimes the money given to her she gives to me and I deposit the money.
Q.
Actually, aside from your wife, you were also the custodian of some of the incorporators here, in the beginning?
A.
Not necessarily, they give to my wife and when my wife hands to me I did not know it belonged to the incorporators.
Q.
It supposes then your wife gives you some of the money received by her in her capacity as treasurer of the corporation?
A.
Maybe.
33
Q.
What did you do with the money, deposit in a regular account?
A.
Deposit in my account.
Q.
Of all the money given to your wife, she did not receive any check?
A.
I do not remember.
Q.
xxx
Is it usual for you, Doctor, to be given Fifty Thousand Pesos without even asking what is this?
xxx
xxx
JUDGE: Reform the question.
Q.
The subscription of your brother-in-law, Mr. Reyes, is Fifty-Two Thousand Pesos, did your wife give you Fifty-two Thousand Pesos?
A.
I have testified before that sometimes my wife gives me money and I do not know exactly for what.
The evidence further shows that the initial cash capitalization of the corporation of P105,000.00 was mostly financed by Villarama. Of the
P105,000.00 deposited in the First National City Bank of New York, representing the initial paid-up capital of the Corporation, P85,000.00
was covered by Villarama's personal check. The deposit slip for the said amount of P105,000.00 was admitted in evidence as Exh. 23,
which shows on its face that P20,000.00 was paid in cash and P85,000.00 thereof was covered by Check No. F-50271 of the First National
City Bank of New York. The testimonies of Alfonso Sancho5 and Joaquin Amansec,6 both employees of said bank, have proved that the
drawer of the check was Jose Villarama himself.
Another witness, Celso Rivera, accountant of the Corporation, testified that while in the books of the corporation there appears an entry
that the treasurer received P95,000.00 as second installment of the paid-in subscriptions, and, subsequently, also P100,000.00 as the first
installment of the offer for second subscriptions worth P200,000.00 from the original subscribers, yet Villarama directed him (Rivera) to
make vouchers liquidating the sums.7 Thus, it was made to appear that the P95,000.00 was delivered to Villarama in payment for
equipment purchased from him, and the P100,000.00 was loaned as advances to the stockholders. The said accountant, however,
testified that he was not aware of any amount of money that had actually passed hands among the parties involved,8 and actually the
CMV
only money of the corporation was the P105,000.00 covered by the deposit slip Exh. 23, of which as mentioned above, P85,000.00 was
paid by Villarama's personal check.
Further, the evidence shows that when the Corporation was in its initial months of operation, Villarama purchased and paid with his
personal checks Ford trucks for the Corporation. Exhibits 20 and 21 disclose that the said purchases were paid by Philippine Bank of
Commerce Checks Nos. 992618-B and 993621-B, respectively. These checks have been sufficiently established by Fausto Abad, Assistant
Accountant of Manila Trading & Supply Co., from which the trucks were purchased9 and Aristedes Solano, an employee of the Philippine
Bank of Commerce,10 as having been drawn by Villarama.
Exhibits 6 to 19 and Exh. 22, which are photostatic copies of ledger entries and vouchers showing that Villarama had co-mingled his
personal funds and transactions with those made in the name of the Corporation, are very illuminating evidence. Villarama has assailed
the admissibility of these exhibits, contending that no evidentiary value whatsoever should be given to them since "they were merely
photostatic copies of the originals, the best evidence being the originals themselves." According to him, at the time Pantranco offered the
said exhibits, it was the most likely possessor of the originals thereof because they were stolen from the files of the Corporation and only
Pantranco was able to produce the alleged photostat copies thereof.
Section 5 of Rule 130 of the Rules of Court provides for the requisites for the admissibility of secondary evidence when the original is in
the custody of the adverse party, thus: (1) opponent's possession of the original; (2) reasonable notice to opponent to produce the
original; (3) satisfactory proof of its existence; and (4) failure or refusal of opponent to produce the original in court.11 Villarama has
practically admitted the second and fourth requisites.12 As to the third, he admitted their previous existence in the files of the
Corporation and also that he had seen some of them.13 Regarding the first element, Villarama's theory is that since even at the time of
the issuance of the subpoena duces tecum, the originals were already missing, therefore, the Corporation was no longer in possession of
the same. However, it is not necessary for a party seeking to introduce secondary evidence to show that the original is in the actual
possession of his adversary. It is enough that the circumstances are such as to indicate that the writing is in his possession or under his
control. Neither is it required that the party entitled to the custody of the instrument should, on being notified to produce it, admit having
it in his possession.14 Hence, secondary evidence is admissible where he denies having it in his possession. The party calling for such
evidence may introduce a copy thereof as in the case of loss. For, among the exceptions to the best evidence rule is "when the original has
been lost, destroyed, or cannot be produced in court."15 The originals of the vouchers in question must be deemed to have been lost, as
even the Corporation admits such loss. Viewed upon this light, there can be no doubt as to the admissibility in evidence of Exhibits 6 to 19
and 22.
Taking account of the foregoing evidence, together with Celso Rivera's testimony,16 it would appear that: Villarama supplied the
organization expenses and the assets of the Corporation, such as trucks and equipment;17 there was no actual payment by the original
subscribers of the amounts of P95,000.00 and P100,000.00 as appearing in the books;18 Villarama made use of the money of the
Corporation and deposited them to his private accounts;19 and the Corporation paid his personal accounts.20
Villarama himself admitted that he mingled the corporate funds with his own money.21 He also admitted that gasoline purchases of the
Corporation were made in his name22 because "he had existing account with Stanvac which was properly secured and he wanted the
Corporation to benefit from the rebates that he received."23
34
The foregoing circumstances are strong persuasive evidence showing that Villarama has been too much involved in the affairs of the
Corporation to altogether negative the claim that he was only a part-time general manager. They show beyond doubt that the
Corporation is his alter ego.
It is significant that not a single one of the acts enumerated above as proof of Villarama's oneness with the Corporation has been denied
by him. On the contrary, he has admitted them with offered excuses.
Villarama has admitted, for instance, having paid P85,000.00 of the initial capital of the Corporation with the lame excuse that "his wife
had requested him to reimburse the amount entrusted to her by the incorporators and which she had used to pay the obligations of Dr.
Villarama (her husband) incurred while he was still the owner of Villa Rey Transit, a single proprietorship." But with his admission that he
had received P350,000.00 from Pantranco for the sale of the two certificates and one unit,24 it becomes difficult to accept Villarama's
explanation that he and his wife, after consultation,25 spent the money of their relatives (the stockholders) when they were supposed to
have their own money. Even if Pantranco paid the P350,000.00 in check to him, as claimed, it could have been easy for Villarama to have
deposited said check in his account and issued his own check to pay his obligations. And there is no evidence adduced that the said
amount of P350,000.00 was all spent or was insufficient to settle his prior obligations in his business, and in the light of the stipulation in
the deed of sale between Villarama and Pantranco that P50,000.00 of the selling price was earmarked for the payments of accounts due
to his creditors, the excuse appears unbelievable.
On his having paid for purchases by the Corporation of trucks from the Manila Trading & Supply Co. with his personal checks, his reason
was that he was only sharing with the Corporation his credit with some companies. And his main reason for mingling his funds with that of
the Corporation and for the latter's paying his private bills is that it would be more convenient that he kept the money to be used in
paying the registration fees on time, and since he had loaned money to the Corporation, this would be set off by the latter's paying his
bills. Villarama admitted, however, that the corporate funds in his possession were not only for registration fees but for other important
obligations which were not specified.26
Indeed, while Villarama was not the Treasurer of the Corporation but was, allegedly, only a part-time manager,27 he admitted not only
having held the corporate money but that he advanced and lent funds for the Corporation, and yet there was no Board Resolution
allowing it.28
Villarama's explanation on the matter of his involvement with the corporate affairs of the Corporation only renders more credible
Pantranco's claim that his control over the corporation, especially in the management and disposition of its funds, was so extensive and
intimate that it is impossible to segregate and identify which money belonged to whom. The interference of Villarama in the complex
affairs of the corporation, and particularly its finances, are much too inconsistent with the ends and purposes of the Corporation law,
which, precisely, seeks to separate personal responsibilities from corporate undertakings. It is the very essence of incorporation that the
acts and conduct of the corporation be carried out in its own corporate name because it has its own personality.
CMV
The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized
and respected in all cases which are within reason and the law.29 When the fiction is urged as a means of perpetrating a fraud or an illegal
act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or
generally the perpetration of knavery or crime,30 the veil with which the law covers and isolates the corporation from the members or
stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals.
Upon the foregoing considerations, We are of the opinion, and so hold, that the preponderance of evidence have shown that the Villa Rey
Transit, Inc. is an alter ego of Jose M. Villarama, and that the restrictive clause in the contract entered into by the latter and Pantranco is
also enforceable and binding against the said Corporation. For the rule is that a seller or promisor may not make use of a corporate entity
as a means of evading the obligation of his covenant.31 Where the Corporation is substantially the alter ego of the covenantor to the
restrictive agreement, it can be enjoined from competing with the covenantee.32
The Corporation contends that even on the supposition that Villa Rey Transit, Inc. and Villarama are one and the same, the restrictive
clause in the contract between Villarama and Pantranco does not include the purchase of existing lines but it only applies to application
for the new lines. The clause in dispute reads thus:
(4)
The SELLER shall not, for a period of ten (10) years from the date of this sale apply for any TPU service identical or competing
with the BUYER. (Emphasis supplied)
As We read the disputed clause, it is evident from the context thereof that the intention of the parties was to eliminate the seller as a
competitor of the buyer for ten years along the lines of operation covered by the certificates of public convenience subject of their
transaction. The word "apply" as broadly used has for frame of reference, a service by the seller on lines or routes that would compete
with the buyer along the routes acquired by the latter. In this jurisdiction, prior authorization is needed before anyone can operate a TPU
service,33whether the service consists in a new line or an old one acquired from a previous operator. The clear intention of the parties
was to prevent the seller from conducting any competitive line for 10 years since, anyway, he has bound himself not to apply for
authorization to operate along such lines for the duration of such period.34
If the prohibition is to be applied only to the acquisition of new certificates of public convenience thru an application with the Public
Service Commission, this would, in effect, allow the seller just the same to compete with the buyer as long as his authority to operate is
only acquired thru transfer or sale from a previous operator, thus defeating the intention of the parties. For what would prevent the
seller, under the circumstances, from having a representative or dummy apply in the latter's name and then later on transferring the same
by sale to the seller? Since stipulations in a contract is the law between the contracting parties,
Every person must, in the exercise of his rights and in the performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith. (Art. 19, New Civil Code.)
35
We are not impressed of Villarama's contention that the re-wording of the two previous drafts of the contract of sale between Villarama
and Pantranco is significant in that as it now appears, the parties intended to effect the least restriction. We are persuaded, after an
examination of the supposed drafts, that the scope of the final stipulation, while not as long and prolix as those in the drafts, is just as
broad and comprehensive. At most, it can be said that the re-wording was done merely for brevity and simplicity.
The evident intention behind the restriction was to eliminate the sellers as a competitor, and this must be, considering such factors as the
good will35 that the seller had already gained from the riding public and his adeptness and proficiency in the trade. On this matter,
Corbin, an authority on Contracts has this to say.36
When one buys the business of another as a going concern, he usually wishes to keep it going; he wishes to get the location, the building,
the stock in trade, and the customers. He wishes to step into the seller's shoes and to enjoy the same business relations with other men.
He is willing to pay much more if he can get the "good will" of the business, meaning by this the good will of the customers, that they may
continue to tread the old footpath to his door and maintain with him the business relations enjoyed by the seller.
... In order to be well assured of this, he obtains and pays for the seller's promise not to reopen business in competition with the business
sold.
As to whether or not such a stipulation in restraint of trade is valid, our jurisprudence on the matter37says:
The law concerning contracts which tend to restrain business or trade has gone through a long series of changes from time to time with
the changing condition of trade and commerce. With trifling exceptions, said changes have been a continuous development of a general
rule. The early cases show plainly a disposition to avoid and annul all contract which prohibited or restrained any one from using a lawful
trade "at any time or at any place," as being against the benefit of the state. Later, however, the rule became well established that if the
restraint was limited to "a certain time" and within "a certain place," such contracts were valid and not "against the benefit of the state."
Later cases, and we think the rule is now well established, have held that a contract in restraint of trade is valid providing there is a
limitation upon either time or place. A contract, however, which restrains a man from entering into business or trade without either a
limitation as to time or place, will be held invalid.
in duration, it is only for ten (10) years; and third, with respect to situs or territory, the restraint is only along the lines covered by the
certificates sold. In view of these limitations, coupled with the consideration of P350,000.00 for just two certificates of public
convenience, and considering, furthermore, that the disputed stipulation is only incidental to a main agreement, the same is reasonable
and it is not harmful nor obnoxious to public service.38 It does not appear that the ultimate result of the clause or stipulation would be to
leave solely to Pantranco the right to operate along the lines in question, thereby establishing monopoly or predominance approximating
thereto. We believe the main purpose of the restraint was to protect for a limited time the business of the buyer.
Indeed, the evils of monopoly are farfetched here. There can be no danger of price controls or deterioration of the service because of the
close supervision of the Public Service Commission.39 This Court had stated long ago,40 that "when one devotes his property to a use in
which the public has an interest, he virtually grants to the public an interest in that use and submits it to such public use under reasonable
rules and regulations to be fixed by the Public Utility Commission."
Regarding that aspect of the clause that it is merely ancillary or incidental to a lawful agreement, the underlying reason sustaining its
validity is well explained in 36 Am. Jur. 537-539, to wit:
... Numerous authorities hold that a covenant which is incidental to the sale and transfer of a trade or business, and which purports to
bind the seller not to engage in the same business in competition with the purchaser, is lawful and enforceable. While such covenants are
designed to prevent competition on the part of the seller, it is ordinarily neither their purpose nor effect to stifle competition generally in
the locality, nor to prevent it at all in a way or to an extent injurious to the public. The business in the hands of the purchaser is carried on
just as it was in the hands of the seller; the former merely takes the place of the latter; the commodities of the trade are as open to the
public as they were before; the same competition exists as existed before; there is the same employment furnished to others after as
before; the profits of the business go as they did before to swell the sum of public wealth; the public has the same opportunities of
purchasing, if it is a mercantile business; and production is not lessened if it is a manufacturing plant.
The reliance by the lower court on tile case of Red Line Transportation Co. v. Bachrach41 and finding that the stipulation is illegal and void
seems misplaced. In the said Red Line case, the agreement therein sought to be enforced was virtually a division of territory between two
operators, each company imposing upon itself an obligation not to operate in any territory covered by the routes of the other. Restraints
of this type, among common carriers have always been covered by the general rule invalidating agreements in restraint of trade. 42
The public welfare of course must always be considered and if it be not involved and the restraint upon one party is not greater than
protection to the other requires, contracts like the one we are discussing will be sustained. The general tendency, we believe, of modern
authority, is to make the test whether the restraint is reasonably necessary for the protection of the contracting parties. If the contract is
reasonably necessary to protect the interest of the parties, it will be upheld. (Emphasis supplied.)
Neither are the other cases relied upon by the plaintiff-appellee applicable to the instant case. In Pampanga Bus Co., Inc. v.
Enriquez,43the undertaking of the applicant therein not to apply for the lifting of restrictions imposed on his certificates of public
convenience was not an ancillary or incidental agreement. The restraint was the principal objective. On the other hand, in Red Line
Transportation Co., Inc. v. Gonzaga,44 the restraint there in question not to ask for extension of the line, or trips, or increase of
equipment was not an agreement between the parties but a condition imposed in the certificate of public convenience itself.
Analyzing the characteristics of the questioned stipulation, We find that although it is in the nature of an agreement suppressing
competition, it is, however, merely ancillary or incidental to the main agreement which is that of sale. The suppression or restraint is only
partial or limited: first, in scope, it refers only to application for TPU by the seller in competition with the lines sold to the buyer; second,
Upon the foregoing considerations, Our conclusion is that the stipulation prohibiting Villarama for a period of 10 years to "apply" for TPU
service along the lines covered by the certificates of public convenience sold by him to Pantranco is valid and reasonable. Having arrived
CMV
36
at this conclusion, and considering that the preponderance of the evidence have shown that Villa Rey Transit, Inc. is itself the alter ego of
Villarama, We hold, as prayed for in Pantranco's third party complaint, that the said Corporation should, until the expiration of the 1-year
period abovementioned, be enjoined from operating the line subject of the prohibition.
To avoid any misunderstanding, it is here to be emphasized that the 10-year prohibition upon Villarama is not against his application for,
or purchase of, certificates of public convenience, but merely the operation of TPU along the lines covered by the certificates sold by him
to Pantranco. Consequently, the sale between Fernando and the Corporation is valid, such that the rightful ownership of the disputed
certificates still belongs to the plaintiff being the prior purchaser in good faith and for value thereof. In view of the ancient rule of caveat
emptor prevailing in this jurisdiction, what was acquired by Ferrer in the sheriff's sale was only the right which Fernando, judgment
debtor, had in the certificates of public convenience on the day of the sale.45
Accordingly, by the "Notice of Levy Upon Personalty" the Commissioner of Public Service was notified that "by virtue of an Order of
Execution issued by the Court of First Instance of Pangasinan, the rights, interests, or participation which the defendant, VALENTIN A.
FERNANDO in the above entitled case may have in the following realty/personalty is attached or levied upon, to wit: The rights,
interests and participation on the Certificates of Public Convenience issued to Valentin A. Fernando, in Cases Nos. 59494, etc. ... Lines
Manila to Lingayen, Dagupan, etc. vice versa." Such notice of levy only shows that Ferrer, the vendee at auction of said certificates, merely
stepped into the shoes of the judgment debtor. Of the same principle is the provision of Article 1544 of the Civil Code, that "If the same
thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken possession
thereof in good faith, if it should be movable property."
There is no merit in Pantranco and Ferrer's theory that the sale of the certificates of public convenience in question, between the
Corporation and Fernando, was not consummated, it being only a conditional sale subject to the suspensive condition of its approval by
the Public Service Commission. While section 20(g) of the Public Service Act provides that "subject to established limitation and
exceptions and saving provisions to the contrary, it shall be unlawful for any public service or for the owner, lessee or operator thereof,
without the approval and authorization of the Commission previously had ... to sell, alienate, mortgage, encumber or lease its property,
franchise, certificates, privileges, or rights or any part thereof, ...," the same section also provides:
... Provided, however, That nothing herein contained shall be construed to prevent the transaction from being negotiated or completed
before its approval or to prevent the sale, alienation, or lease by any public service of any of its property in the ordinary course of its
business.
Villa Rey Transit, Inc. claims that by virtue of the "tortious acts" of defendants (Pantranco and Ferrer) in acquiring the certificates of public
convenience in question, despite constructive and actual knowledge on their part of a prior sale executed by Fernando in favor of the said
corporation, which necessitated the latter to file the action to annul the sheriff's sale to Ferrer and the subsequent transfer to Pantranco,
it is entitled to collect actual and compensatory damages, and attorney's fees in the amount of P25,000.00. The evidence on record,
however, does not clearly show that said defendants acted in bad faith in their acquisition of the certificates in question. They believed
that because the bill of sale has yet to be approved by the Public Service Commission, the transaction was not a consummated sale, and,
therefore, the title to or ownership of the certificates was still with the seller. The award by the lower court of attorney's fees of
P5,000.00 in favor of Villa Rey Transit, Inc. is, therefore, without basis and should be set aside.
Eusebio Ferrer's charge that by reason of the filing of the action to annul the sheriff's sale, he had suffered and should be awarded moral,
exemplary damages and attorney's fees, cannot be entertained, in view of the conclusion herein reached that the sale by Fernando to the
Corporation was valid.
Pantranco, on the other hand, justifies its claim for damages with the allegation that when it purchased ViIlarama's business for
P350,000.00, it intended to build up the traffic along the lines covered by the certificates but it was rot afforded an opportunity to do so
since barely three months had elapsed when the contract was violated by Villarama operating along the same lines in the name of Villa
Rey Transit, Inc. It is further claimed by Pantranco that the underhanded manner in which Villarama violated the contract is pertinent in
establishing punitive or moral damages. Its contention as to the proper measure of damages is that it should be the purchase price of
P350,000.00 that it paid to Villarama. While We are fully in accord with Pantranco's claim of entitlement to damages it suffered as a result
of Villarama's breach of his contract with it, the record does not sufficiently supply the necessary evidentiary materials upon which to
base the award and there is need for further proceedings in the lower court to ascertain the proper amount.
PREMISES CONSIDERED, the judgment appealed from is hereby modified as follows:
1.
The sale of the two certificates of public convenience in question by Valentin Fernando to Villa Rey Transit, Inc. is declared
preferred over that made by the Sheriff at public auction of the aforesaid certificate of public convenience in favor of Eusebio Ferrer;
2.
Reversed, insofar as it dismisses the third-party complaint filed by Pangasinan Transportation Co. against Jose M. Villarama,
holding that Villa Rey Transit, Inc. is an entity distinct and separate from the personality of Jose M. Villarama, and insofar as it awards the
sum of P5,000.00 as attorney's fees in favor of Villa Rey Transit, Inc.;
It is clear, therefore, that the requisite approval of the PSC is not a condition precedent for the validity and consummation of the sale.
3.
The case is remanded to the trial court for the reception of evidence in consonance with the above findings as regards the
amount of damages suffered by Pantranco; and
Anent the question of damages allegedly suffered by the parties, each of the appellants has its or his own version to allege.
4.
CMV
On equitable considerations, without costs. So ordered.
37
G.R. No. 100812
June 25, 1999
court also found that his legal services were not compensated despite repeated demands, and thus ordered petitioner to pay him the
amount of fifty thousand (P50,000.00) pesos. 7
FRANCISCO MOTORS CORPORATION, petitioner,

Dissatisfied with the trial court's order, petitioner elevated the matter to the Court of Appeals, posing the following issues:
vs.
COURT OF APPEALS and SPOUSES GREGORIO and LIBRADA MANUEL, respondents.
I.
WHETHER OR NOT THE DECISION RENDERED BY THE LOWER COURT IS NULL AND VOID AS IT NEVER ACQUIRED JURISDICTION OVER THE
PERSON OF THE DEFENDANT.
QUISUMBING, J.:
II.
This petition for review on certiorari, under Rule 45 of the Rules of Court, seeks to annul the decision 1 of the Court of Appeals in C.A. G.R.
CV No. 10014 affirming the decision rendered by Branch 135, Regional Trial Court of Makati, Metro Manila. The procedural antecedents of
this petition are as follows:
On January 23, 1985, petitioner filed a complaint 2 against private respondents to recover three thousand four hundred twelve and six
centavos (P3,412.06), representing the balance of the jeep body purchased by the Manuels from petitioner; an additional sum of twenty
thousand four hundred fifty-four and eighty centavos (P20,454.80) representing the unpaid balance on the cost of repair of the vehicle;
and six thousand pesos (P6,000.00) for cost of suit and attorney's fees. 3 To the original balance on the price of jeep body were added the
costs of repair. 4 In their answer, private respondents interposed a counterclaim for unpaid legal services by Gregorio Manuel in the
amount of fifty thousand pesos (P50,000) which was not paid by the incorporators, directors and officers of the petitioner. The trial court
decided the case on June 26, 1985, in favor of petitioner in regard to the petitioner's claim for money, but also allowed the counter-claim
of private respondents. Both parties appealed. On April 15, 1991, the Court of Appeals sustained the trial court's decision. 5 Hence, the
present petition.
For our review in particular is the propriety of the permissive counterclaim which private respondents filed together with their answer to
petitioner's complaint for a sum of money. Private respondent Gregorio Manuel alleged as an affirmative defense that, while he was
petitioner's Assistant Legal Officer, he represented members of the Francisco family in the intestate estate proceedings of the late Benita
Trinidad. However, even after the termination of the proceedings, his services were not paid. Said family members, he said, were also
incorporators, directors and officers of petitioner. Hence to petitioner's collection suit, he filed a counter permissive counterclaim for the
unpaid attorney's fees. 6
For failure of petitioner to answer the counterclaim, the trial court declared petitioner in default on this score, and evidence ex-parte was
presented on the counterclaim. The trial court ruled in favor of private respondents and found that Gregorio Manuel indeed rendered
legal services to the Francisco family in Special Proceedings Number 7803 "In the Matter of Intestate Estate of Benita Trinidad". Said
CMV
WHETHER OR NOT PLAINTIFF-APPELLANT NOT BEING A REAL PARTY IN THE ALLEGED PERMISSIVE COUNTERCLAIM SHOULD BE HELD
LIABLE TO THE CLAIM OF DEFENDANT-APPELLEES.
III.
WHETHER OR NOT THERE IS FAILURE ON THE PART OF PLAINTIFF-APPELLANT TO ANSWER THE ALLEGED PERMISSIVE COUNTERCLAIM. 8
Petitioner contended that the trial court did not acquire jurisdiction over it because no summons was validly served on it together with
the copy of the answer containing the permissive counterclaim. Further, petitioner questions the propriety of its being made party to the
case because it was not the real party in interest but the individual members of the Francisco family concerned with the intestate case.
In its assailed decision now before us for review, respondent Court of Appeals held that a counterclaim must be answered in ten (10) days,
pursuant to Section 4, Rule 11, of the Rules of Court; and nowhere does it state in the Rules that a party still needed to be summoned
anew if a counterclaim was set up against him. Failure to serve summons, said respondent court, did not effectively negate trial court's
jurisdiction over petitioner in the matter of the counterclaim. It likewise pointed out that there was no reason for petitioner to be excused
from answering the counterclaim. Court records showed that its former counsel, Nicanor G. Alvarez, received the copy of the answer with
counterclaim two (2) days prior to his withdrawal as counsel for petitioner. Moreover when petitioner's new counsel, Jose N. Aquino,
entered his appearance, three (3) days still remained within the period to file an answer to the counterclaim. Having failed to answer,
petitioner was correctly considered in default by the trial
38
court. 9 Even assuming that the trial court acquired no jurisdiction over petitioner, respondent court also said, but having filed a motion
for reconsideration seeking relief from the said order of default, petitioner was estopped from further questioning the trial court's
jurisdiction. 10
On the question of its liability for attorney's fees owing to private respondent Gregorio Manuel, petitioner argued that being a
corporation, it should not be held liable therefor because these fees were owed by the incorporators, directors and officers of the
corporation in their personal capacity as heirs of Benita Trinidad. Petitioner stressed that the personality of the corporation, vis-a-vis the
individual persons who hired the services of private respondent, is separate and distinct, 11 hence, the liability of said individuals did not
become an obligation chargeable against petitioner.
THE COURT OF APPEALS ERRED IN AFFIRMING THAT THERE WAS JURISDICTION OVER PETITIONER WITH RESPECT TO THE COUNTERCLAIM.
13
Petitioner submits that respondent court should not have resorted to piercing the veil of corporate fiction because the transaction
concerned only respondent Gregorio Manuel and the heirs of the late Benita Trinidad. According to petitioner, there was no cause of
action by said respondent against petitioner; personal concerns of the heirs should be distinguished from those involving corporate
affairs. Petitioner further contends that the present case does not fall among the instances wherein the courts may look beyond the
distinct personality of a corporation. According to petitioner, the services for which respondent Gregorio Manuel seeks to collect fees
from petitioner are personal in nature. Hence, it avers the heirs should have been sued in their personal capacity, and not involve the
corporation. 14
Nevertheless, on the foregoing issue, the Court of Appeals ruled as follows:
However, this distinct and separate personality is merely a fiction created by law for convenience and to promote justice. Accordingly, this
separate personality of the corporation may be disregarded, or the veil of corporate fiction pierced, in cases where it is used as a cloak or
cover for found (sic) illegality, or to work an injustice, or where necessary to achieve equity or when necessary for the protection of
creditors. (Sulo ng Bayan, Inc. vs. Araneta, Inc., 72 SCRA 347) Corporations are composed of natural persons and the legal fiction of a
separate corporate personality is not a shield for the commission of injustice and inequity. (Chemplex Philippines, Inc. vs. Pamatian, 57
SCRA 408).
In the instant case, evidence shows that the plaintiff-appellant Francisco Motors Corporation is composed of the heirs of the late Benita
Trinidad as directors and incorporators for whom defendant Gregorio Manuel rendered legal services in the intestate estate case of their
deceased mother. Considering the aforestated principles and circumstances established in this case, equity and justice demands plaintiffappellant's veil of corporate identity should be pierced and the defendant be compensated for legal services rendered to the heirs, who
are directors of the plaintiff-appellant corporation. 12
Now before us, petitioner assigns the following errors:
I.
With regard to the permissive counterclaim, petitioner also insists that there was no proper service of the answer containing the
permissive counterclaim. It claims that the counterclaim is a separate case which can only be properly served upon the opposing party
through summons. Further petitioner states that by nature, a permissive counterclaim is one which does not arise out of nor is necessarily
connected with the subject of the opposing party's claim. Petitioner avers that since there was no service of summons upon it with regard
to the counterclaim, then the court did not acquire jurisdiction over petitioner. Since a counterclaim is considered an action independent
from the answer, according to petitioner, then in effect there should be two simultaneous actions between the same parties: each party is
at the same time both plaintiff and defendant with respect to the other, 15 requiring in each case separate summonses.
In their Comment, private respondents focus on the two questions raised by petitioner. They defend the propriety of piercing the veil of
corporate fiction, but deny the necessity of serving separate summonses on petitioner in regard to their permissive counterclaim
contained in the answer.
Private respondents maintain both trial and appellate courts found that respondent Gregorio Manuel was employed as assistant legal
officer of petitioner corporation, and that his services were solicited by the incorporators, directors and members to handle and represent
them in Special Proceedings No. 7803, concerning the Intestate Estate of the late Benita Trinidad. They assert that the members of
petitioner corporation took advantage of their positions by not compensating respondent Gregorio Manuel after the termination of the
estate proceedings despite his repeated demands for payment of his services. They cite findings of the appellate court that support
piercing the veil of corporate identity in this particular case. They assert that the corporate veil may be disregarded when it is used to
defeat public convenience, justify wrong, protect fraud, and defend crime. It may also be pierced, according to them, where the corporate
entity is being used as an alter ego, adjunct, or business conduit for the sole benefit of the stockholders or of another corporate entity. In
these instances, they aver, the corporation should be treated merely as an association of individual persons. 16
THE COURT OF APPEALS ERRED IN APPLYING THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY.
Private respondents dispute petitioner's claim that its right to due process was violated when respondents' counterclaim was granted due
course, although no summons was served upon it. They claim that no provision in the Rules of Court requires service of summons upon a
defendant in a counterclaim. Private respondents argue that when the petitioner filed its complaint before the trial court it voluntarily
submitted itself to the jurisdiction of the court. As a consequence, the issuance of summons on it was no longer necessary. Private
respondents say they served a copy of their answer with affirmative defenses and counterclaim on petitioner's former counsel, Nicanor G.
Alvarez. While petitioner would have the Court believe that respondents served said copy upon Alvarez after he had withdrawn his
II.
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39
appearance as counsel for the petitioner, private respondents assert that this contention is utterly baseless. Records disclose that the
answer was received two (2) days before the former counsel for petitioner withdrew his appearance, according to private respondents.
They maintain that the present petition is but a form of dilatory appeal, to set off petitioner's obligations to the respondents by running
up more interest it could recover from them. Private respondents therefore claim damages against petitioner. 17
To resolve the issues in this case, we must first determine the propriety of piercing the veil of corporate fiction.
Basic in corporation law is the principle that a corporation has a separate personality distinct from its stockholders and from other
corporations to which it may be connected. 18 However, under the doctrine of piercing the veil of corporate entity, the corporation's
separate juridical personality may be disregarded, for example, when the corporate identity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime. Also, where the corporation is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation, then its distinct personality may be ignored. 19 In these circumstances, the courts will treat the
corporation as a mere aggrupation of persons and the liability will directly attach to them. The legal fiction of a separate corporate
personality in those cited instances, for reasons of public policy and in the interest of justice, will be justifiably set aside.
In our view, however, given the facts and circumstances of this case, the doctrine of piercing the corporate veil has no relevant application
here. Respondent court erred in permitting the trial court's resort to this doctrine. The rationale behind piercing a corporation's identity in
a given case is to remove the barrier between the corporation from the persons comprising it to thwart the fraudulent and illegal schemes
of those who use the corporate personality as a shield for undertaking certain proscribed activities. However, in the case at bar, instead of
holding certain individuals or persons responsible for an alleged corporate act, the situation has been reversed. It is the petitioner as a
corporation which is being ordered to answer for the personal liability of certain individual directors, officers and incorporators
concerned. Hence, it appears to us that the doctrine has been turned upside down because of its erroneous invocation. Note that
according to private respondent Gregorio Manuel his services were solicited as counsel for members of the Francisco family to represent
them in the intestate proceedings over Benita Trinidad's estate. These estate proceedings did not involve any business of petitioner.
Note also that he sought to collect legal fees not just from certain Francisco family members but also from petitioner corporation on the
claims that its management had requested his services and he acceded thereto as an employee of petitioner from whom it could be
deduced he was also receiving a salary. His move to recover unpaid legal fees through a counterclaim against Francisco Motors
Corporation, to offset the unpaid balance of the purchase and repair of a jeep body could only result from an obvious misapprehension
that petitioner's corporate assets could be used to answer for the liabilities of its individual directors, officers, and incorporators. Such
result if permitted could easily prejudice the corporation, its own creditors, and even other stockholders; hence, clearly inequitous to
petitioner.
Furthermore, considering the nature of the legal services involved, whatever obligation said incorporators, directors and officers of the
corporation had incurred, it was incurred in their personal capacity. When directors and officers of a corporation are unable to
compensate a party for a personal obligation, it is far-fetched to allege that the corporation is perpetuating fraud or promoting injustice,
and be thereby held liable therefor by piercing its corporate veil. While there are no hard and fast rules on disregarding separate
corporate identity, we must always be mindful of its function and purpose. A court should be careful in assessing the milieu where the
CMV
doctrine of piercing the corporate veil may be applied. Otherwise an injustice, although unintended, may result from its erroneous
application.
The personality of the corporation and those of its incorporators, directors and officers in their personal capacities ought to be kept
separate in this case. The claim for legal fees against the concerned individual incorporators, officers and directors could not be properly
directed against the corporation without violating basic principles governing corporations. Moreover, every action including a
counterclaim must be prosecuted or defended in the name of the real party in interest. 20 It is plainly an error to lay the claim for legal
fees of private respondent Gregorio Manuel at the door of petitioner (FMC) rather than individual members of the Francisco family.
However, with regard to the procedural issue raised by petitioner's allegation, that it needed to be summoned anew in order for the court
to acquire jurisdiction over it, we agree with respondent court's view to the contrary. Section 4, Rule 11 of the Rules of Court provides
that a counterclaim or cross-claim must be answered within ten (10) days from service. Nothing in the Rules of Court says that summons
should first be served on the defendant before an answer to counterclaim must be made. The purpose of a summons is to enable the
court to acquire jurisdiction over the person of the defendant. Although a counterclaim is treated as an entirely distinct and independent
action, the defendant in the counterclaim, being the plaintiff in the original complaint, has already submitted to the jurisdiction of the
court. Following Rule 9, Section 3 of the 1997 Rules of Civil Procedure, 21 if a defendant (herein petitioner) fails to answer the
counterclaim, then upon motion of plaintiff, the defendant may be declared in default. This is what happened to petitioner in this case,
and this Court finds no procedural error in the disposition of the appellate court on this particular issue. Moreover, as noted by the
respondent court, when petitioner filed its motion seeking to set aside the order of default, in effect it submitted itself to the jurisdiction
of the court. As well said by respondent court:
Further on the lack of jurisdiction as raised by plaintiff-appellant[,] [t]he records show that upon its request, plaintiff-appellant was
granted time to file a motion for reconsideration of the disputed decision. Plaintiff-appellant did file its motion for reconsideration to set
aside the order of default and the judgment rendered on the counterclaim.
Thus, even if the court acquired no jurisdiction over plaintiff-appellant on the counterclaim, as it vigorously insists, plaintiff-appellant is
considered to have submitted to the court's jurisdiction when it filed the motion for reconsideration seeking relief from the court.
(Soriano vs. Palacio, 12 SCRA 447). A party is estopped from assailing the jurisdiction of a court after voluntarily submitting himself to its
jurisdiction. (Tejones vs. Gironella, 159 SCRA 100). Estoppel is a bar against any claims of lack of jurisdiction. (Balais vs. Balais, 159 SCRA
37). 22
WHEREFORE, the petition is hereby GRANTED and the assailed decision is hereby REVERSED insofar only as it held Francisco Motors
Corporation liable for the legal obligation owing to private respondent Gregorio Manuel; but this decision is without prejudice to his filing
the proper suit against the concerned members of the Francisco family in their personal capacity. No pronouncement as to
costs.1wphi1.nt
SO ORDERED.
40
G.R. No. 142936
April 17, 2002
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners,

vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.
Pampanga Sugar Mills (PASUMIL in short), is a corporation organized, existing and operating under the 1975 laws of the Philippines, and
had its business office before 1975 at Del Carmen, Floridablanca, Pampanga; that the plaintiff is engaged in the business of general
construction for the repairs and/or construction of different kinds of machineries and buildings; that on August 26, 1975, the defendant
PNB acquired the assets of the defendant PASUMIL that were earlier foreclosed by the Development Bank of the Philippines (DBP) under
LOI No. 311; that the defendant PNB organized the defendant NASUDECO in September, 1975, to take ownership and possession of the
assets and ultimately to nationalize and consolidate its interest in other PNB controlled sugar mills; that prior to October 29, 1971, the
defendant PASUMIL engaged the services of plaintiff for electrical rewinding and repair, most of which were partially paid by the
defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that finally, on October 29, 1971, the plaintiff and the defendant
PASUMIL entered into a contract for the plaintiff to perform the following, to wit
PANGANIBAN, J.:
(a) Construction of one (1) power house building;
Basic is the rule that a corporation has a legal personality distinct and separate from the persons and entities owning it. The corporate veil
may be lifted only if it has been used to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or
perpetuate injustice. Thus, the mere fact that the Philippine National Bank (PNB) acquired ownership or management of some assets of
the Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at the resulting public auction by the Development
Bank of the Philippines (DBP), will not make PNB liable for the PASUMILs contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000 Decision1 of the Court of Appeals (CA) in CA-GR CV No. 57610. The decretal
portion of the challenged Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby AFFIRMED."2
(b) Construction of three (3) reinforced concrete foundation for three (3) units 350 KW diesel engine generating set[s];
(c) Construction of three (3) reinforced concrete foundation for the 5,000 KW and 1,250 KW turbo generator sets;
(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel engine generating set[s];
(e) Installation of turbine and diesel generating sets including transformer, switchboard, electrical wirings and pipe provided those stated
units are completely supplied with their accessories;
(f) Relocating of 2,400 V transmission line, demolition of all existing concrete foundation and drainage canals, excavation, and earth
fillings all for the total amount of P543,500.00 as evidenced by a contract, [a] xerox copy of which is hereto attached as Annex A and
made an integral part of this complaint;
The Facts
The factual antecedents of the case are summarized by the Court of Appeals as follows:
"In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly organized, existing, and operating under the laws of
the Philippines, with office and principal place of business at Nos. 794-812 Del Monte [A]venue, Quezon City, while the defendant [herein
petitioner] Philippine National Bank (herein referred to as PNB), is a semi-government corporation duly organized, existing and operating
under the laws of the Philippines, with office and principal place of business at Escolta Street, Sta. Cruz, Manila; whereas, the other
defendant, the National Sugar Development Corporation (NASUDECO in brief), is also a semi-government corporation and the sugar arm
of the PNB, with office and principal place of business at the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the defendant
CMV
that aside from the work contract mentioned-above, the defendant PASUMIL required the plaintiff to perform extra work, and provide
electrical equipment and spare parts, such as:
(a) Supply of electrical devices;
(b) Extra mechanical works;
41
(c) Extra fabrication works;
(d) Supply of materials and consumable items;
"The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the ground that the complaint failed to state
sufficient allegations to establish a cause of action against both defendants, inasmuch as there is lack or want of privity of contract
between the plaintiff and the two defendants, the PNB and NASUDECO, said defendants citing Article 1311 of the New Civil Code, and the
case law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and Manila Port Service, et al. v. Court of Appeals, et al., 20 SCRA 1214.
(e) Electrical shop repair;

"The motion to dismiss was by the court a quo denied in its Order of November 27, 1980; in the same order, that court directed the
defendants to file their answer to the complaint within 15 days.
(f) Supply of parts and related works for turbine generator;
"In their answer, the defendant NASUDECO reiterated the grounds of its motion to dismiss, to wit:
(g) Supply of electrical equipment for machinery;
(h)
Supply of diesel engine parts and other related works including fabrication of parts.
that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only P250,000.00, leaving an unpaid balance, as of June
27, 1973, amounting to P527,263.80, as shown in the Certification of the chief accountant of the PNB, a machine copy of which is
appended as Annex C of the complaint; that out of said unpaid balance of P527,263.80, the defendant PASUMIL made a partial payment
to the plaintiff of P14,000.00, in broken amounts, covering the period from January 5, 1974 up to May 23, 1974, leaving an unpaid balance
of P513,263.80; that the defendant PASUMIL and the defendant PNB, and now the defendant NASUDECO, failed and refused to pay the
plaintiff their just, valid and demandable obligation; that the President of the NASUDECO is also the Vice-President of the PNB, and this
official holds office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought this official to pay the outstanding obligation of
the defendant PASUMIL, inasmuch as the defendant PNB and NASUDECO now owned and possessed the assets of the defendant
PASUMIL, and these defendants all benefited from the works, and the electrical, as well as the engineering and repairs, performed by the
plaintiff; that because of the failure and refusal of the defendants to pay their just, valid, and demandable obligations, plaintiff suffered
actual damages in the total amount of P513,263.80; and that in order to recover these sums, the plaintiff was compelled to engage the
professional services of counsel, to whom the plaintiff agreed to pay a sum equivalent to 25% of the amount of the obligation due by way
of attorneys fees. Accordingly, the plaintiff prayed that judgment be rendered against the defendants PNB, NASUDECO, and PASUMIL,
jointly and severally to wit:
(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with annual interest of 14% from the time the obligation falls
due and demandable;
(2) Condemning the defendants to pay attorneys fees amounting to 25% of the amount claim;
(3) Ordering the defendants to pay the costs of the suit.
CMV
That the complaint does not state a sufficient cause of action against the defendant NASUDECO because: (a) NASUDECO is not x x x privy
to the various electrical construction jobs being sued upon by the plaintiff under the present complaint; (b) the taking over by NASUDECO
of the assets of defendant PASUMIL was solely for the purpose of reconditioning the sugar central of defendant PASUMIL pursuant to
martial law powers of the President under the Constitution; (c) nothing in the LOI No. 189-A (as well as in LOI No. 311) authorized or
commanded the PNB or its subsidiary corporation, the NASUDECO, to assume the corporate obligations of PASUMIL as that being involved
in the present case; and, (d) all that was mentioned by the said letter of instruction insofar as the PASUMIL liabilities [were] concerned
[was] for the PNB, or its subsidiary corporation the NASUDECO, to make a study of, and submit [a] recommendation on the problems
concerning the same.
"By way of counterclaim, the NASUDECO averred that by reason of the filing by the plaintiff of the present suit, which it [labeled] as
unfounded or baseless, the defendant NASUDECO was constrained to litigate and incur litigation expenses in the amount of P50,000.00,
which plaintiff should be sentenced to pay. Accordingly, NASUDECO prayed that the complaint be dismissed and on its counterclaim, that
the plaintiff be condemned to pay P50,000.00 in concept of attorneys fees as well as exemplary damages.
"In its answer, the defendant PNB likewise reiterated the grounds of its motion to dismiss, namely: (1) the complaint states no cause of
action against the defendant PNB; (2) that PNB is not a party to the contract alleged in par. 6 of the complaint and that the alleged
services rendered by the plaintiff to the defendant PASUMIL upon which plaintiffs suit is erected, was rendered long before PNB took
possession of the assets of the defendant PASUMIL under LOI No. 189-A; (3) that the PNB take-over of the assets of the defendant
PASUMIL under LOI 189-A was solely for the purpose of reconditioning the sugar central so that PASUMIL may resume its operations in
time for the 1974-75 milling season, and that nothing in the said LOI No. 189-A, as well as in LOI No. 311, authorized or directed PNB to
assume the corporate obligation/s of PASUMIL, let alone that for which the present action is brought; (4) that PNBs management and
operation under LOI No. 311 did not refer to any asset of PASUMIL which the PNB had to acquire and thereafter [manage], but only to
those which were foreclosed by the DBP and were in turn redeemed by the PNB from the DBP; (5) that conformably to LOI No. 311, on
August 15, 1975, the PNB and the Development Bank of the Philippines (DBP) entered into a Redemption Agreement whereby DBP sold,
transferred and conveyed in favor of the PNB, by way of redemption, all its (DBP) rights and interest in and over the foreclosed real and/or
personal properties of PASUMIL, as shown in Annex C which is made an integral part of the answer; (6) that again, conformably with LOI
No. 311, PNB pursuant to a Deed of Assignment dated October 21, 1975, conveyed, transferred, and assigned for valuable consideration,
42
in favor of NASUDECO, a distinct and independent corporation, all its (PNB) rights and interest in and under the above Redemption
Agreement. This is shown in Annex D which is also made an integral part of the answer; *7+ that as a consequence of the said Deed of
Assignment, PNB on October 21, 1975 ceased to managed and operate the above-mentioned assets of PASUMIL, which function was now
actually transferred to NASUDECO. In other words, so asserted PNB, the complaint as to PNB, had become moot and academic because of
the execution of the said Deed of Assignment; [8] that moreover, LOI No. 311 did not authorize or direct PNB to assume the corporate
obligations of PASUMIL, including the alleged obligation upon which this present suit was brought; and [9] that, at most, what was
granted to PNB in this respect was the authority to make a study of and submit recommendation on the problems concerning the claims
of PASUMIL creditors, under sub-par. 5 LOI No. 311.
"In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate and to incur expenses in this case, hence it is
entitled to claim attorneys fees in the amount of at least P50,000.00. Accordingly, PNB prayed that the complaint be dismissed; and that
on its counterclaim, that the plaintiff be sentenced to pay defendant PNB the sum of P50,000.00 as attorneys fees, aside from exemplary
damages in such amount that the court may seem just and equitable in the premises.
'(SGD) ERNESTO S. TENGCO

Judge"3
Ruling of the Court of Appeals
Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity for a corporation to take over and
operate the business of another corporation, while disavowing or repudiating any responsibility, obligation or liability arising therefrom.4
Hence, this Petition.5

"Summons by publication was made via the Philippines Daily Express, a newspaper with editorial office at 371 Bonifacio Drive, Port Area,
Manila, against the defendant PASUMIL, which was thereafter declared in default as shown in the August 7, 1981 Order issued by the Trial
Court.
"After due proceedings, the Trial Court rendered judgment, the decretal portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant Corporation, Philippine National Bank (PNB)
NATIONAL SUGAR DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL), ordering the latter to pay jointly
and severally the former the following:
1. The sum of P513,623.80 plus interest thereon at the rate of 14% per annum as claimed from September 25, 1980 until fully paid;
2. The sum of P102,724.76 as attorneys fees; and,
Issues
In their Memorandum, petitioners raise the following errors for the Courts consideration:
"I
The Court of Appeals gravely erred in law in holding the herein petitioners liable for the unpaid corporate debts of PASUMIL, a
corporation whose corporate existence has not been legally extinguished or terminated, simply because of petitioners*+ take-over of the
management and operation of PASUMIL pursuant to the mandates of LOI No. 189-A, as amended by LOI No. 311.
"II
The Court of Appeals gravely erred in law in not applying [to] the case at bench the ruling enunciated in Edward J. Nell Co. v. Pacific Farms,
15 SCRA 415."6
3. Costs.
SO ORDERED.
Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the unpaid debts of PASUMIL to
respondent.
Manila, Philippines, September 4, 1986.
CMV
43
This Courts Ruling
Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an
alter ego of a person or of another corporation.14 For reasons of public policy and in the interest of justice, the corporate veil will
justifiably be impaled15 only when it becomes a shield for fraud, illegality or inequity committed against third persons.16
The Petition is meritorious.
Main Issue:
Hence, any application of the doctrine of piercing the corporate veil should be done with caution.17 A court should be mindful of the
milieu where it is to be applied.18 It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or
crime was committed against another, in disregard of its rights.19 The wrongdoing must be clearly and convincingly established; it cannot
be presumed.20 Otherwise, an injustice that was never unintended may result from an erroneous application.21
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of the Rules of Court.7 To this rule, however,
there are some exceptions enumerated in Fuentes v. Court of Appeals.8 After a careful scrutiny of the records and the pleadings
submitted by the parties, we find that the lower courts misappreciated the evidence presented.9 Overlooked by the CA were certain
relevant facts that would justify a conclusion different from that reached in the assailed Decision.10
Petitioners posit that they should not be held liable for the corporate debts of PASUMIL, because their takeover of the latters foreclosed
assets did not make them assignees. On the other hand, respondent asserts that petitioners and PASUMIL should be treated as one entity
and, as such, jointly and severally held liable for PASUMILs unpaid obligation.1wphi1.nt
As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former
acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: (1) where
the purchaser expressly or impliedly agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the
corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the transaction is
fraudulently entered into in order to escape liability for those debts.11
This Court has pierced the corporate veil to ward off a judgment credit,22 to avoid inclusion of corporate assets as part of the estate of
the decedent,23 to escape liability arising from a debt,24 or to perpetuate fraud and/or confuse legitimate issues25 either to promote or
to shield unfair objectives26 or to cover up an otherwise blatant violation of the prohibition against forum-shopping.27 Only in these and
similar instances may the veil be pierced and disregarded.28
The question of whether a corporation is a mere alter ego is one of fact.29 Piercing the veil of corporate fiction may be allowed only if the
following elements concur: (1) control -- not mere stock control, but complete domination -- not only of finances, but of policy and
business practice in respect to the transaction attacked, must have been such that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own; (2) such control must have been used by the defendant to commit a fraud or a wrong
to perpetuate the violation of a statutory or other positive legal duty, or a dishonest and an unjust act in contravention of plaintiffs legal
right; and (3) the said control and breach of duty must have proximately caused the injury or unjust loss complained of.30
We believe that the absence of the foregoing elements in the present case precludes the piercing of the corporate veil. First, other than
the fact that petitioners acquired the assets of PASUMIL, there is no showing that their control over it warrants the disregard of corporate
personalities.31 Second, there is no evidence that their juridical personality was used to commit a fraud or to do a wrong; or that the
separate corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another entity or person.32 Third,
respondent was not defrauded or injured when petitioners acquired the assets of PASUMIL.33
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of law. It possesses the right of succession and such powers, attributes, and
properties expressly authorized by law or incident to its existence.12 It has a personality separate and distinct from the persons
composing it, as well as from any other legal entity to which it may be related.13 This is basic.
CMV
Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting clear and convincing evidence
to justify the setting aside of the separate corporate personality rule.34 However, it utterly failed to discharge this burden;35 it failed to
establish by competent evidence that petitioners separate corporate veil had been used to conceal fraud, illegality or inequity.36
While we agree with respondents claim that the assets of the National Sugar Development Corporation (NASUDECO) can be easily traced
to PASUMIL,37 we are not convinced that the transfer of the latters assets to petitioners was fraudulently entered into in order to escape
liability for its debt to respondent.38
44
A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and acquired the assets as the highest
bidder at the public auction conducted.39 The bank was justified in foreclosing the mortgage, because the PASUMIL account had incurred
arrearages of more than 20 percent of the total outstanding obligation.40 Thus, DBP had not only a right, but also a duty under the law to
foreclose the subject properties.41
The merger, however, does not become effective upon the mere agreement of the constituent corporations.55 Since a merger or
consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an
express provision of law authorizing them.56 For a valid merger or consolidation, the approval by the Securities and Exchange Commission
(SEC) of the articles of merger or consolidation is required.57 These articles must likewise be duly approved by a majority of the respective
stockholders of the constituent corporations.58
Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB acquired PASUMILs assets that DBP had foreclosed and purchased in the
normal course. Petitioner bank was likewise tasked to manage temporarily the operation of such assets either by itself or through a
subsidiary corporation.44
In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The procedure prescribed under
Title IX of the Corporation Code59 was not followed.
PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to Section 6 of Act No. 3135.45 These assets
were later conveyed to PNB for a consideration, the terms of which were embodied in the Redemption Agreement.46 PNB, as successorin-interest, stepped into the shoes of DBP as PASUMILs creditor.47 By way of a Deed of Assignment,48 PNB then transferred to
NASUDECO all its rights under the Redemption Agreement.
In fact, PASUMILs corporate existence, as correctly found by the CA, had not been legally extinguished or terminated.60 Further, prior to
PNBs acquisition of the foreclosed assets, PASUMIL had previously made partial payments to respondent for the formers obligation in
the amount of P777,263.80. As of June 27, 1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974,
another P14,000.
In Development Bank of the Philippines v. Court of Appeals,49 we had the occasion to resolve a similar issue. We ruled that PNB, DBP and
their transferees were not liable for Marinduque Minings unpaid obligations to Remington Industrial Sales Corporation (Remington) after
the two banks had foreclosed the assets of Marinduque Mining. We likewise held that Remington failed to discharge its burden of proving
bad faith on the part of Marinduque Mining to justify the piercing of the corporate veil.
Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent.61 LOI No. 11 explicitly provides that
PNB shall study and submit recommendations on the claims of PASUMILs creditors.62 Clearly, the corporate separateness between
PASUMIL and PNB remains, despite respondents insistence to the contrary.63
WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No pronouncement as to costs.
In the instant case, the CA erred in affirming the trial courts lifting of the corporate mask.50 The CA did not point to any fact evidencing
bad faith on the part of PNB and its transferee.51 The corporate fiction was not used to defeat public convenience, justify a wrong,
protect fraud or defend crime.52 None of the foregoing exceptions was shown to exist in the present case.53 On the contrary, the lifting
of the corporate veil would result in manifest injustice. This we cannot allow.
SO ORDERED.
G.R. No. 58168
December 19, 1989
No Merger or Consolidation
CONCEPCION MAGSAYSAY-LABRADOR, SOLEDAD MAGSAYSAY-CABRERA, LUISA MAGSAYSAY-CORPUZ, assisted be her husband, Dr. Jose
Corpuz, FELICIDAD P. MAGSAYSAY, and MERCEDES MAGSAYSAY-DIAZ, petitioners,
Respondent further claims that petitioners should be held liable for the unpaid obligations of PASUMIL by virtue of LOI Nos. 189-A and
311, which expressly authorized PASUMIL and PNB to merge or consolidate. On the other hand, petitioners contend that their takeover of
the operations of PASUMIL did not involve any corporate merger or consolidation, because the latter had never lost its separate identity
as a corporation.
vs.
THE COURT OF APPEALS and ADELAIDA RODRIGUEZ-MAGSAYSAY, Special Administratrix of the Estate of the late Genaro F. Magsaysay
respondents.
A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the
other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the
combined business.54
FERNAN, C.J.:
CMV
45
in a separate proceeding, such that with the denial of the motion for intervention, they are not left without any remedy or judicial relief
under existing law.
In this petition for review on certiorari, petitioners seek to reverse and set aside [1] the decision of the Court of Appeals dated July l3,
1981, 1 affirming that of the Court of First Instance of Zambales and Olongapo City which denied petitioners' motion to intervene in an
annulment suit filed by herein private respondent, and [2] its resolution dated September 7, 1981, denying their motion for
reconsideration.
Petitioners are raising a purely legal question; whether or not respondent Court of Appeals correctly denied their motion for intervention.
Petitioners' motion for reconsideration was denied. Hence, the instant recourse.
Petitioners anchor their right to intervene on the purported assignment made by the late Senator of a certain portion of his shareholdings
to them as evidenced by a Deed of Sale dated June 20, 1978. 2 Such transfer, petitioners posit, clothes them with an interest, protected
by law, in the matter of litigation.
The facts are not controverted.
On February 9, 1979, Adelaida Rodriguez-Magsaysay, widow and special administratix of the estate of the late Senator Genaro Magsaysay,
brought before the then Court of First Instance of Olongapo an action against Artemio Panganiban, Subic Land Corporation (SUBIC),
Filipinas Manufacturer's Bank (FILMANBANK) and the Register of Deeds of Zambales. In her complaint, she alleged that in 1958, she and
her husband acquired, thru conjugal funds, a parcel of land with improvements, known as "Pequena Island", covered by TCT No. 3258;
that after the death of her husband, she discovered [a] an annotation at the back of TCT No. 3258 that "the land was acquired by her
husband from his separate capital;" [b] the registration of a Deed of Assignment dated June 25, 1976 purportedly executed by the late
Senator in favor of SUBIC, as a result of which TCT No. 3258 was cancelled and TCT No. 22431 issued in the name of SUBIC; and [c] the
registration of Deed of Mortgage dated April 28, 1977 in the amount of P 2,700,000.00 executed by SUBIC in favor of FILMANBANK; that
the foregoing acts were void and done in an attempt to defraud the conjugal partnership considering that the land is conjugal, her marital
consent to the annotation on TCT No. 3258 was not obtained, the change made by the Register of Deeds of the titleholders was effected
without the approval of the Commissioner of Land Registration and that the late Senator did not execute the purported Deed of
Assignment or his consent thereto, if obtained, was secured by mistake, violence and intimidation. She further alleged that the
assignment in favor of SUBIC was without consideration and consequently null and void. She prayed that the Deed of Assignment and the
Deed of Mortgage be annulled and that the Register of Deeds be ordered to cancel TCT No. 22431 and to issue a new title in her favor.
On March 7, 1979, herein petitioners, sisters of the late senator, filed a motion for intervention on the ground that on June 20, 1978, their
brother conveyed to them one-half (1/2 ) of his shareholdings in SUBIC or a total of 416,566.6 shares and as assignees of around 41 % of
the total outstanding shares of such stocks of SUBIC, they have a substantial and legal interest in the subject matter of litigation and that
they have a legal interest in the success of the suit with respect to SUBIC.
On July 26, 1979, the court denied the motion for intervention, and ruled that petitioners have no legal interest whatsoever in the matter
in litigation and their being alleged assignees or transferees of certain shares in SUBIC cannot legally entitle them to intervene because
SUBIC has a personality separate and distinct from its stockholders.
Invoking the principle enunciated in the case of PNB v. Phil. Veg. Oil Co., 49 Phil. 857,862 & 853 (1927), 3 petitioners strongly argue that
their ownership of 41.66% of the entire outstanding capital stock of SUBIC entitles them to a significant vote in the corporate affairs; that
they are affected by the action of the widow of their late brother for it concerns the only tangible asset of the corporation and that it
appears that they are more vitally interested in the outcome of the case than SUBIC.
Viewed in the light of Section 2, Rule 12 of the Revised Rules of Court, this Court affirms the respondent court's holding that petitioners
herein have no legal interest in the subject matter in litigation so as to entitle them to intervene in the proceedings below. In the case of
Batama Farmers' Cooperative Marketing Association, Inc. v. Rosal, 4 we held: "As clearly stated in Section 2 of Rule 12 of the Rules of
Court, to be permitted to intervene in a pending action, the party must have a legal interest in the matter in litigation, or in the success of
either of the parties or an interest against both, or he must be so situated as to be adversely affected by a distribution or other disposition
of the property in the custody of the court or an officer thereof ."
To allow intervention, [a] it must be shown that the movant has legal interest in the matter in litigation, or otherwise qualified; and [b]
consideration must be given as to whether the adjudication of the rights of the original parties may be delayed or prejudiced, or whether
the intervenor's rights may be protected in a separate proceeding or not. Both requirements must concur as the first is not more
important than the second. 5
The interest which entitles a person to intervene in a suit between other parties must be in the matter in litigation and of such direct and
immediate character that the intervenor will either gain or lose by the direct legal operation and effect of the judgment. Otherwise, if
persons not parties of the action could be allowed to intervene, proceedings will become unnecessarily complicated, expensive and
interminable. And this is not the policy of the law. 6
The words "an interest in the subject" mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a
legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not recover. 7
On appeal, respondent Court of Appeals found no factual or legal justification to disturb the findings of the lower court. The appellate
court further stated that whatever claims the petitioners have against the late Senator or against SUBIC for that matter can be ventilated
CMV
46
Here, the interest, if it exists at all, of petitioners-movants is indirect, contingent, remote, conjectural, consequential and collateral. At the
very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the
profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations.
While a share of stock represents a proportionate or aliquot interest in the property of the corporation, it does not vest the owner thereof
with any legal right or title to any of the property, his interest in the corporate property being equitable or beneficial in nature.
Shareholders are in no legal sense the owners of corporate property, which is owned by the corporation as a distinct legal person. 8
And even assuming arguendo that there was a valid transfer, petitioners are nonetheless barred from intervening inasmuch as their rights
can be ventilated and amply protected in another proceeding.
WHEREFORE, the instant petition is hereby DENIED. Costs against petitioners.
SO ORDERED.
Petitioners further contend that the availability of other remedies, as declared by the Court of appeals, is totally immaterial to the
availability of the remedy of intervention.
PHILIPPINE DEPOSIT INSURANCE CORPORATION,

Petitioner,
We cannot give credit to such averment. As earlier stated, that the movant's interest may be protected in a separate proceeding is a
factor to be considered in allowing or disallowing a motion for intervention. It is significant to note at this juncture that as per records,
there are four pending cases involving the parties herein, enumerated as follows: [1] Special Proceedings No. 122122 before the CFI of
Manila, Branch XXII, entitled "Concepcion Magsaysay-Labrador, et al. v. Subic Land Corp., et al.", involving the validity of the transfer by
the late Genaro Magsaysay of one-half of his shareholdings in Subic Land Corporation; [2] Civil Case No. 2577-0 before the CFI of
Zambales, Branch III, "Adelaida Rodriguez-Magsaysay v. Panganiban, etc.; Concepcion Labrador, et al. Intervenors", seeking to annul the
purported Deed of Assignment in favor of SUBIC and its annotation at the back of TCT No. 3258 in the name of respondent's deceased
husband; [3] SEC Case No. 001770, filed by respondent praying, among other things that she be declared in her capacity as the surviving
spouse and administratrix of the estate of Genaro Magsaysay as the sole subscriber and stockholder of SUBIC. There, petitioners, by
motion, sought to intervene. Their motion to reconsider the denial of their motion to intervene was granted; [4] SP No. Q-26739 before
the CFI of Rizal, Branch IV, petitioners herein filing a contingent claim pursuant to Section 5, Rule 86, Revised Rules of Court. 9 Petitioners'
interests are no doubt amply protected in these cases.
- versus
CITIBANK, N.A. and BANK OF AMERICA, S.T. & N.A.,

Respondents.
Neither do we lend credence to petitioners' argument that they are more interested in the outcome of the case than the corporationassignee, owing to the fact that the latter is willing to compromise with widow-respondent and since a compromise involves the giving of
reciprocal concessions, the only conceivable concession the corporation may give is a total or partial relinquishment of the corporate
assets. 10
Such claim all the more bolsters the contingent nature of petitioners' interest in the subject of litigation.
The factual findings of the trial court are clear on this point. The petitioners cannot claim the right to intervene on the strength of the
transfer of shares allegedly executed by the late Senator. The corporation did not keep books and records. 11 Perforce, no transfer was
ever recorded, much less effected as to prejudice third parties. The transfer must be registered in the books of the corporation to affect
third persons. The law on corporations is explicit. Section 63 of the Corporation Code provides, thus: "No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred."
CMV
G.R. No. 170290
Present:
VELASCO, JR., J., Chairperson,

PERALTA,
ABAD,
MENDOZA, and
47
REYES,* JJ.
Respondent Citibank, N.A. (Citibank) is a banking corporation while respondent Bank of America, S.T. & N.A. (BA) is a national banking
association, both of which are duly organized and existing under the laws of the United States of America and duly licensed to do business
in the Philippines, with offices in Makati City.[3]
Promulgated:
April 11, 2012
In 1977, PDIC conducted an examination of the books of account of Citibank. It discovered that Citibank, in the course of its banking
business, from September 30, 1974 to June 30, 1977, received from its head office and other foreign branches a total of
P11,923,163,908.00 in dollars, covered by Certificates of Dollar Time Deposit that were interest-bearing with corresponding maturity
dates.*4+ These funds, which were lodged in the books of Citibank under the account Their Account-Head Office/Branches-Foreign
Currency, were not reported to PDIC as deposit liabilities that were subject to assessment for insurance.*5+ As such, in a letter dated
March 16, 1978, PDIC assessed Citibank for deficiency in the sum of P1,595,081.96.[6]
x --------------------------------------------------------------------------------------- x
DECISION
MENDOZA, J.:
This is a petition for review under Rule 45 of the 1997 Revised Rules of Civil Procedure, assailing the October 27, 2005 Decision[1] of the
Court of Appeals (CA) in CA-G.R. CV No. 61316, entitled Citibank, N.A. and Bank of America, S.T. & N.A. v. Philippine Deposit Insurance
Corporation.
Similarly, sometime in 1979, PDIC examined the books of accounts of BA which revealed that from September 30, 1976 to June 30, 1978,
BA received from its head office and its other foreign branches a total of P629,311,869.10 in dollars, covered by Certificates of Dollar Time
Deposit that were interest-bearing with corresponding maturity dates and lodged in their books under the account Due to Head
Office/Branches.*7+ Because BA also excluded these from its deposit liabilities, PDIC wrote to BA on October 9, 1979, seeking the
remittance of P109,264.83 representing deficiency premium assessments for dollar deposits.[8]
Believing that litigation would inevitably arise from this dispute, Citibank and BA each filed a petition for declaratory relief before the
Court of First Instance (now the Regional Trial Court) of Rizal on July 19, 1979 and December 11, 1979, respectively.[9] In their petitions,
Citibank and BA sought a declaratory judgment stating that the money placements they received from their head office and other foreign
branches were not deposits and did not give rise to insurable deposit liabilities under Sections 3 and 4 of R.A. No. 3591 (the PDIC Charter)
and, as a consequence, the deficiency assessments made by PDIC were improper and erroneous.[10] The cases were then
consolidated.[11]
On June 29, 1998, the Regional Trial Court, Branch 163, Pasig City (RTC) promulgated its Decision[12] in favor of Citibank and BA, ruling
that the subject money placements were not deposits and did not give rise to insurable deposit liabilities, and that the deficiency
assessments issued by PDIC were improper and erroneous. Therefore, Citibank and BA were not liable to pay the same. The RTC
reasoned out that the money placements subject of the petitions were not assessable for insurance purposes under the PDIC Charter
because said placements were deposits made outside of the Philippines and, under Section 3.05(b) of the PDIC Rules and Regulations,[13]
such deposits are excluded from the computation of deposit liabilities. Section 3(f) of the PDIC Charter likewise excludes from the
definition of the term deposit any obligation of a bank payable at the office of the bank located outside the Philippines. The RTC further
stated that there was no depositor-depository relationship between the respondents and their head office or other branches. As a result,
such deposits were not included as third-party deposits that must be insured. Rather, they were considered inter-branch deposits which
were excluded from the assessment base, in accordance with the practice of the United States Federal Deposit Insurance Corporation
(FDIC) after which PDIC was patterned.
The Facts
Petitioner Philippine Deposit Insurance Corporation (PDIC) is a government instrumentality created by virtue of Republic Act (R.A.) No.
3591, as amended by R.A. No. 9302.[2]
CMV
48
Aggrieved, PDIC appealed to the CA which affirmed the ruling of the RTC in its October 27, 2005 Decision. In so ruling, the CA found that
the money placements were received as part of the banks internal dealings by Citibank and BA as agents of their respective head offices.
This showed that the head office and the Philippine branch were considered as the same entity. Thus, no bank deposit could have arisen
from the transactions between the Philippine branch and the head office because there did not exist two separate contracting parties to
act as depositor and depositary.[14] Secondly, the CA called attention to the purpose for the creation of PDIC which was to protect the
deposits of depositors in the Philippines and not the deposits of the same bank through its head office or foreign branches.[15] Thirdly,
because there was no law or jurisprudence on the treatment of inter-branch deposits between the Philippine branch of a foreign bank
and its head office and other branches for purposes of insurance, the CA was guided by the procedure observed by the FDIC which
considered inter-branch deposits as non-assessable.[16] Finally, the CA cited Section 3(f) of R.A. No. 3591, which specifically excludes
obligations payable at the office of the bank located outside the Philippines from the definition of a deposit or an insured deposit. Since
the subject money placements were made in the respective head offices of Citibank and BA located outside the Philippines, then such
placements could not be subject to assessment under the PDIC Charter.[17]
Whether or not the money placements subject matter of these petitions are assessable for insurance purposes under the PDIC Act.[19]
The sole question to be resolved in this case is whether the funds placed in the Philippine branch by the head office and foreign
branches of Citibank and BA are insurable deposits under the PDIC Charter and, as such, are subject to assessment for insurance
premiums.
The Courts Ruling

Hence, this petition.
The Court rules in the negative.
The Issues
A branch has no separate legal personality;
PDIC raises the issue of whether or not the subject dollar deposits are assessable for insurance purposes under the PDIC Charter
with the following assigned errors:
A.
The appellate court erred in ruling that the subject dollar deposits are money placements, thus, they are not subject to the provisions of
Republic Act No. 6426 otherwise known as the Foreign Currency Deposit Act of the Philippines.
B.
The appellate court erred in ruling that the subject dollar deposits are not covered by the PDIC insurance.[18]
Respondents similarly identify only one issue in this case:
CMV
Purpose of the PDIC
PDIC argues that the head offices of Citibank and BA and their individual foreign branches are separate and independent entities. It
insists that under American jurisprudence, a banks head office and its branches have a principal-agent relationship only if they operate in
the same jurisdiction. In the case of foreign branches, however, no such relationship exists because the head office and said foreign
branches are deemed to be two distinct entities.[20] Under Philippine law, specifically, Section 3(b) of R.A. No. 3591, which defines the
terms bank and banking institutions, PDIC contends that the law treats a branch of a foreign bank as a separate and independent
banking unit.[21]
The respondents, on the other hand, initially point out that the factual findings of the RTC and the CA, with regard to the nature of
the money placements, the capacity in which the same were received by the respondents and the exclusion of inter-branch deposits from
assessment, can no longer be disturbed and should be accorded great weight by this Court.[22] They also argue that the money
placements are not deposits. They postulate that for a deposit to exist, there must be at least two parties a depositor and a depository
each with a legal personality distinct from the other. Because the respondents respective head offices and their branches form only a
single legal entity, there is no creditor-debtor relationship and the funds placed in the Philippine branch belong to one and the same bank.
A bank cannot have a deposit with itself.[23]
This Court is of the opinion that the key to the resolution of this controversy is the relationship of the Philippine branches of Citibank and
BA to their respective head offices and their other foreign branches.
49
The Court begins by examining the manner by which a foreign corporation can establish its presence in the Philippines. It may
choose to incorporate its own subsidiary as a domestic corporation, in which case such subsidiary would have its own separate and
independent legal personality to conduct business in the country. In the alternative, it may create a branch in the Philippines, which
would not be a legally independent unit, and simply obtain a license to do business in the Philippines.[24]
In the case of Citibank and BA, it is apparent that they both did not incorporate a separate domestic corporation to represent its
business interests in the Philippines. Their Philippine branches are, as the name implies, merely branches, without a separate legal
personality from their parent company, Citibank and BA. Thus, being one and the same entity, the funds placed by the respondents in
their respective branches in the Philippines should not be treated as deposits made by third parties subject to deposit insurance under the
PDIC Charter.
Sec. 75. Head Office Guarantee. In order to provide effective protection of the interests of the depositors and other creditors of
Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the prompt payment of all liabilities of its
Philippine branch.
Residents and citizens of the Philippines who are creditors of a branch in the Philippines of foreign bank shall have preferential rights to
the assets of such branch in accordance with the existing laws.
Republic Act No. 7721:

For lack of judicial precedents on this issue, the Court seeks guidance from American jurisprudence. In the leading case of Sokoloff v.
The National City Bank of New York,[25] where the Supreme Court of New York held:
Sec. 5. Head Office Guarantee. The head office of foreign bank branches shall guarantee prompt payment of all liabilities of its Philippine
branches.
Where a bank maintains branches, each branch becomes a separate business entity with separate books of account. A depositor in one
branch cannot issue checks or drafts upon another branch or demand payment from such other branch, and in many other respects the
branches are considered separate corporate entities and as distinct from one another as any other bank. Nevertheless, when considered
with relation to the parent bank they are not independent agencies; they are, what their name imports, merely branches, and are subject
to the supervision and control of the parent bank, and are instrumentalities whereby the parent bank carries on its business, and are
established for its own particular purposes, and their business conduct and policies are controlled by the parent bank and their property
and assets belong to the parent bank, although nominally held in the names of the particular branches. Ultimate liability for a debt of a
branch would rest upon the parent bank. [Emphases supplied]
Moreover, PDIC must be reminded of the purpose for its creation, as espoused in Section 1 of R.A. No. 3591 (The PDIC Charter) which
provides:
This ruling was later reiterated in the more recent case of United States v. BCCI Holdings Luxembourg[26] where the United States Court
of Appeals, District of Columbia Circuit, emphasized that while individual bank branches may be treated as independent of one another,
each branch, unless separately incorporated, must be viewed as a part of the parent bank rather than as an independent entity.
The Corporation shall, as a basic policy, promote and safeguard the interests of the depositing public by way of providing permanent and
continuing insurance coverage on all insured deposits.
In addition, Philippine banking laws also support the conclusion that the head office of a foreign bank and its branches are
considered as one legal entity. Section 75 of R.A. No. 8791 (The General Banking Law of 2000) and Section 5 of R.A. No. 7221 (An Act
Liberalizing the Entry of Foreign Banks) both require the head office of a foreign bank to guarantee the prompt payment of all the
liabilities of its Philippine branch, to wit:
R.A. No. 9576, which amended the PDIC Charter, reaffirmed the rationale for the establishment of the PDIC:
Republic Act No. 8791:
CMV
Section 1. There is hereby created a Philippine Deposit Insurance Corporation hereinafter referred to as the Corporation which shall
insure, as herein provided, the deposits of all banks which are entitled to the benefits of insurance under this Act, and which shall have
the powers hereinafter granted.
Section 1. Statement of State Policy and Objectives. - It is hereby declared to be the policy of the State to strengthen the mandatory
deposit insurance coverage system to generate, preserve, maintain faith and confidence in the country's banking system, and protect it
from illegal schemes and machinations.
50
Towards this end, the government must extend all means and mechanisms necessary for the Philippine Deposit Insurance Corporation to
effectively fulfill its vital task of promoting and safeguarding the interests of the depositing public by way of providing permanent and
continuing insurance coverage on all insured deposits, and in helping develop a sound and stable banking system at all times.
The purpose of the PDIC is to protect the depositing public in the event of a bank closure. It has already been sufficiently established by
US jurisprudence and Philippine statutes that the head office shall answer for the liabilities of its branch. Now, suppose the Philippine
branch of Citibank suddenly closes for some reason. Citibank N.A. would then be required to answer for the deposit liabilities of Citibank
Philippines. If the Court were to adopt the posture of PDIC that the head office and the branch are two separate entities and that the
funds placed by the head office and its foreign branches with the Philippine branch are considered deposits within the meaning of the
PDIC Charter, it would result to the incongruous situation where Citibank, as the head office, would be placed in the ridiculous position of
having to reimburse itself, as depositor, for the losses it may incur occasioned by the closure of Citibank Philippines. Surely our law
makers could not have envisioned such a preposterous circumstance when they created PDIC.
Finally, the Court agrees with the CA ruling that there is nothing in the definition of a bank and a banking institution in Section
3(b) of the PDIC Charter[27] which explicitly states that the head office of a foreign bank and its other branches are separate and distinct
from their Philippine branches.
There is no need to complicate the matter when it can be solved by simple logic bolstered by law and jurisprudence. Based on the
foregoing, it is clear that the head office of a bank and its branches are considered as one under the eyes of the law. While branches are
treated as separate business units for commercial and financial reporting purposes, in the end, the head office remains responsible and
answerable for the liabilities of its branches which are under its supervision and control. As such, it is unreasonable for PDIC to require
the respondents, Citibank and BA, to insure the money placements made by their home office and other branches. Deposit insurance is
superfluous and entirely unnecessary when, as in this case, the institution holding the funds and the one which made the placements are
one and the same legal entity.
Funds not a deposit under the definition

of the PDIC Charter;
To refute PDICs allegations, the respondents explain the inter-branch transactions which necessitate the creation of the accounts or
placements subject of this case. When the Philippine branch needs to procure foreign currencies, it will coordinate with a branch in
another country which handles foreign currency purchases. Both branches have existing accounts with their head office and when a
money placement is made in relation to the acquisition of foreign currency from the international market, the amount is credited to the
account of the Philippine branch with its head office while the same is debited from the account of the branch which facilitated the
purchase. This is further documented by the issuance of a certificate of time deposit with a stated interest rate and maturity date. The
interest rate represents the cost of obtaining the funds while the maturity date represents the date on which the placement must be
returned. On the maturity date, the amount previously credited to the account of the Philippine branch is debited, together with the cost
for obtaining the funds, and credited to the account of the other branch. The respondents insist that the interest rate and maturity date
are simply the basis for the debit and credit entries made by the head office in the accounts of its branches to reflect the inter-branch
accommodation.[30] As regards the maintenance of currency cover over the subject money placements, the respondents point out that
they maintain foreign currency cover in excess of what is required by law as a matter of prudent banking practice.[31]
PDIC attempts to define money placement in order to impugn the respondents claim that the funds received from their head office and
other branches are money placements and not deposits, as defined under the PDIC Charter. In the process, it loses sight of the important
issue in this case, which is the determination of whether the funds in question are subject to assessment for deposit insurance as required
by the PDIC Charter. In its struggle to find an adequate definition of money placement, PDIC desperately cites R.A. No. 6848, The
Charter of the Al-Amanah Islamic Investment Bank of the Philippines. Reliance on the said law is unfounded because nowhere in the law
is the term money placement defined. Additionally, R.A. No. 6848 refers to the establishment of an Islamic bank subject to the rulings
of Islamic Sharia to assist in the development of the Autonomous Region of Muslim Mindanao (ARMM),*32+ making it utterly irrelevant to
the case at bench. Since Citibank and BA are neither Islamic banks nor are they located anywhere near the ARMM, then it should be
painfully obvious that R.A. No. 6848 cannot aid us in deciding this case.
Furthermore, PDIC heavily relies on the fact that the respondents documented the money placements with certificates of time deposit to
simply conclude that the funds involved are deposits, as contemplated by the PDIC Charter, and are consequently subject to assessment
for deposit insurance. It is this kind of reasoning that creates non-existent obscurities in the law and obstructs the prompt resolution of
what is essentially a straightforward issue, thereby causing this case to drag on for more than three decades.
Excluded from assessment
PDIC avers that the funds are dollar deposits and not money placements. Citing R.A. No. 6848, it defines money placement as a deposit
which is received with authority to invest. Because there is no evidence to indicate that the respondents were authorized to invest the
subject dollar deposits, it argues that the same cannot be considered money placements.[28] PDIC then goes on to assert that the funds
received by Citibank and BA are deposits, as contemplated by Section 3(f) of R.A. No. 3591, for the following reasons: (1) the dollar
deposits were received by Citibank and BA in the course of their banking operations from their respective head office and foreign
branches and were recorded in their books as Account-Head Office/Branches-Time Deposits pursuant to Central Bank Circular No. 343
which implements R.A. No. 6426; (2) the dollar deposits were credited as dollar time accounts and were covered by Certificates of Dollar
Time Deposit which were interest-bearing and payable upon maturity, and (3) the respondents maintain 100% foreign currency cover for
their deposit liability arising from the dollar time deposits as required by Section 4 of R.A. No. 6426.[29]
CMV
Noticeably, PDIC does not dispute the veracity of the internal transactions of the respondents which gave rise to the issuance of the
certificates of time deposit for the funds the subject of the present dispute. Neither does it question the findings of the RTC and the CA
that the money placements were made, and were payable, outside of the Philippines, thus, making them fall under the exclusions to
deposit liabilities. PDIC also fails to impugn the truth of the testimony of John David Shaffer, then a Fiscal Agent and Head of the
Assessment Section of the FDIC, that inter-branch deposits were excluded from the assessment base. Therefore, the determination of
facts of the lower courts shall be accepted at face value by this Court, following the well-established principle that factual findings of the
trial court, when adopted and confirmed by the CA, are binding and conclusive on this Court, and will generally not be reviewed on
appeal.[33]
51
As explained by the respondents, the transfer of funds, which resulted from the inter-branch transactions, took place in the books of
account of the respective branches in their head office located in the United States. Hence, because it is payable outside of the
Philippines, it is not considered a deposit pursuant to Section 3(f) of the PDIC Charter:
Chairperson,
LEONARDO-DE CASTRO,
BERSAMIN,
Sec. 3(f) The term deposit means the unpaid balance of money or its equivalent received by a bank in the usual course of business and
for which it has given or is obliged to give credit to a commercial, checking, savings, time or thrift account or which is evidenced by its
certificate of deposit, and trust funds held by such bank whether retained or deposited in any department of said bank or deposit in
another bank, together with such other obligations of a bank as the Board of Directors shall find and shall prescribe by regulations to be
deposit liabilities of the Bank; Provided, that any obligation of a bank which is payable at the office of the bank located outside of the
Philippines shall not be a deposit for any of the purposes of this Act or included as part of the total deposits or of the insured deposits;
Provided further, that any insured bank which is incorporated under the laws of the Philippines may elect to include for insurance its
deposit obligation payable only at such branch. [Emphasis supplied]
DEL CASTILLO, and

VILLARAMA, JR., JJ.
SAIDALI PASAWILAN, WILFREDO VERCELES AND MELCHOR BULUSAN,
Respondents.
Promulgated:
The testimony of Mr. Shaffer as to the treatment of such inter-branch deposits by the FDIC, after which PDIC was modelled, is also
persuasive. Inter-branch deposits refer to funds of one branch deposited in another branch and both branches are part of the same
parent company and it is the practice of the FDIC to exclude such inter-branch deposits from a banks total deposit liabilities subject to
assessment.[34]
All things considered, the Court finds that the funds in question are not deposits within the definition of the PDIC Charter and are,
thus, excluded from assessment.
September 14, 2011

x-- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
DECISION
VILLARAMA, JR., J.:
WHEREFORE, the petition is DENIED. The October 27, 2005 Decision of the Court of Appeals in CA-G.R. CV No. 61316 is AFFIRMED.
ALERT SECURITY AND INVESTIGATION AGENCY, INC. AND/OR MANUEL D. DASIG,
Petitioners,
This petition for review on certiorari assails the Decision[1] dated February 1, 2008 of the Court of Appeals (CA) in CA-G.R. SP No. 99861.
The appellate court reversed and set aside the January 31, 2007 Decision[2] and March 15, 2007 Resolution[3] of the National Labor
Relations Commission (NLRC) and reinstated the Labor Arbiters Decision*4+ finding petitioners guilty of illegal dismissal.
The facts follow.
Respondents Saidali Pasawilan, Wilfredo Verceles and Melchor Bulusan were all employed by petitioner Alert Security and Investigation
Agency, Inc. (Alert Security) as security guards beginning March 31, 1996, January 14, 1997, and January 24, 1997, respectively. They
were paid 165.00 pesos a day as regular employees, and assigned at the Department of Science and Technology (DOST) pursuant to a
security service contract between the DOST and Alert Security.
- versus G.R. No. 182397
Present:
CORONA, C.J.,
CMV
Respondents aver that because they were underpaid, they filed a complaint for money claims against Alert Security and its president and
general manager, petitioner Manuel D. Dasig, before Labor Arbiter Ariel C. Santos. As a result of their complaint, they were relieved from
their posts in the DOST and were not given new assignments despite the lapse of six months. On January 26, 1999, they filed a joint
complaint for illegal dismissal against petitioners.
Petitioners, on the other hand, deny that they dismissed the respondents. They claimed that from the DOST, respondents were merely
detailed at the Metro Rail Transit, Inc. at the Light Rail Transit Authority (LRTA) Compound in Aurora Blvd. because the wages therein
were already adjusted to the latest minimum wage. Petitioners presented Duty Detail Orders*5+ that Alert Security issued to show that
respondents were in fact assigned to LRTA. Respondents, however, failed to report at the LRTA and instead kept loitering at the DOST and
52
tried to convince other security guards to file complaints against Alert Security. Thus, on August 3, 1998, Alert Security filed a termination
report*6+ with the Department of Labor and Employment relative to the termination of the respondents.
SO ORDERED.[14]
Upon motion of the respondents, the joint complaint for illegal dismissal was ordered consolidated with respondents earlier complaint
for money claims. The records of the illegal dismissal case were sent to Labor Arbiter Ariel C. Santos, but later returned to the Office of
the Labor Arbiter hearing the illegal dismissal complaint because a Decision[7] has already been rendered in the complaint for money
claims on July 14, 1999. In that decision, the complaint for money claims was dismissed for lack of merit but petitioners were ordered to
pay respondents their latest salary differentials.
On July 28, 2000, Labor Arbiter Melquiades Sol D. Del Rosario rendered a Decision[8] on the complaint for illegal dismissal. The Labor
Arbiter ruled:
CONFORMABLY WITH THE FOREGOING, judgment is hereby rendered finding complainants to have been illegally dismissed.
Consequently, each complainant should be paid in solidum by the respondents the individual awards computed in the body of the
decision, which is hereto adopted as part of this disposition.
SO ORDERED.[9]
Aggrieved, petitioners appealed the decision to the NLRC claiming that the Labor Arbiter erred in deciding a re-filed case when it was filed
in violation of the prohibitions against litis pendencia and forum shopping. Further, petitioners argued that complainants were not
illegally dismissed but were only transferred. They claimed that it was the respondents who refused to report for work in their new
assignment.
On January 31, 2007, the NLRC rendered a Decision[10] ruling that Labor Arbiter Del Rosario did not err in taking cognizance of
respondents complaint for illegal dismissal because the July 14, 1999 Decision of Labor Arbiter Santos on the complaint for money claims
did not at all pass upon the issue of illegal dismissal. The NLRC, however, dismissed the complaint for illegal dismissal after ruling that the
fact of dismissal or termination of employment was not sufficiently established. According to the NLRC, *the+ sweeping generalization
that the complainants were constructively dismissed is not sufficient to establish the existence of illegal dismissal.*11+ The dispositive
portion of the NLRC decision reads:
WHEREFORE, premises considered, the respondents appeal is hereby given due course and the decision dated July 28, 2000 is hereby
REVERSED and SET-ASIDE and a new one entered DISMISSING the complaint for illegal dismissal for lack of merit.
Petitioners filed a motion for reconsideration, but the motion was denied in a Resolution[15] dated March 31, 2008.
Petitioners are now before this Court to seek relief by way of a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended.
Petitioners argue that the CA erred when it held that the NLRC committed grave abuse of discretion. According to petitioners, the NLRC
was correct when it ruled that there was no sufficient basis to rule that respondents were terminated from their employment while there
was proof that they were merely transferred from DOST to LRTA as shown in the Duty Detail Orders. Verily, petitioners claim that there
was no termination at all; instead, respondents abandoned their employment by refusing to report for duty at the LRTA Compound.
Further, petitioners argue that the CA erred when it reinstated the July 28, 2000 Decision of Labor Arbiter Del Rosario in its entirety. The
dispositive portion of said decision ruled that respondents should be paid their monetary awards in solidum by Alert Security and Manuel
D. Dasig, its President and General Manager. They argue that Alert Security is a duly organized domestic corporation which has a legal
personality separate and distinct from its members or owners. Hence, liability for whatever compensation or money claims owed to
employees must be borne solely by Alert Security and not by any of its individual stockholders or officers.
On the other hand, respondents claim that the NLRC committed a serious error in ruling that they failed to provide factual substantiation
of their claim of constructive dismissal. Respondents aver that their Complaint Form[16] sufficiently constitutes the basis of their claim of
illegal dismissal. Also, respondents aver that Alert Security itself admitted that respondents were relieved from their posts as security
guards in DOST, albeit raising the defense that it was a mere transfer as shown by Duty Detail Orders, which, however, were never
received by respondents, as observed by the Labor Arbiter.
Essentially, the issue for resolution is whether respondents were illegally dismissed.
We rule in the affirmative.
As a rule, employment cannot be terminated by an employer without any just or authorized cause. No less than the 1987 Constitution in
Section 3, Article 13 guarantees security of tenure for workers and because of this, an employee may only be terminated for just[17] or
authorized[18] causes that
must comply with the due process requirements mandated[19] by law. Hence, employers are barred from arbitrarily removing their
workers whenever and however they want. The law sets the valid grounds for termination as well as the proper procedure to take when
terminating the services of an employee.
SO ORDERED.[12]
Unfazed, respondents filed a petition for certiorari with the CA questioning the NLRC decision and alleging grave abuse of discretion.
On February 1, 2008, the CA rendered the assailed Decision[13] reversing and setting aside the NLRC decision and reinstating the July 28,
2000 Decision of Labor Arbiter Del Rosario. The CA ruled that Alert Security, as an employer, failed to discharge its burden to show that
the employees separation from employment was not motivated by discrimination, made in bad faith, or effected as a form of punishment
or demotion without sufficient cause. The CA also found that respondents were never informed of the Duty Detail Orders transferring
them to a new post, thereby making the alleged transfer ineffective. The dispositive portion of the CA decision states:
WHEREFORE, premises considered, the January 31, 2007 decision of the NLRC is hereby REVERSED and SET ASIDE and the July 28, 2000
decision of the Labor Arbiter is hereby REVIVED.
CMV
In De Guzman, Jr. v. Commission on Elections,[20] the Court, speaking of the Constitutional guarantee of security of tenure to all workers,
ruled:
x x x It only means that an employee cannot be dismissed (or transferred) from the service for causes other than those provided by
law and after due process is accorded the employee. What it seeks to prevent is capricious exercise of the power to dismiss. x x x
(Emphasis supplied.)
Although we recognize the right of employers to shape their own work force, this management prerogative must not curtail the basic
right of employees to security of tenure. There must be a valid and lawful reason for terminating the employment of a worker.
Otherwise, it is illegal and would be dealt with by the courts accordingly.
As stated in Bascon v. Court of Appeals:[21]
53
x x x The employers power to dismiss must be tempered with the employees right to security of tenure. Time and again we have
said that the preservation of the lifeblood of the toiling laborer comes before concern for business profits. Employers must be reminded
to exercise the power to dismiss with great caution, for the State will not hesitate to come to the succor of workers wrongly dismissed by
capricious employers.
In the case at bar, respondents were relieved from their posts because they filed with the Labor Arbiter a complaint against their
employer for money claims due to underpayment of wages. This reason is unacceptable and illegal. Nowhere in the law providing for the
just and authorized causes of termination of employment is there any direct or indirect reference to filing a legitimate complaint for
money claims against the employer as a valid ground for termination.
The Labor Code, as amended, enumerates several just and authorized causes for a valid termination of employment. An employee
asserting his right and asking for minimum wage is not among those causes. Dismissing an employee on this ground amounts to
retaliation by management for an employees legitimate grievance without due process. Such stroke of retribution has no place in
Philippine Labor Laws.
Petitioners aver that respondents were merely transferred to a new post wherein the wages are adjusted to the current minimum wage
standards. They maintain that the respondents voluntarily abandoned their jobs when they failed to report for duty in the new location.
Assuming this is true, we still cannot hold that the respondents abandoned their posts. For abandonment of work to fall under Article 282
(b) of the Labor Code, as amended, as gross and habitual neglect of duties there must be the concurrence of two elements. First, there
should be a failure of the employee to report for work without a valid or justifiable reason, and second, there should be a showing that
the employee intended to sever the employer-employee relationship, the second element being the more determinative factor as
manifested by overt acts.[22]
As regards the second element of intent to sever the employer-employee relationship, the CA correctly ruled that:
x x x the fact that petitioners filed a complaint for illegal dismissal is indicative of their intention to remain employed with private
respondent considering that one of their prayers in the complaint is for re-instatement. As declared by the Supreme Court, a complaint
for illegal dismissal is inconsistent with the charge of abandonment, because when an employee takes steps to protect himself against a
dismissal, this cannot, by logic, be said to be abandonment by him of his right to be able to work.[23]
Further, according to Alert Security itself, respondents continued to report for work and loiter in the DOST after the alleged transfer order
was issued. Such circumstance makes it unlikely that respondents have clear intention of leaving their respective jobs. In any case, there
is no dispute that in cases of abandonment of work, notice shall be served at the workers last known address.*24+ This petitioners failed
to do.
On the element of the failure of the employee to report for work, we also cannot accept the allegations of petitioners that respondents
unjustifiably refused to report for duty in their new posts. A careful review of the records reveals that there is no showing that
respondents were notified of their new assignments. Granting that the Duty Detail Orders were indeed issued, they served no purpose
unless the intended recipients of the orders are informed of such.
x x x The managerial prerogative to transfer personnel must be exercised without grave abuse of discretion, bearing in mind the
basic elements of justice and fair play. Having the right should not be confused with the manner in which that right is exercised. Thus, it
cannot be used as a subterfuge by the employer to rid himself of an undesirable worker. In particular, the employer must be able to show
that the transfer is not unreasonable, inconvenient or prejudicial to the employee; nor does it involve a demotion in rank or a diminution
of his salaries, privileges and other benefits. x x x
In addition to these tests for a valid transfer, there should be proper and effective notice to the employee concerned. It is the employers
burden to show that the employee was duly notified of the transfer. Verily, an employer cannot reasonably expect an employee to
report for work in a new location without first informing said employee of the transfer. Petitioners insistence on the sufficiency of mere
issuance of the transfer order is indicative of bad faith on their part.
Besides, according to petitioners, the reason for the transfer to LRTA of the respondents was that the wages in LRTA were already
adjusted to comply with the minimum wage rates. Now it is hard to believe that after being ordered to transfer to LRTA where the wages
are better, the respondents would still refuse the transfer. That would mean that the respondents refused better wages and instead
chose to remain in DOST, underpaid, and go through the lengthy process of claiming and asking for minimum wage. This proposed
scenario of petitioners simply does not jibe with human logic and experience.
On the question of the propriety of holding petitioner Manuel D. Dasig, president and general manager of Alert Security, solidarily liable
with Alert Security for the payment of the money awards in favor of respondents, we find petitioners arguments meritorious.
Basic is the rule that a corporation has a separate and distinct personality apart from its directors, officers, or owners. In exceptional
cases, courts find it proper to breach this corporate personality in order to make directors, officers, or owners solidarily liable for the
companies acts. Section 31, Paragraph 1 of the Corporation Code[26] provides:
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such directors, or trustees shall be liable jointly and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or members and other persons.
xxxx
Jurisprudence has been consistent in defining the instances when the separate and distinct personality of a corporation may be
disregarded in order to hold the directors, officers, or owners of the corporation liable for corporate debts. In McLeod v. National Labor
Relations Commission,[27] the Court ruled:
Thus, the rule is still that the doctrine of piercing the corporate veil applies only when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime. 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. x x x
Further, in Carag v. National Labor Relations Commission,[28] the Court clarified the McLeod doctrine as regards labor laws, to wit:
The employer cannot simply conclude that an employee is ipso facto notified of a transfer when there is no evidence to indicate that the
employee had knowledge of the transfer order. Hence, the failure of an employee to report for work at the new location cannot be taken
against him as an element of abandonment.
We have already ruled in McLeod v. NLRC[29] and Spouses Santos v. NLRC[30] that Article 212(e)[31] of the Labor Code, by itself,
does not make a corporate officer personally liable for the debts of the corporation. The governing law on personal liability of directors for
debts of the corporation is still Section 31 of the Corporation Code. x x x
We acknowledge and recognize the right of an employer to transfer employees in the interest of the service. This exercise is a
management prerogative which is a lawful right of an employer. However, like all rights, there are limitations to the right to transfer
employees. As ruled in the case of Blue Dairy Corporation v. NLRC:[25]
In the present case, there is no evidence to indicate that Manuel D. Dasig, as president and general manager of Alert Security, is using the
veil of corporate fiction to defeat public convenience, justify wrong, protect fraud, or defend crime. Further, there is no showing that Alert
Security has folded up its business or is reneging in its obligations. In the final analysis, it is Alert Security that respondents are after and it
is also Alert Security who should take responsibility for their illegal dismissal.
CMV
54
WHEREFORE, the petition for review on certiorari is DENIED. The Decision of the Court of Appeals in CA-G.R. SP No. 99861 and the
Decision dated July 28, 2000 of the Labor Arbiter are MODIFIED. Petitioner Manuel D. Dasig is held not solidarily liable with petitioner
Alert Security and Investigation, Inc. for the payment of the monetary awards in favor of respondents. Said Decision of the Court of
Appeals in all other aspects is AFFIRMED.
On several occasions, from June 23, 1997 to September 3, 1997, respondent International Exchange Bank (iBank), granted loans to
Hammer Garments Corporation (Hammer), covered by promissory notes and deeds of assignment, in the following amounts:3
With costs against the petitioners.

Date of Promissory
Note Amount
June 23, 1997
P 5,599,471.33
July 24, 1997
2,700,000.00
HEIRS OF FE TAN UY (Represented by her heir, Mauling Uy Lim), Petitioners,
July 25, 1997
2,300,000.00
vs.
August 1, 1997
2,938,505.04
INTERNATIONAL EXCHANGE BANK, Respondent.
August 1, 1997
3,361,494.96
August 14, 1997
980,000.00
August 21, 1997
2,527,200.00
August 21, 1997
3,146,715.00
September 3, 1997
1,385,511.75
SO ORDERED.
G.R. No. 166282
February 13, 2013
x-----------------------x
G.R. No. 166283
Total
GOLDKEYDEVELOPMENT CORPORATION, Petitioner,
vs.
INTERNATIONAL EXCHANGE BANK, Respondent.
DECISION
MENDOZA, J.:
Before the Court are two consolidated petitions for review on certiorari under Rule 45 of the 1997 Revised Rules of Civil Procedure,
assailing the August 16, 2004 Decision1 and the December 2, 2004 Resolution2 of the Court of Appeals (CA) in CA-G.R. CV No. 69817
entitled "International Exchange Bank v. Hammer Garments Corp., et al."
P24,938,898.08
These were made pursuant to the Letter-Agreement,4 dated March 23, 1996, between iBank and Hammer, represented by its President
and General Manager, Manuel Chua (Chua) a.k.a. Manuel Chua Uy Po Tiong, granting Hammer a P 25 Million-Peso Omnibus Line.5 The
loans were secured by a P 9 Million-Peso Real Estate Mortgage6 executed on July 1, 1997 by Goldkey Development Corporation (Goldkey)
over several of its properties and a P 25 Million-Peso Surety Agreement7 signed by Chua and his wife, Fe Tan Uy (Uy), on April 15, 1996.
As of October 28, 1997, Hammer had an outstanding obligation of P25,420,177.62 to iBank.8 Hammer defaulted in the payment of its
loans, prompting iBank to foreclose on Goldkeys third-party Real Estate Mortgage. The mortgaged properties were sold for P 12 million
during the foreclosure sale, leaving an unpaid balance of P 13,420,177.62.9 For failure of Hammer to pay the deficiency, iBank filed a
Complaint10 for sum of money on December 16, 1997 against Hammer, Chua, Uy, and Goldkey before the Regional Trial Court, Makati
City (RTC).11
Despite service of summons, Chua and Hammer did not file their respective answers and were declared in default. In her separate answer,
Uy claimed that she was not liable to iBank because she never executed a surety agreement in favor of iBank. Goldkey, on the other hand,
also denies liability, averring that it acted only as a third-party mortgagor and that it was a corporation separate and distinct from
Hammer.12
The Facts
CMV
55
Meanwhile, iBank applied for the issuance of a writ of preliminary attachment which was granted by the RTC in its December 17, 1997
Order.13 The Notice of Levy on Attachment of Real Properties, dated July 15, 1998, covering the properties under the name of Goldkey,
was sent by the sheriff to the Registry of Deeds of Quezon City.14
Simplifying the issues in this case, the Court must resolve the following: (1) whether Uy can be held liable to iBank for the loan obligation
of Hammer as an officer and stockholder of the said corporation; and (2) whether Goldkey can be held liable for the obligation of Hammer
for being a mere alter ego of the latter.
The RTC, in its Decision,15 dated December 27, 2000, ruled in favor of iBank. While it made the pronouncement that the signature of Uy
on the Surety Agreement was a forgery, it nevertheless held her liable for the outstanding obligation of Hammer because she was an
officer and stockholder of the said corporation. The RTC agreed with Goldkey that as a third-party mortgagor, its liability was limited to
the properties mortgaged. It came to the conclusion, however, that Goldkey and Hammer were one and the same entity for the following
reasons: (1) both were family corporations of Chua and Uy, with Chua as the President and Chief Operating Officer; (2) both corporations
shared the same office and transacted business from the same place, (3) the assets of Hammer and Goldkey were co-mingled; and (4)
when Chua absconded, both Hammer and Goldkey ceased to operate. As such, the piercing of the veil of corporate fiction was warranted.
Uy, as an officer and stockholder of Hammer and Goldkey, was found liable to iBank together with Chua, Hammer and Goldkey for the
deficiency of P13,420,177.62.
The Courts Ruling
The petitions are partly meritorious.
Uy is not liable; The piercing of the

veil of corporate fiction is not justified
Aggrieved, the heirs of Uy and Goldkey (petitioners) elevated the case to the CA. On August 16, 2004, it promulgated its decision affirming
the findings of the RTC. The CA found that iBank was not negligent in evaluating the financial stability of Hammer. According to the
appellate court, iBank was induced to grant the loan because petitioners, with intent to defraud the bank, submitted a falsified Financial
Report for 1996 which incorrectly declared the assets and cashflow of Hammer.16 Because petitioners acted maliciously and in bad faith
and used the corporate fiction to defraud iBank, they should be treated as one and the same as Hammer.17
The heirs of Uy argue that the latter could not be held liable for being merely an officer of Hammer and Goldkey because it was not shown
that she had committed any actionable wrong22 or that she had participated in the transaction between Hammer and iBank. They further
claim that she had cut all ties with Hammer and her husband long before the execution of the loan.23
The Court finds in favor of Uy.

Hence, these petitions filed separately by the heirs of Uy and Goldkey. On February 9, 2005, this Court ordered the consolidation of the
two cases.18
The Issues
Petitioners raise the following issues:
Whether or not a trial court, under the facts of this case, can go out of the issues raised by the pleadings;19
Basic is the rule in corporation law that a corporation is a juridical entity which is vested with a legal personality separate and distinct from
those acting for and in its behalf and, in general, from the people comprising it. Following this principle, obligations incurred by the
corporation, acting through its directors, officers and employees, are its sole liabilities. A director, officer or employee of a corporation is
generally not held personally liable for obligations incurred by the corporation.24 Nevertheless, this legal fiction may be disregarded if it is
used as a means to perpetrate fraud or an illegal act, or as a vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues.25 This is consistent with the provisions of the Corporation Code of the Philippines, which states:
Sec. 31. Liability of directors, trustees or officers. Directors or trustees who wilfully and knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire any personal
or pecuniary interest in conflict with their duty as such directors or trustees shall be liable jointly and severally for all damages resulting
therefrom suffered by the corporation, its stockholders or members and other persons.
Whether or not there is guilt by association in those cases where the veil of corporate fiction may be pierced;20 and
Solidary liability will then attach to the directors, officers or employees of the corporation in certain circumstances, such as:
Whether or not the "alter ego" theory in disregarding the corporate personality of a corporation is applicable to Goldkey.21
CMV
56
1. When directors and trustees or, in appropriate cases, the officers of a corporation: (a) vote for or assent to patently unlawful acts of the
corporation; (b) act in bad faith or with gross negligence in directing the corporate affairs; and (c) are guilty of conflict of interest to the
prejudice of the corporation, its stockholders or members, and other persons;
2. When a director or officer has consented to the issuance of watered stocks or who, having knowledge thereof, did not forthwith file
with the corporate secretary his written objection thereto;
3. When a director, trustee or officer has contractually agreed or stipulated to hold himself personally and solidarily liable with the
corporation; or
At most, Uy could have been charged with negligence in the performance of her duties as treasurer of Hammer by allowing the company
to contract a loan despite its precarious financial position. Furthermore, if it was true, as petitioners claim, that she no longer performed
the functions of a treasurer, then she should have formally resigned as treasurer to isolate herself from any liability that could result from
her being an officer of the corporation. Nonetheless, these shortcomings of Uy are not sufficient to justify the piercing of the corporate
veil which requires that the negligence of the officer must be so gross that it could amount to bad faith and must be established by clear
and convincing evidence. Gross negligence is one that is characterized by the lack of the slightest care, acting or failing to act in a situation
where there is a duty to act, wilfully and intentionally with a conscious indifference to the consequences insofar as other persons may be
affected.30
It behooves this Court to emphasize that the piercing of the veil of corporate fiction is frowned upon and can only be done if it has been
clearly established that the separate and distinct personality of the corporation is used to justify a wrong, protect fraud, or perpetrate a
deception.31 As aptly explained in Philippine National Bank v. Andrada Electric & Engineering Company:32
4. When a director, trustee or officer is made, by specific provision of law, personally liable for his corporate action.26
Before a director or officer of a corporation can be held personally liable for corporate obligations, however, the following requisites must
concur: (1) the complainant must allege in the complaint that the director or officer assented to patently unlawful acts of the corporation,
or that the officer was guilty of gross negligence or bad faith; and (2) the complainant must clearly and convincingly prove such unlawful
acts, negligence or bad faith.27
While it is true that the determination of the existence of any of the circumstances that would warrant the piercing of the veil of
corporate fiction is a question of fact which cannot be the subject of a petition for review on certiorari under Rule 45, this Court can take
cognizance of factual issues if the findings of the lower court are not supported by the evidence on record or are based on a
misapprehension of facts.28
In this case, petitioners are correct to argue that it was not alleged, much less proven, that Uy committed an act as an officer of Hammer
that would permit the piercing of the corporate veil. A reading of the complaint reveals that with regard to Uy, iBank did not demand that
she be held liable for the obligations of Hammer because she was a corporate officer who committed bad faith or gross negligence in the
performance of her duties such that the lifting of the corporate mask would be merited. What the complaint simply stated is that she,
together with her errant husband Chua, acted as surety of Hammer, as evidenced by her signature on the Surety Agreement which was
later found by the RTC to have been forged.29
Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu
where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be
presumed. Otherwise, an injustice that was never unintended may result from an erroneous application.33
Indeed, there is no showing that Uy committed gross negligence. And in the absence of any of the aforementioned requisites for making a
corporate officer, director or stockholder personally liable for the obligations of a corporation, Uy, as a treasurer and stockholder of
Hammer, cannot be made to answer for the unpaid debts of the corporation.
Goldkey is a mere alter ego of Hammer
Goldkey contends that it cannot be held responsible for the obligations of its stockholder, Chua.34 Moreover, it theorizes that iBank is
estopped from expanding Goldkeys liability beyond the real estate mortgage.35 It adds that it did not authorize the execution of the said
mortgage.36 Finally, it passes the blame on to iBank for failing to exercise the requisite due diligence in properly evaluating Hammers
creditworthiness before it was extended an omnibus line.37
The Court disagrees with Goldkey.

Considering that the only basis for holding Uy liable for the payment of the loan was proven to be a falsified document, there was no
sufficient justification for the RTC to have ruled that Uy should be held jointly and severally liable to iBank for the unpaid loan of Hammer.
Neither did the CA explain its affirmation of the RTCs ruling against Uy. The Court cannot give credence to the simplistic declaration of the
RTC that liability would attach directly to Uy for the sole reason that she was an officer and stockholder of Hammer.
CMV
There is no reason to discount the findings of the CA that iBank duly inspected the viability of Hammer and satisfied itself that the latter
was a good credit risk based on the Financial Statement submitted. In addition, iBank required that the loan be secured by Goldkeys Real
Estate Mortgage and the Surety Agreement with Chua and Uy. The records support the factual conclusions made by the RTC and the CA.
57
To the Courts mind, Goldkeys argument, that iBank is barred from pursuing Goldkey for the satisfaction of the unpaid obligation of
Hammer because it had already limited its liability to the real estate mortgage, is completely absurd. Goldkey needs to be reminded that it
is being sued not as a consequence of the real estate mortgage, but rather, because it acted as an alter ego of Hammer. Accordingly, they
must be treated as one and the same entity, making Goldkey accountable for the debts of Hammer.
In fact, it is Goldkey who is now precluded from denying the validity of the Real Estate Mortgage. In its Answer with Affirmative Defenses
and Compulsory Counterclaim, dated January 5, 1998, it already admitted that it acted as a third-party mortgagor to secure the obligation
of Hammer to iBank.38 Thus, it cannot, at this late stage, question the due execution of the third-party mortgage.
1. Both corporations are family corporations of defendants Manuel Chua and his wife Fe Tan Uy. The other incorporators and
shareholders of the two corporations are the brother and sister of Manuel Chua (Benito Ng Po Hing and Nenita Chua Tan) and the sister of
Fe Tan Uy, Milagros Revilla. The other incorporator/share holder is Manling Uy, the daughter of Manuel Chua Uy Po Tiong and Fe Tan Uy.
The stockholders of Hammer Garments as of March 23, 1987, aside from spouses Manuel and Fe Tan Uy are: Benito Chua, brother Manuel
Chua, Nenita Chua Tan, sister of Manuel Chua and Tessie See Chua Tan. On March 8, 1988, the shares of Tessie See Chua Uy were
assigned to Milagros T. Revilla, thereby consolidating the shares in the family of Manuel Chua and Fe Tan Uy.
2. Hammer Garments and Goldkey share the same office and practically transact their business from the same place.
Similarly, Goldkey is undoubtedly mistaken in claiming that iBank is seeking to enforce an obligation of Chua. The records clearly show
that it was Hammer, of which Chua was the president and a stockholder, which contracted a loan from iBank. What iBank sought was
redress from Goldkey by demanding that the veil of corporate fiction be lifted so that it could not raise the defense of having a separate
juridical personality to evade liability for the obligations of Hammer.
Under a variation of the doctrine of piercing the veil of corporate fiction, 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 one and the same.39
While the conditions for the disregard of the juridical entity may vary, the following are some probative factors of identity that will justify
the application of the doctrine of piercing the corporate veil, as laid down in Concept Builders, Inc. v NLRC:40
3. Defendant Manuel Chua is the President and Chief Operating Officer of both corporations. All business transactions of Goldkey and
Hammer are done at the instance of defendant Manuel Chua who is authorized to do so by the corporations.
The promissory notes subject of this complaint are signed by him as Hammers President and General Manager. The third-party real estate
mortgage of defendant Goldkey is signed by him for Goldkey to secure the loan obligation of Hammer Garments with plaintiff "iBank". The
other third-party real estate mortgages which Goldkey executed in favor of the other creditor banks of Hammer are also assigned by
Manuel Chua.
4. The assets of Goldkey and Hammer are co-mingled. The real properties of Goldkey are mortgaged to secure Hammers obligation with
creditor banks.
(1) Stock ownership by one or common ownership of both corporations;
(2) Identity of directors and officers;
The proceed of at least two loans which Hammer obtained from plaintiff "iBank", purportedly to finance its export to Wal-Mart are
instead used to finance the purchase of a managers check payable to Goldkey. The defendants claim that Goldkey is a creditor of
Hammer to justify its receipt of the Managers check is not substantiated by evidence. Despite subpoenas issued by this Court, Goldkey
thru its treasurer, defendant Fe Tan Uy and or its corporate secretary Manling Uy failed to produce the Financial Statement of Goldkey.
(3) The manner of keeping corporate books and records, and
(4) Methods of conducting the business.41
These factors are unquestionably present in the case of Goldkey and Hammer, as observed by the RTC, as follows:
CMV
5. When defendant Manuel Chua "disappeared", the defendant Goldkey ceased to operate despite the claim that the other "officers" and
stockholders like Benito Chua, Nenita Chua Tan, Fe Tan Uy, Manling Uy and Milagros T. Revilla are still around and may be able to
continue the business of Goldkey, if it were different or distinct from Hammer which suffered financial set back.42
Based on the foregoing findings of the RTC, it was apparent that Goldkey was merely an adjunct of Hammer and, as such, the legal fiction
that it has a separate personality from that of Hammer should be brushed aside as they are, undeniably, one and the same.
58
WHEREFORE, the petition are PARTLY GRANTED. The August 16, 2004 Decision and the December 2, 2004 Resolution of the Court of
Appeals in CA-G.R. CV No. 69817, are hereby MODIFIED. Fe Tan Uy is released from any liability arising from the debts incurred by
Hammer from iBank. Hammer Garments Corporation, Manuel Chua Uy Po Tiong and Goldkey Development Corporation are jointly and
severally liable to pay International Exchange Bank the sum of P13,420,177.62 representing the unpaid loan obligation of Hammer as of
December 12, 1997 plus interest. No costs.
On January 19, 1998, Maraon filed a complaint in the RTC against the Cuencas for the collection of a sum of money and damages. His
complaint, docketed as Civil Case No. 98-023, included an application for the issuance of a writ of preliminary attachment.3 On January
26, 1998, the RTC granted the application for the issuance of the writ of preliminary attachment conditioned upon the posting of a bond
of P1,000,000.00 executed in favor of the Cuencas. Less than a month later, Maraon amended the complaint to implead Tayactac as a
defendant.4
SO ORDERED.
On February 11, 1998, Maraon posted SICI Bond No. 68427 JCL (4) No. 02370 in the amount of P1,000,000.00 issued by Stronghold
Insurance. Two days later, the RTC issued the writ of preliminary attachment.5 The sheriff served the writ, the summons and a copy of the
complaint on the Cuencas on the same day. The service of the writ, summons and copy of the complaint were made on Tayactac on
February 16, 1998.6
G.R. No. 173297
March 6, 2013
STRONGHOLD INSURANCE COMPANY, INC., Petitioner,

vs.
TOMAS CUENCA, MARCELINA CUENCA, MILAGROS CUENCA, BRAMIE T. TAYACTAC, and MANUEL D. MARANON, JR., Respondents.
DECISION
BERSAMIN, J.:
The personality of a corporation is distinct and separate from the personalities of its stockholders. Hence, its stockholders are not
themselves the real parties in interest to claim and recover compensation for the damages arising from the wrongful attachment of its
assets. Only the corporation is the real party in interest for that purpose.
Enforcing the writ of preliminary attachment on February 16 and February 17, 1998, the sheriff levied upon the equipment, supplies,
materials and various other personal property belonging to Arc Cuisine, Inc. that were found in the leased corporate office-cumcommissary or kitchen of the corporation.7 On February 19, 1998, the sheriff submitted a report on his proceedings,8 and filed an ex
parte motion seeking the transfer of the levied properties to a safe place. The RTC granted the ex parte motion on February 23, 1998.9
On February 25, 1998, the Cuencas and Tayactac presented in the RTC a Motion to Dismiss and to Quash Writ of Preliminary Attachment
on the grounds that: (1) the action involved intra-corporate matters that were within the original and exclusive jurisdiction of the
Securities and Exchange Commission (SEC); and (2) there was another action pending in the SEC as well as a criminal complaint in the
Office of the City Prosecutor of Paraaque City.10
On March 5, 1998, Maraon opposed the motion.11
On August 10, 1998, the RTC denied the Motion to Dismiss and to Quash Writ of Preliminary Attachment, stating that the action, being
one for the recovery of a sum of money and damages, was within its jurisdiction.12
The Case
Stronghold Insurance Company, Inc. (Stronghold Insurance), a domestic insurance company, assails the decision promulgated on January
31, 2006,1 whereby the Court of Appeals (CA) in CA-G.R. CV No. 79145 affirmed the judgment rendered on April 28, 2003 by the Regional
Trial Court in Parafiaque City (RTC) holding Stronghold Insurance and respondent Manuel D. Marafion, Jr. jointly and solidarily liable for
damages to respondents Tomas Cuenca, Marcelina Cuenca, Milagros Cuenca (collectively referred to as Cuencas), and Bramie Tayactac,
upon the latters claims against the surety bond issued by Stronghold Insurance for the benefit of Maraon.2
Under date of September 3, 1998, the Cuencas and Tayactac moved for the reconsideration of the denial of their Motion to Dismiss and to
Quash Writ of Preliminary Attachment, but the RTC denied their motion for reconsideration on September 16, 1998.
Thus, on October 14, 1998, the Cuencas and Tayactac went to the CA on certiorari and prohibition to challenge the August 10, 1998 and
September 16, 1998 orders of the RTC on the basis of being issued with grave abuse of discretion amounting to lack or excess of
jurisdiction (C.A.-G.R. SP No. 49288).13
Antecedents
CMV
59
On June 16, 1999, the CA promulgated its assailed decision in C.A.-G.R. SP No. 49288,14 granting the petition. It annulled and set aside the
challenged orders, and dismissed the amended complaint in Civil Case No. 98-023 for lack of jurisdiction, to wit:
Stronghold Insurance filed its answer and opposition on April 13, 2000. In turn, the Cuencas and Tayactac filed their reply on May 5, 2000.
WHEREFORE, the Orders herein assailed are hereby ANNULLED AND SET ASIDE, and the judgment is hereby rendered DISMISSING the
Amended Complaint in Civil Case No. 98-023 of the respondent court, for lack of jurisdiction.
SO ORDERED.
On May 25, 2000, Maraon filed his own comment/opposition to the Motion to Require Sheriff to Deliver Attached Properties and to Set
Case for Hearing of the Cuencas and Tayactac, arguing that because the attached properties belonged to Arc Cuisine, Inc. 50% of the
stockholding of which he and his relatives owned, it should follow that 50% of the value of the missing attached properties constituted
liquidating dividends that should remain with and belong to him. Accordingly, he prayed that he should be required to return only
P100,000.00 to the Cuencas and Tayactac.18
On December 27, 1999, the CA remanded to the RTC for hearing and resolution of the Cuencas and Tayactacs claim for the damages
sustained from the enforcement of the writ of preliminary attachment.15
On June 5, 2000, the RTC commanded Maraon to surrender all the attached properties to the RTC through the sheriff within 10 days
from notice; and directed the Cuencas and Tayactac to submit the affidavits of their witnesses in support of their claim for damages.19
On February 17, 2000,16 the sheriff reported to the RTC, as follows:
On June 6, 2000, the Cuencas and Tayactac submitted their Manifestation and Compliance.20
On the scheduled inventory of the properties (February 17, 2000) and to comply with the Resolution of the Court of Appeals dated
December 24, 1999 ordering the delivery of the attached properties to the defendants, the proceedings thereon being:
Ruling of the RTC
1. With the assistance for (sic) the counsel of Cuencas, Atty. Pulumbarit, Atty. Ayo, defendant Marcelina Cuenca, and two Court Personnel,
Robertson Catorce and Danilo Abanto, went to the warehouse where Mr. Maraon recommended for safekeeping the properties in which
he personally assured its safety, at No. 14, Marian II Street, East Service Road, Paraaque Metro Manila.
2. That to our surprise, said warehouse is now tenanted by a new lessee and the properties were all gone and missing.
3. That there are informations (sic) that the properties are seen at Contis Pastry & Bake Shop owned by Mr. Maraon, located at BF
Homes in Paraaque City.
On April 6, 2000, the Cuencas and Tayactac filed a Motion to Require Sheriff to Deliver Attached Properties and to Set Case for Hearing,17
praying that: (1) the Branch Sheriff be ordered to immediately deliver the attached properties to them; (2) Stronghold Insurance be
directed to pay them the damages being sought in accordance with its undertaking under the surety bond for P1,000,0000.00; (3)
Maraon be held personally liable to them considering the insufficiency of the amount of the surety bond; (4) they be paid the total of
P1,721,557.20 as actual damages representing the value of the lost attached properties because they, being accountable for the
properties, would be turning that amount over to Arc Cuisine, Inc.; and (5) Maraon be made to pay P200,000.00 as moral damages,
P100,000.00 as exemplary damages, and P100,000.00 as attorneys fees.
CMV
After trial, the RTC rendered its judgment on April 28, 2003, holding Maraon and Stronghold Insurance jointly and solidarily liable for
damages to the Cuencas and Tayactac,21 viz:
WHEREFORE, premises considered, as the defendants were able to preponderantly prove their entitlement for damages by reason of the
unlawful and wrongful issuance of the writ of attachment, MANUEL D. MARAON, JR., plaintiff and defendant, Stronghold Insurance
Company Inc., are found to be jointly and solidarily liable to pay the defendants the following amount to wit:
(1) PhP1,000,000.00 representing the amount of the bond;
(2) PhP 100,000.00 as moral damages;
(3) PhP 50,000.00 as exemplary damages;
(4) Php 100,000.00 as attorneys fees; and
60
I.
(5) To pay the cost of suit.
SO ORDERED.
THE COURT OF APPEALS COMMITTED GRAVE REVERSIBLE ERROR AND DECIDED QUESTIONS OF SUBSTANCE IN A WAY NOT IN
ACCORDANCE WITH LAW AND APPLICABLE DECISIONS OF THE HONORABLE COURT CONSIDERING THAT THE COURT OF APPEALS
AFFIRMED THE ERRONEOUS DECISION OF THE TRIAL COURT HOLDING RESPONDENT MARA[]ON AND PETITIONER STRONGHOLD JOINTLY
AND SOLIDARILY LIABLE TO PAY THE RESPONDENTS CUENCA, et al., FOR PURPORTED DAMAGES BY REASON OF THE ALLEGED UNLAWFUL
AND WRONGFUL ISSUANCE OF THE WRIT OF ATTACHMENT, DESPITE THE FACT THAT:
Ruling of the CA
Only Stronghold Insurance appealed to the CA (C.A.-G.R. CV No. 79145), assigning the following errors to the RTC, to wit:
A) RESPONDENT CUENCA et al., ARE NOT THE OWNERS OF THE PROPERTIES ATTACHED AND THUS, ARE NOT THE PROPER PARTIES TO
CLAIM ANY PURPORTED DAMAGES ARISING THEREFROM.
B) THE PURPORTED DAMAGES BY REASON OF THE ALLEGED UNLAWFUL AND WRONGFUL ISSUANCE OF THE WRIT OF ATTACHMENT WERE
CAUSED BY THE NEGLIGENCE OF THE BRANCH SHERIFF OF THE TRIAL COURT AND HIS FAILURE TO COMPLY WITH THE PROVISIONS OF THE
RULES OF COURT PERTAINING TO THE ATTACHMENT OF PROPERTIES.
I.
THE LOWER COURT ERRED IN ORDERING SURETY-APPELLANT TO PAY THE AMOUNT OF P1,000,000.00 REPRESENTING THE AMOUNT OF
THE BOND AND OTHER DAMAGES TO THE DEFENDANTS.
II.
THE LOWER COURT ERRED IN NOT TAKING INTO ACCOUNT THE INDEMNITY AGREEMENT (EXH. "2-SURETY") EXECUTED BY MANUEL D.
MARAON, JR. IN FAVOR OF STRONGHOLD WHEREIN HE BOUND HIMSELF TO INDEMNIFY STRONGHOLD OF WHATEVER AMOUNT IT MAY
BE HELD LIABLE ON ACCOUNT OF THE ISSUANCE OF THE ATTACHMENT BOND.22
On January 31, 2006, the CA, finding no reversible error, promulgated its decision affirming the judgment of the RTC.23
C) THE TRIAL COURT GRAVELY ERRED WHEN IT HELD PETITIONER STRONGHOLD TO BE SOLIDARILY LIABLE WITH RESPONDENT
MARA[]ON TO RESPONDENTS CUENCA et al., FOR MORAL DAMAGES, EXEMPLARY DAMAGES, ATTORNEYS FEES AND COST OF SUIT
DESPITE THE FACT THAT THE GUARANTY OF PETITIONER STRONGHOLD PURSUANT TO ITS SURETY BOND IS LIMITED ONLY TO THE
AMOUNT OF P1,000,000.00.
II
IN ANY EVENT, THE DECISION OF THE COURT APPEALS SHOULD HAVE HELD RESPONDENT MARA[]ON TO BE LIABLE TO INDEMNIFY
PETITIONER STRONGHOLD FOR ALL PAYMENTS, DAMAGES, COSTS, LOSSES, PENALTIES, CHARGES AND EXPENSES IT SUSTAINED IN
CONNECTION WITH THE INSTANT CASE, PURSUANT TO THE INDEMNITY AGREEMENT ENTERED INTO BY PETITIONER STRONGHOLD AND
RESPONDENT MARA[]ON.24
Stronghold Insurance moved for reconsideration, but the CA denied its motion for reconsideration on June 22, 2006.
On their part, the Cuencas and Tayactac counter:
Issues
Hence, this appeal by petition for review on certiorari by Stronghold Insurance, which submits that:
CMV
A. Having actively participated in the trial and appellate proceedings of this case before the Regional Trial Court and the Court of Appeals,
respectively, petitioner Stronghold is legally and effectively BARRED by ESTOPPEL from raising for the first time on appeal before this
Honorable Court a defense and/or issue not raised below.25
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B. Even assuming arguendo without admitting that the principle of estoppel is not applicable in this instant case, the assailed Decision and
Resolution find firm basis in law considering that the writ of attachment issued and enforced against herein respondents has been
declared ILLEGAL, NULL AND VOID for having been issued beyond the jurisdiction of the trial court.
C. There having been a factual and legal finding of the illegality of the issuance and consequently, the enforcement of the writ of
attachment, Maranon and his surety Stronghold, consistent with the facts and the law, including the contract of suretyship they entered
into, are JOINTLY AND SEVERALLY liable for the damages sustained by herein respondents by reason thereof.
D. Contrary to the allegations of Stronghold, its liability as surety under the attachment bond without which the writ of attachment shall
not issue and be enforced against herein respondent if prescribed by law. In like manner, the obligations and liability on the attachment
bond are also prescribed by law and not left to the discretion or will of the contracting parties to the prejudice of the persons against
whom the writ was issued.
E. Contrary to the allegations of Stronghold, its liability for the damages sustained by herein respondents is both a statutory and
contractual obligation and for which, it cannot escape accountability and liability in favor of the person against whom the illegal writ of
attachment was issued and enforced. To allow Stronghold to delay, excuse or exempt itself from liability is unconstitutional, unlawful, and
contrary to the basic tenets of equity and fair play.
F. While the liability of Stronghold as surety indeed covers the principal amount of P1,000,000.00, nothing in the law and the contract
between the parties limit or exempt Stronghold from liability for other damages. Including costs of suit and interest.26
In his own comment,27
Maraon insisted that he could not be personally held liable under the attachment bond because the judgment of the RTC was rendered
without jurisdiction over the subject matter of the action that involved an intra-corporate controversy among the stockholders of Arc
Cuisine, Inc.; and that the jurisdiction properly pertained to the SEC, where another action was already pending between the parties.
Ruling
Although the question of whether the Cuencas and Tayactac could themselves recover damages arising from the wrongful attachment of
the assets of Arc Cuisine, Inc. by claiming against the bond issued by Stronghold Insurance was not raised in the CA, we do not brush it
aside because the actual legal interest of the parties in the subject of the litigation is a matter of substance that has jurisdictional impact,
even on appeal before this Court.
CMV
The petition for review is meritorious.
There is no question that a litigation should be disallowed immediately if it involves a person without any interest at stake, for it would be
futile and meaningless to still proceed and render a judgment where there is no actual controversy to be thereby determined. Courts of
law in our judicial system are not allowed to delve on academic issues or to render advisory opinions. They only resolve actual
controversies, for that is what they are authorized to do by the Fundamental Law itself, which forthrightly ordains that the judicial power
is wielded only to settle actual controversies involving rights that are legally demandable and enforceable.28
To ensure the observance of the mandate of the Constitution, Section 2, Rule 3 of the Rules of Court requires that unless otherwise
authorized by law or the Rules of Court every action must be prosecuted or defended in the name of the real party in interest.29 Under
the same rule, a real party in interest is one who stands to be benefited or injured by the judgment in the suit, or one who is entitled to
the avails of the suit. Accordingly, a person , to be a real party in interest in whose name an action must be prosecuted, should appear to
be the present real owner of the right sought to be enforced, that is, his interest must be a present substantial interest, not a mere
expectancy, or a future, contingent, subordinate, or consequential interest.30
Where the plaintiff is not the real party in interest, the ground for the motion to dismiss is lack of cause of action.31 The reason for this is
that the courts ought not to pass upon questions not derived from any actual controversy. Truly, a person having no material interest to
protect cannot invoke the jurisdiction of the court as the plaintiff in an action.32 Nor does a court acquire jurisdiction over a case where
the real party in interest is not present or impleaded.
The purposes of the requirement for the real party in interest prosecuting or defending an action at law are: (a) to prevent the
prosecution of actions by persons without any right, title or interest in the case; (b) to require that the actual party entitled to legal relief
be the one to prosecute the action; (c) to avoid a multiplicity of suits; and (d) to discourage litigation and keep it within certain bounds,
pursuant to sound public policy.33 Indeed, considering that all civil actions must be based on a cause of action,34 defined as the act or
omission by which a party violates the right of another,35 the former as the defendant must be allowed to insist upon being opposed by
the real party in interest so that he is protected from further suits regarding the same claim.36 Under this rationale, the requirement
benefits the defendant because "the defendant can insist upon a plaintiff who will afford him a setup providing good res judicata
protection if the struggle is carried through on the merits to the end."37
The rule on real party in interest ensures, therefore, that the party with the legal right to sue brings the action, and this interest ends
when a judgment involving the nominal plaintiff will protect the defendant from a subsequent identical action. Such a rule is intended to
bring before the court the party rightfully interested in the litigation so that only real controversies will be presented and the judgment,
when entered, will be binding and conclusive and the defendant will be saved from further harassment and vexation at the hands of other
claimants to the same demand.38
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But the real party in interest need not be the person who ultimately will benefit from the successful prosecution of the action. Hence, to
aid itself in the proper identification of the real party in interest, the court should first ascertain the nature of the substantive right being
asserted, and then must determine whether the party asserting that right is recognized as the real party in interest under the rules of
procedure. Truly, that a party stands to gain from the litigation is not necessarily controlling.39
It is fundamental that the courts are established in order to afford reliefs to persons whose rights or property interests have been invaded
or violated, or are threatened with invasion by others conduct or acts, and to give relief only at the instance of such persons. The
jurisdiction of a court of law or equity may not be invoked by or for an individual whose rights have not been breached.40
The remedial right or the remedial obligation is the persons interest in the controversy. The right of the plaintiff or other claimant is
alleged to be violated by the defendant, who has the correlative obligation to respect the right of the former. Otherwise put, without the
right, a person may not become a party plaintiff; without the obligation, a person may not be sued as a party defendant; without the
violation, there may not be a suit. In such a situation, it is legally impossible for any person or entity to be both plaintiff and defendant in
the same action, thereby ensuring that the controversy is actual and exists between adversary parties. Where there are no adversary
parties before it, the court would be without jurisdiction to render a judgment.41
There is no dispute that the properties subject to the levy on attachment belonged to Arc Cuisine, Inc. alone, not to the Cuencas and
Tayactac in their own right. They were only stockholders of Arc Cuisine, Inc., which had a personality distinct and separate from that of
any or all of them.42 The damages occasioned to the properties by the levy on attachment, wrongful or not, prejudiced Arc Cuisine, Inc.,
not them. As such, only Arc Cuisine, Inc. had the right under the substantive law to claim and recover such damages. This right could not
also be asserted by the Cuencas and Tayactac unless they did so in the name of the corporation itself. But that did not happen herein,
because Arc Cuisine, Inc. was not even joined in the action either as an original party or as an intervenor.
The Cuencas and Tayactac were clearly not vested with any direct interest in the personal properties coming under the levy on
attachment by virtue alone of their being stockholders in Arc Cuisine, Inc. Their stockholdings represented only their proportionate or
aliquot interest in the properties of the corporation, but did not vest in them any legal right or title to any specific properties of the
corporation. Without doubt, Arc Cuisine, Inc. remained the owner as a distinct legal person.43
Given the separate and distinct legal personality of Arc Cuisine, Inc., the Cuencas and Tayactac lacked the legal personality to claim the
damages sustained from the levy of the formers properties. According to Asset Privatization Trust v. Court of Appeals,44 even when the
foreclosure on the assets of the corporation was wrongful and done in bad faith the stockholders had no standing to recover for
themselves moral damages; otherwise, they would be appropriating and distributing part of the corporations assets prior to the
dissolution of the corporation and the liquidation of its debts and liabilities. Moreover, in Evangelista v. Santos,45 the Court, resolving
whether or not the minority stockholders had the right to bring an action for damages against the principal officers of the corporation for
their own benefit, said:
As to the second question, the complaint shows that the action is for damages resulting from mismanagement of the affairs and assets of
the corporation by its principal officer, it being alleged that defendants maladministration has brought about the ruin of the corporation
and the consequent loss of value of its stocks. The injury complained of is thus primarily to the corporation, so that the suit for the
damages claimed should be by the corporation rather than by the stockholders (3 Fletcher, Cyclopedia of Corporation pp. 977-980). The
stockholders may not directly claim those damages for themselves for that would result in the appropriation by, and the distribution
among them of part of the corporate assets before the dissolution of the corporation and the liquidation of its debts and liabilities,
something which cannot be legally done in view of section 16 of the Corporation Law, which provides:
No shall corporation shall make or declare any stock or bond dividend or any dividend whatsoever except from the surplus profits arising
from its business, or divide or distribute its capital stock or property other than actual profits among its members or stockholders until
after the payment of its debts and the termination of its existence by limitation or lawful dissolution.
xxxx
In the present case, the plaintiff stockholders have brought the action not for the benefit of the corporation but for their own benefit,
since they ask that the defendant make good the losses occasioned by his mismanagement and pay to them the value of their respective
participation in the corporate assets on the basis of their respective holdings. Clearly, this cannot be done until all corporate debts, if
there be any, are paid and the existence of the corporation terminated by the limitation of its charter or by lawful dissolution in view of
the provisions of section 16 of the Corporation Law. (Emphasis ours)
It results that plaintiffs complaint shows no cause of action in their favor so that the lower court did not err in dismissing the complaint on
that ground.
While plaintiffs ask for remedy to which they are not entitled unless the requirement of section 16 of the Corporation Law be first
complied with, we note that the action stated in their complaint is susceptible of being converted into a derivative suit for the benefit of
the corporation by a mere change in the prayer. Such amendment, however, is not possible now, since the complaint has been filed in the
wrong court, so that the same has to be dismissed.46
That Maraon knew that Arc Cuisine, Inc. owned the properties levied on attachment but he still excluded Arc Cuisine, Inc. from his
complaint was of no consequence now. The Cuencas and Tayactac still had no right of action even if the affected properties were then
under their custody at the time of the attachment, considering that their custody was only incidental to the operation of the corporation.
It is true, too, that the Cuencas and Tayactac could bring in behalf of Arc Cuisine, Inc. a proper action to recover damages resulting from
the attachment. Such action would be one directly brought in the name of the corporation. Yet, that was not true here, for, instead, the
Cuencas and Tayactac presented the claim in their own names.
CMV
63
Roxas (Roxas), represented by petitioner herein, encroached on a quarter of her property by arbitrarily extending his concrete fence
beyond the correct limits.
In view of the outcome just reached, the Court deems it unnecessary to give any extensive consideration to the remaining issues.
WHEREFORE, the Court GRANTS the petition for review; and REVERSES and SETS ASIDE the decision of the Court of Appeals in CA-G.R. CV
No. 79145 promulgated on January 31,2006.
In his Answer, Roxas imputed the blame to respondent Our Ladys Village Foundation, Inc., now Our Ladys Foundation, Inc. (OLFI). He
then filed a Third-Party Complaint against respondent and claimed that he only occupied the adjoining portion in order to get the
equivalent area of what he had lost when OLFI trimmed his property for the subdivision road. The RTC admitted the Third-Party Complaint
and proceeded to trial on the merits.
No pronouncements on costs of suit.

After considering the evidence of all the parties, the trial court held that Latosa had established her claim of encroachment by a
preponderance of evidence. It found that Roxas occupied a total of 112 square meters of Latosas lots, and that, in turn, OLFI trimmed his
property by 92 square meters. The dispositive portion of the Decision4 reads:
SO ORDERED.
G.R. No. 182378
March 6, 2013
WHEREFORE, the Court hereby renders judgment as follows:
MERCY VDA. DE ROXAS, represented by ARLENE C. ROXAS-CRUZ, in her capacity as substitute appellant-petitioner, Petitioner,
On the Complaint:
vs.
OUR LADY'S FOUNDATION, INC., Respondent.
1. Ordering the defendant to return and surrender the portion of 116 sq. meters which lawfully belongs to the plaintiff being a portion of
Lot 19;
DECISION
2. Ordering defendant to demolish whatever structure constructed [sic] thereon and to remove the same at his own expense;
SERENO, CJ.:
3. Ordering defendant to. reimburse plaintiff the amount of P1,500.00 for the expenses in the relocation survey;
Before this Court is a Rule 45 Petition, seeking a review of the Court of Appeals (CA) 25 September 2007 Decision1 and 11 March 2008
Resolution2 in CA-G.R. SP No. 88622, which nullified the (1) Notices of Garnishment directed against the bank accounts of petitioner's
general manager; and (2) the 2 December 2004 Order3 in Civil Case No. 5403 of the Regional Trial Court (RTC) of Sorsogon City, Branch 52.
The Order required respondent to reimburse petitioner Pl ,800 per square meter of the 92-square-meter property it had encroached
upon.
4. Ordering the dismissal of the counter claim.
On the 3rd Party Complaint:

The antecedent facts are as follows:
On 1 September 1988, Salve Dealca Latosa filed before the RTC a Complaint for the recovery of ownership of a portion of her residential
land located at Our Ladys Village, Bibincahan, Sorsogon, Sorsogon, docketed as Civil Case No. 5403. According to her, Atty. Henry Amado
CMV
1. Ordering the 3rd Party Defendant to reimburse 3rd Party Plaintiff the value of 92 sq. meters which is a portion of Lot 23 of the def-3rd
Party Plaintiff plus legal interest to be reckoned from the time it was paid to the 3rd Party Defendant;
64
2. 3rd Party Defendant is ordered to pay the 3rd Party Plaintiff the sum of P10,000.00 as attorney's fees and P5,000 as litigation expenses;
Refusing to pay P1,800 per square meter to Roxas, OLFI filed a Rule 65 Petition before the CA.11 Respondent asserted that since the
dispositive portion of the Decision ordered it to reimburse Roxas, it should only be made to return the purchase price that he had
originally paid, which was P40 per square meter for the 92-square-meter property.
3. 3rd Party Defendant shall pay the cost of suit.
SO ORDERED.5
Subsequently, Roxas appealed to the CA, which later denied the appeal. Since the Decision had become final, the RTC issued a Writ of
Execution6 to implement the ruling ordering OLFI to reimburse Roxas for the value of the 92-square-meter property plus legal interest to
be reckoned from the time the amount was paid to the third-party defendant. The trial court then approved the Sheriffs Bill,7 which
valued the subject property at P2,500 per square meter or a total of P230,000. Adding the legal interest of 12% per annum for 10 years,
respondents judgment obligations totaled P506,000.
Opposing the valuation of the subject property, OLFI filed a Motion to Quash the Sheriffs Bill and a Motion for Inhibition of the RTC judge.
It insisted that it should reimburse Roxas only at the rate of P40 per square meter, the same rate that Roxas paid when the latter first
purchased the property. Nevertheless, before resolving the Motions filed by OLFI, the trial court approved an Amended Sheriffs Bill,8
which reduced the valuation to P1,800 per square meter.
Eventually, the RTC denied both the Motion for Inhibition and the Motion to Quash the Sheriffs Bill. It cited fairness to justify the
computation of respondents judgment obligation found in the Amended Sheriffs Bill. In its 2 December 2004 Order, the trial court
explained:
Although it might be true that the property was originally purchased at P40.00 per square meter, the value of the Philippine Peso has
greatly devaluated since then P40.00 may be able to purchase a square meter of land twenty (20) or more years ago but it could only buy
two (2) kilos of rice today. It would be most unfair to the defendants-third party plaintiff if the third party defendant would only be made
to reimburse the purchase price at P40.00 per square meter. Anyway, this Court is in the best position to determine what amount should
be reimbursed since it is the one who rendered the decision which was affirmed in toto by the Appellate Court and this Court is of the
opinion and so holds that that amount should be P1,800.00 per square meter.9
To collect the aforementioned amount, Notices of Garnishment10 were then issued by the sheriff to the managers of the Development
Bank of the Philippines and the United Coconut Planters Bank for them to garnish the account of Bishop Robert Arcilla-Maullon (ArcillaMaullon), OLFIs general manager.
Petitioner argues otherwise. Roxas first clarified that the dispositive portion of the Decision is silent as to the value of the subject property
whether the value is to be reckoned from the date of purchase or from the date of payment after the finality of judgment.12 Following
this clarification, petitioner pointed out that the valuation of the subject property was for the trial court to undertake, and that the
reimbursement contemplated referred to the repayment of all the expenses, damages, and losses. Roxas ultimately argued that the
payment for the property encroached upon must not be absurd and must take into consideration the devaluation of the Philippine peso.
The arguments of Roxas did not persuade the CA. It construed reimbursement as an obligation to pay back what was previously paid and
thus required OLFI to merely reimburse him at the rate of P40 per square meter, which was the consideration respondent had received
when Roxas purchased the subdivision lots. Therefore, for changing the tenor of the RTC Decision by requiring the reimbursement of
P1,800 per square meter, both the Amended Sheriffs Bill and the 2 December 2004 Order of the RTC were considered null and void.
Further, the CA nullified the Notices of Garnishment issued against the bank accounts of Arcilla-Maullon. It noted that since the general
manager of OLFI was not impleaded in the proceedings, he could not be held personally liable for the obligation of the corporation.
Before this Court, petitioner maintains that OLFI should be made to pay P1,800, and not P40 per square meter as upheld in the 2
December 2004 Order of the RTC.13 For the immediate enforcement of the Order, petitioner further argues that because OLFI is a dummy
corporation, the bank accounts of its general manager can be garnished to collect the judgment obligation of respondent.14
Hence, the pertinent issue in this case requires the determination of the correct amount to be reimbursed by OLFI to Roxas. As a corollary
matter, this Court also resolves the propriety of issuing the Notices of Garnishment against the bank accounts of Arcilla-Maullon as OLFIs
general manager.
RULING OF THE COURT
Based on the dispositive portion of the RTC Decision, OLFI was ordered to reimburse Roxas for the value of the 92-square-meter property
plus legal interest to be reckoned from the time it was paid to the third-party defendant.
In interpreting this directive, both the trial and the appellate courts differed in interpreting the amount of reimbursement payable by
respondent to petitioner. The RTC pegged the reimbursable amount at P1,800 per square meter to reflect the current value of the
property, while the CA maintained the original amount of the lot at P40 per square meter.
CMV
65
The appellate court appreciated that in the main case for the recovery of ownership before the court of origin, only OLFI was named as
respondent corporation, and that its general manager was never impleaded in the proceedings a quo.
To settle the contention, this Court resorts to the provisions of the Civil Code governing encroachment on property. Under Article 448
pertaining to encroachments in good faith, as well as Article 450 referring to encroachments in bad faith, the owner of the land
encroached upon petitioner herein has the option to require respondent builder to pay the price of the land.
Although these provisions of the Civil Code do not explicitly state the reckoning period for valuing the property, Ballatan v. Court of
Appeals15 already specifies that in the event that the seller elects to sell the lot, "the price must be fixed at the prevailing market value at
the time of payment." More recently, Tuatis v. Spouses Escol16 illustrates that the present or current fair value of the land is to be
reckoned at the time that the landowner elected the choice, and not at the time that the property was purchased. We quote below the
relevant portion of that Decision:17
Under the second option, Visminda may choose not to appropriate the building and, instead, oblige Tuatis to pay the present or current
fair value of the land. The P10,000.00 price of the subject property, as stated in the Deed of Sale on Installment executed in November
1989, shall no longer apply, since Visminda will be obliging Tuatis to pay for the price of the land in the exercise of Vismindas rights under
Article 448 of the Civil Code, and not under the said Deed. Tuatis obligation will then be statutory, and not contractual, arising only when
Visminda has chosen her option under Article 448 of the Civil Code.
Still under the second option, if the present or current value of the land, the subject property herein, turns out to be considerably more
than that of the building built thereon, Tuatis cannot be obliged to pay for the subject property, but she must pay Visminda reasonable
rent for the same. Visminda and Tuatis must agree on the terms of the lease; otherwise, the court will fix the terms. (Emphasis supplied)
In Sarmiento v. Agana,18 we reckoned the valuation of the property at the time that the real owner of the land asked the builder to
vacate the property encroached upon. Moreover, the oft-cited case Depra v. Dumlao19 likewise ordered the courts of origin to compute
the current fair price of the land in cases of encroachment on real properties.
From these cases, it follows that the CA incorrectly pegged the reimbursable amount at the old market value of the subject property P40
per square meter as reflected in the Deed of Absolute Sale20 between the parties. On the other hand, the RTC properly considered in its
2 December 2004 Order the value of the lot at P1,800 per square meter, the current fair price as determined in the Amended Sheriffs Bill.
Thus, we reverse the ruling of the CA and reinstate the 2 December 2004 Order of the RTC directing OLFI to reimburse petitioner at
P1,800 per square meter.
Given this finding, this Court holds that since OLFIs general manager was not a party to the case, the CA correctly ruled that ArcillaMaullon cannot be held personally liable for the obligation of the corporation. In Santos v. NLRC,21 this Court upholds the doctrine of
separate juridical personality of corporate entities. The case emphasizes that a corporation is a juridical entity with a legal personality
separate and distinct from those acting for and on its behalf and, in general, of the people comprising it.22 Hence, the obligations incurred
by the corporation, acting through its officers such as in this case, are its sole liabilities.23
To hold the general manager of OLFI liable, petitioner claims that it is a mere business conduit of Arcilla-Maullon, hence, the corporation
does not maintain a bank account separate and distinct from the bank accounts of its members. In support of this claim, petitioner
submits that because OLFI did not rebut the attack on its legal personality, as alleged in petitioners Opposition and Comments on the
Motion to Quash Notice/Writ of Garnishment dated 15 March 2005,24 respondent effectively admitted by its silence that it was a mere
dummy corporation.
This argument does not persuade us, for any piercing of the corporate veil has to be done with caution.25 Save for its rhetoric, petitioner
fails to adduce any evidence that would prove OLFI's status as a dummy corporation. In this regard, we recently explained in Sarona v.
NLRC26 as follows:
A court should be mindful of the milieu where it is to be applied.1wphi1 It must be certain that the corporate fiction was misused to such
an extent that injustice, fraud, or crime was committed against another, in disregard of rights. The wrongdoing must be clearly and
convincingly established; it cannot be presumed. Otherwise, an injustice that was never unintended may result from an erroneous
application. (Citation omitted)
In any event, in order for us to hold Arcilla-Maullon personally liable alone for the debts of the corporation and thus pierce the veil of
corporate fiction, we have required that the bad faith of the officer must first be established clearly and convincingly.27 Petitioner,
however, has failed to include any submission pertaining to any wrongdoing of the general manager. Necessarily, it would be unjust to
hold the latter personally liable.
Therefore, we refuse to allow the execution of a corporate judgment debt against the general manager of the corporation, since in no
legal sense is he the owner of the corporate property.28 Consequently, this Court sustains the CA in nullifying the Notices of Garnishment
against his bank accounts.
Nevertheless, with regard to the issue pertaining to the Notices of Garnishment issued against the bank accounts of Arcilla-Maullon, we
affirm the ruling of the CA.
IN VIEW THEREOF, the 25 September 2007 Decision and 11 March 2008 Resolution of the Court of Appeals in CA-GR SP No. 88622 are
AFFIRMED with MODIFICATION in that the value of the 92-square-meter property for which respondent should reimburse petitioner, as
CMV
66
determined by the 2 December 2004 Order of the Regional Trial Court in Civil Case No. 5403, is hereby reinstated at P1,800 per square
meter.
LEONARDO-DE CASTRO, J.:
SO ORDERED.
G.R. No. 167530
March 13, 2013
PHILIPPINE NATIONAL BANK, Petitioner,

vs.
These petitions for review on certiorari1 assail the Decision2 dated November 30, 2004 and the Resolution3 dated March 22, 2005 of the
Court of Appeals in CA-G.R. CV No. 57553. The said Decision affirmed the Decision4 dated November 6, 1995 of the Regional Trial Court
(RTC) of Makati City, Branch 62, granting a judgment award of P8,370,934.74, plus legal interest, in favor of respondent Hydro Resources
Contractors Corporation (HRCC) with the modification that the Privatization and Management Office (PMO), successor of petitioner Asset
Privatization Trust (APT),5 has been held solidarily liable with Nonoc Mining and Industrial Corporation (NMIC)6 and petitioners Philippine
National Bank (PNB) and Development Bank of the Philippines (DBP), while the Resolution denied reconsideration separately prayed for
by PNB, DBP, and APT.
HYDRO RESOURCES CONTRACTORS CORPORATION, Respondent.
x-----------------------x
Sometime in 1984, petitioners DBP and PNB foreclosed on certain mortgages made on the properties of Marinduque Mining and
Industrial Corporation (MMIC). As a result of the foreclosure, DBP and PNB acquired substantially all the assets of MMIC and resumed the
business operations of the defunct MMIC by organizing NMIC.7 DBP and PNB owned 57% and 43% of the shares of NMIC, respectively,
except for five qualifying shares.8 As of September 1984, the members of the Board of Directors of NMIC, namely, Jose Tengco, Jr.,
Rolando Zosa, Ruben Ancheta, Geraldo Agulto, and Faustino Agbada, were either from DBP or PNB.9
G.R. No. 167561
ASSET PRIVATIZATION TRUST, Petitioner,
Subsequently, NMIC engaged the services of Hercon, Inc., for NMICs Mine Stripping and Road Construction Program in 1985 for a total
contract price of P35,770,120. After computing the payments already made by NMIC under the program and crediting the NMICs
receivables from
vs.
x-----------------------x
G.R. No. 167603
Hercon, Inc., the latter found that NMIC still has an unpaid balance of P8,370,934.74.10 Hercon, Inc. made several demands on NMIC,
including a letter of final demand dated August 12, 1986, and when these were not heeded, a complaint for sum of money was filed in the
RTC of Makati, Branch 136 seeking to hold petitioners NMIC, DBP, and PNB solidarily liable for the amount owing Hercon, Inc.11 The case
was docketed as Civil Case No. 15375.
Subsequent to the filing of the complaint, Hercon, Inc. was acquired by HRCC in a merger. This prompted the amendment of the
complaint to substitute HRCC for Hercon, Inc.12
DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs.
Thereafter, on December 8, 1986, then President Corazon C. Aquino issued Proclamation No. 50 creating the APT for the expeditious
disposition and privatization of certain government corporations and/or the assets thereof. Pursuant to the said Proclamation, on
February 27, 1987, DBP and PNB executed their respective deeds of transfer in favor of the National Government assigning, transferring
and conveying certain assets and liabilities, including their respective stakes in NMIC.13 In turn and on even date, the National
Government transferred the said assets and liabilities to the APT as trustee under a Trust Agreement.14 Thus, the complaint was
amended for the second time to implead and include the APT as a defendant.
DECISION
CMV
67
In its answer,15 NMIC claimed that HRCC had no cause of action. It also asserted that its contract with HRCC was entered into by its then
President without any authority. Moreover, the said contract allegedly failed to comply with laws, rules and regulations concerning
government contracts. NMIC further claimed that the contract amount was manifestly excessive and grossly disadvantageous to the
government. NMIC made counterclaims for the amounts already paid to Hercon, Inc. and attorneys fees, as well as payment for
equipment rental for four trucks, replacement of parts and other services, and damage to some of NMICs properties.16
From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both DBP and PNB. Thus, the DBP and PNB
are jointly and severally liable with NMIC for the latters unpaid obligations to plaintiff.23
Having found DBP and PNB solidarily liable with NMIC, the dispositive portion of the Decision of the trial court reads:
For its part, DBPs answer17 raised the defense that HRCC had no cause of action against it because DBP was not privy to HRCCs contract
with NMIC. Moreover, NMICs juridical personality is separate from that of DBP. DBP further interposed a counterclaim for attorneys
fees.18
PNBs answer19 also invoked lack of cause of action against it. It also raised estoppel on HRCCs part and laches as defenses, claiming that
the inclusion of PNB in the complaint was the first time a demand for payment was made on it by HRCC. PNB also invoked the separate
juridical personality of NMIC and made counterclaims for moral damages and attorneys fees.20
APT set up the following defenses in its answer21: lack of cause of action against it, lack of privity between Hercon, Inc. and APT, and the
National Governments preferred lien over the assets of NMIC.22
After trial, the RTC of Makati rendered a Decision dated November 6, 1995 in favor of HRCC. It pierced the corporate veil of NMIC and
held DBP and PNB solidarily liable with NMIC:
WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of the plaintiff HYDRO RESOURCES CONTRACTORS
CORPORATION and against the defendants NONOC
MINING AND INDUSTRIAL CORPORATION, DEVELOPMENT BANK OF THE PHILIPPINES and PHILIPPINE NATIONAL BANK, ordering the
aforenamed defendants, to pay the plaintiff jointly and severally, the sum of P8,370,934.74 plus legal interest thereon from date of
demand, and attorneys fees equivalent to 25% of the judgment award.
The complaint against APT is hereby dismissed. However, APT, as trustee of NONOC MINING AND INDUSTRIAL CORPORATION is directed
to ensure compliance with this Decision.24
DBP and PNB filed their respective appeals in the Court of Appeals. Both insisted that it was wrong for the RTC to pierce the veil of NMICs
corporate personality and hold DBP and PNB solidarily liable with NMIC.25
On the issue of whether or not there is sufficient ground to pierce the veil of corporate fiction, this Court likewise finds for the plaintiff.
The Court of Appeals rendered the Decision dated November 30, 2004, affirmed the piercing of the veil of the corporate personality of
NMIC and held DBP, PNB, and APT solidarily liable with NMIC. In particular, the Court of Appeals made the following findings:
From the documentary evidence adduced by the plaintiff, some of which were even adopted by defendants and DBP and PNB as their
own evidence (Exhibits "I", "I-1", "I-2", "I-3", "I-4", "I-5", "I5-A", "I-5-B", "I-5-C", "I-5-D" and submarkings, inclusive), it had been established
that except for five (5) qualifying shares, NMIC is owned by defendants DBP and PNB, with the former owning 57% thereof, and the latter
43%. As of September 24, 1984, all the members of NMICs Board of Directors, namely, Messrs. Jose Tengco, Jr., Rolando M. Zosa, Ruben
Ancheta, Geraldo Agulto, and Faustino Agbada are either from DBP or PNB (Exhibits "I-5", "I-5-C", "I-5-D").
The business of NMIC was then also being conducted and controlled by both DBP and PNB. In fact, it was Rolando M. Zosa, then Governor
of DBP, who was signing and entering into contracts with third persons, on behalf of NMIC.
In this jurisdiction, it is well-settled that "where it appears that the business enterprises are owned, conducted and controlled by the same
parties, both law and equity will, when necessary to protect the rights of third persons, disregard legal fiction that two (2) corporations
are distinct entities, and treat them as identical." (Phil. Veterans Investment Development Corp. vs. CA, 181 SCRA 669).
CMV
In the case before Us, it is indubitable that [NMIC] was owned by appellants DBP and PNB to the extent of 57% and 43% respectively; that
said two (2) appellants are the only stockholders, with the qualifying stockholders of five (5) consisting of its own officers and included in
its charter merely to comply with the requirement of the law as to number of incorporators; and that the directorates of DBP, PNB and
[NMIC] are interlocked.
xxxx
We find it therefore correct for the lower court to have ruled that:
68
"From all indications, it appears that NMIC is a mere adjunct, business conduit or alter ego of both DBP and PNB. Thus, the DBP and PNB
are jointly and severally liable with NMIC for the latters unpaid obligation to plaintiff."26 (Citation omitted.)
The Court of Appeals then concluded that, "in keeping with the concept of justice and fair play," the corporate veil of NMIC should be
pierced, ratiocinating:
For to treat NMIC as a separate legal entity from DBP and PNB for the purpose of securing beneficial contracts, and then using such
separate entity to evade the payment of a just debt, would be the height of injustice and iniquity. Surely that could not have been the
intendment of the law with respect to corporations. x x x.27
The dispositive portion of the Decision of the Court of Appeals reads:
WHEREFORE, premises considered, the Decision appealed from is hereby MODIFIED. The judgment in favor of appellee Hydro Resources
Contractors Corporation in the amount of P8,370,934.74 with legal interest from date of demand is hereby AFFIRMED, but the dismissal of
the case as against Assets Privatization Trust is REVERSED, and its successor the Privatization and Management Office is INCLUDED as one
of those jointly and severally liable for such indebtedness. The award of attorneys fees is DELETED.
All other claims and counter-claims are hereby DISMISSED.
Costs against appellants.28
The respective motions for reconsideration of DBP, PNB, and APT were denied.29
Hence, these consolidated petitions.30
All three petitioners assert that NMIC is a corporate entity with a juridical personality separate and distinct from both PNB and DBP. They
insist that the majority ownership by DBP and PNB of NMIC is not a sufficient ground for disregarding the separate corporate personality
of NMIC because NMIC was not a mere adjunct, business conduit or alter ego of DBP and PNB. According to them, the application of the
doctrine of piercing the corporate veil is unwarranted as nothing in the records would show that the ownership and control of the
shareholdings of NMIC by DBP and PNB were used to commit fraud, illegality or injustice. In the absence of evidence that the stock control
by DBP and PNB over NMIC was used to commit some fraud or a wrong and that said control was the proximate cause of the injury
sustained by HRCC, resort to the doctrine of "piercing the veil of corporate entity" is misplaced.31
CMV
DBP and PNB further argue that, assuming they may be held solidarily liable with NMIC to pay NMICs exclusive and separate corporate
indebtedness to HRCC, such liability of the two banks was transferred to and assumed by the National Government through the APT, now
the PMO, under the respective deeds of transfer both dated February 27, 1997 executed by DBP and PNB pursuant to Proclamation No.
50 dated December 8, 1986 and Administrative Order No. 14 dated February 3, 1987.32
For its part, the APT contends that, in the absence of an unqualified assumption by the National Government of all liabilities incurred by
NMIC, the National Government through the APT could not be held liable for NMICs contractual liability. The APT asserts that HRCC had
not sufficiently shown that the APT is the successor-in-interest of all the liabilities of NMIC, or of DBP and PNB as transferors, and that the
adjudged liability is included among the liabilities assigned and transferred by DBP and PNB in favor of the National Government.33
HRCC counters that both the RTC and the CA correctly applied the doctrine of "piercing the veil of corporate fiction." It claims that NMIC
was the alter ego of DBP and PNB which owned, conducted and controlled the business of NMIC as shown by the following circumstances:
NMIC was owned by DBP and PNB, the officers of DBP and PNB were also the officers of NMIC, and DBP and PNB financed the operations
of NMIC. HRCC further argues that a parent corporation may be held liable for the contracts or obligations of its subsidiary corporation
where the latter is a mere agency, instrumentality or adjunct of the parent corporation.34
Moreover, HRCC asserts that the APT was properly held solidarily liable with DBP, PNB, and NMIC because the APT assumed the
obligations of DBP and PNB as the successor-in-interest of the said banks with respect to the assets and liabilities of NMIC.35 As trustee of
the Republic of the Philippines, the APT also assumed the responsibility of the Republic pursuant to the following provision of Section 2.02
of the respective deeds of transfer executed by DBP and PNB in favor of the Republic:
SECTION 2. TRANSFER OF BANKS LIABILITIES
xxxx
2.02 With respect to the Banks liabilities which are contingent and those liabilities where the Banks creditors consent to the transfer
thereof is not obtained, said liabilities shall remain in the books of the BANK with the GOVERNMENT funding the payment thereof.36
After a careful review of the case, this Court finds the petitions impressed with merit.
A corporation is an artificial entity created by operation of law. It possesses the right of succession and such powers, attributes, and
properties expressly authorized by law or incident to its existence.37 It has a personality separate and distinct from that of its
69
stockholders and from that of other corporations to which it may be connected.38 As a consequence of its status as a distinct legal entity
and as a result of a conscious policy decision to promote capital formation,39 a corporation incurs its own liabilities and is legally
responsible for payment of its obligations.40 In other words, by virtue of the separate juridical personality of a corporation, the corporate
debt or credit is not the debt or credit of the stockholder.41 This protection from liability for shareholders is the principle of limited
liability.42
Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced when the corporation is just an
alter ego of a person or of another corporation. For reasons of public policy and in the interest of justice, the corporate veil will justifiably
be impaled only when it becomes a shield for fraud, illegality or inequity committed against third persons.43
(1) Control, not mere majority or complete stock control, but complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own;
(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of plaintiffs legal right; and
(3) The aforesaid control and breach of duty must have proximately caused the injury or unjust loss complained of.50 (Emphases omitted.)
However, the rule is that a court should be careful in assessing the milieu where the doctrine of the corporate veil may be applied.
Otherwise an injustice, although unintended, may result from its erroneous application.44 Thus, cutting through the corporate cover
requires an approach characterized by due care and caution:
Hence, any application of the doctrine of piercing the corporate veil should be done with caution. A court should be mindful of the milieu
where it is to be applied. It must be certain that the corporate fiction was misused to such an extent that injustice, fraud, or crime was
committed against another, in disregard of its rights. The wrongdoing must be clearly and convincingly established; it cannot be
presumed. x x x.45 (Emphases supplied; citations omitted.)
Sarona v. National Labor Relations Commission46 has defined the scope of application of the doctrine of piercing the corporate veil:
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. (Citation omitted.)
Here, HRCC has alleged from the inception of this case that DBP and PNB (and the APT as assignee of DBP and PNB) should be held
solidarily liable for using NMIC as alter ego.47 The RTC sustained the allegation of HRCC and pierced the corporate veil of NMIC pursuant
to the alter ego theory when it concluded that NMIC "is a mere adjunct, business conduit or alter ego of both DBP and PNB."48 The Court
of Appeals upheld such conclusion of the trial court.49 In other words, both the trial and appellate courts relied on the alter ego theory
when they disregarded the separate corporate personality of NMIC.
In this connection, case law lays down a three-pronged test to determine the application of the alter ego theory, which is also known as
the instrumentality theory, namely:
CMV
The first prong is the "instrumentality" or "control" test. This test requires that the subsidiary be completely under the control and
domination of the parent.51 It examines the parent corporations relationship with the subsidiary.52 It inquires whether a subsidiary
corporation is so organized and controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate entity will be ignored.53 It seeks to establish whether the subsidiary
corporation has no autonomy and the parent corporation, though acting through the subsidiary in form and appearance, "is operating the
business directly for itself."54
The second prong is the "fraud" test. This test requires that the parent corporations conduct in using the subsidiary corporation be
unjust, fraudulent or wrongful.55 It examines the relationship of the plaintiff to the corporation.56 It recognizes that piercing is
appropriate only if the parent corporation uses the subsidiary in a way that harms the plaintiff creditor.57 As such, it requires a showing of
"an element of injustice or fundamental unfairness."58
The third prong is the "harm" test. This test requires the plaintiff to show that the defendants control, exerted in a fraudulent, illegal or
otherwise unfair manner toward it, caused the harm suffered.59 A causal connection between the fraudulent conduct committed through
the instrumentality of the subsidiary and the injury suffered or the damage incurred by the plaintiff should be established. The plaintiff
must prove that, unless the corporate veil is pierced, it will have been treated unjustly by the defendants exercise of control and
improper use of the corporate form and, thereby, suffer damages.60
To summarize, piercing the corporate veil based on the alter ego theory requires the concurrence of three elements: control of the
corporation by the stockholder or parent corporation, fraud or fundamental unfairness imposed on the plaintiff, and harm or damage
caused to the plaintiff by the fraudulent or unfair act of the corporation. The absence of any of these elements prevents piercing the
corporate veil.61
This Court finds that none of the tests has been satisfactorily met in this case.
70
In applying the alter ego doctrine, the courts are concerned with reality and not form, with how the corporation operated and the
individual defendants relationship to that operation.62 With respect to the control element, it refers not to paper or formal control by
majority or even complete stock control but actual control which amounts to "such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of its own, and is but a conduit for its principal."63 In addition,
the control must be shown to have been exercised at the time the acts complained of took place.64
Both the RTC and the Court of Appeals applied the alter ego theory and penetrated the corporate cover of NMIC based on two factors: (1)
the ownership by DBP and PNB of effectively all the stocks of NMIC, and (2) the alleged interlocking directorates of DBP, PNB and NMIC.65
Unfortunately, the conclusion of the trial and appellate courts that the DBP and PNB fit the alter ego theory with respect to NMICs
transaction with HRCC on the premise of complete stock ownership and interlocking directorates involved a quantum leap in logic and law
exposing a gap in reason and fact.
While ownership by one corporation of all or a great majority of stocks of another corporation and their interlocking directorates may
serve as indicia of control, by themselves and without more, however, these circumstances are insufficient to establish an alter ego
relationship or connection between DBP and PNB on the one hand and NMIC on the other hand, that will justify the puncturing of the
latters corporate cover. This Court has declared that "mere ownership by a single stockholder or by another corporation of all or nearly
all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality."66 This Court
has likewise ruled that the "existence of interlocking directors, corporate officers and shareholders is not enough justification to pierce
the veil of corporate fiction in the absence of fraud or other public policy considerations."67
True, the findings of fact of the Court of Appeals are conclusive and cannot be reviewed on appeal to this Court, provided they are borne
out of the record or are based on substantial evidence.68 It is equally true that the question of whether one corporation is merely an alter
ego of another is purely one of fact. So is the question of whether a corporation is a paper company, a sham or subterfuge or whether the
requisite quantum of evidence has been adduced warranting the piercing of the veil of corporate personality.69 Nevertheless, it has been
held in Sarona v. National Labor Relations Commission70 that this Court has the power to resolve a question of fact, such as whether a
corporation is a mere alter ego of another entity or whether the corporate fiction was invoked for fraudulent or malevolent ends, if the
findings in the assailed decision are either not supported by the evidence on record or based on a misapprehension of facts.
In this case, nothing in the records shows that the corporate finances, policies and practices of NMIC were dominated by DBP and PNB in
such a way that NMIC could be considered to have no separate mind, will or existence of its own but a mere conduit for DBP and PNB. On
the contrary, the evidence establishes that HRCC knew and acted on the knowledge that it was dealing with NMIC, not with NMICs
stockholders. The letter proposal of Hercon, Inc., HRCCs predecessor-in-interest, regarding the contract for NMICs mine stripping and
road construction program was addressed to and accepted by NMIC.71 The various billing reports, progress reports, statements of
accounts and communications of Hercon, Inc./HRCC regarding NMICs mine stripping and road construction program in 1985 concerned
NMIC and NMICs officers, without any indication of or reference to the control exercised by DBP and/or PNB over NMICs affairs, policies
and practices.72
CMV
HRCC has presented nothing to show that DBP and PNB had a hand in the act complained of, the alleged undue disregard by NMIC of the
demands of HRCC to satisfy the unpaid claims for services rendered by HRCC in connection with NMICs mine stripping and road
construction program in 1985. On the contrary, the overall picture painted by the evidence offered by HRCC is one where HRCC was
dealing with NMIC as a distinct juridical person acting through its own corporate officers.73
Moreover, the finding that the respective boards of directors of NMIC, DBP, and PNB were interlocking has no basis. HRCCs Exhibit "I5,"74 the initial General Information Sheet submitted by NMIC to the Securities and Exchange Commission, relied upon by the trial court
and the Court of Appeals may have proven that DBP and PNB owned the stocks of NMIC to the extent of 57% and 43%, respectively.
However, nothing in it supports a finding that NMIC, DBP, and PNB had interlocking directors as it only indicates that, of the five members
of NMICs board of directors, four were nominees of either DBP or PNB and only one was a nominee of both DBP and PNB.75 Only two
members of the board of directors of NMIC, Jose Tengco, Jr. and Rolando Zosa, were established to be members of the board of
governors of DBP and none was proved to be a member of the board of directors of PNB.76 No director of NMIC was shown to be also
sitting simultaneously in the board of governors/directors of both DBP and PNB.
In reaching its conclusion of an alter ego relationship between DBP and PNB on the one hand and NMIC on the other hand, the Court of
Appeals invoked Sibagat Timber Corporation v. Garcia,77 which it described as "a case under a similar factual milieu."78 However, in
Sibagat Timber Corporation, this Court took care to enumerate the circumstances which led to the piercing of the corporate veil of Sibagat
Timber Corporation for being the alter ego of Del Rosario & Sons Logging Enterprises, Inc. Those circumstances were as follows: holding
office in the same building, practical identity of the officers and directors of the two corporations and assumption of management and
control of Sibagat Timber Corporation by the directors/officers of Del Rosario & Sons Logging Enterprises, Inc.
Here, DBP and PNB maintain an address different from that of NMIC.79 As already discussed, there was insufficient proof of interlocking
directorates. There was not even an allegation of similarity of corporate officers. Instead of evidence that DBP and PNB assumed and
controlled the management of NMIC, HRCCs evidence shows that NMIC operated as a distinct entity endowed with its own legal
personality. Thus, what obtains in this case is a factual backdrop different from, not similar to, Sibagat Timber Corporation.
In relation to the second element, to disregard the separate juridical personality of a corporation, the wrongdoing or unjust act in
contravention of a plaintiffs legal rights must be clearly and convincingly established; it cannot be presumed. Without a demonstration
that any of the evils sought to be prevented by the doctrine is present, it does not apply.80
In this case, the Court of Appeals declared:
We are not saying that PNB and DBP are guilty of fraud in forming NMIC, nor are we implying that NMIC was used to conceal fraud. x x
x.81
71
Such a declaration clearly negates the possibility that DBP and PNB exercised control over NMIC which DBP and PNB used "to commit
fraud or wrong, to perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust act in contravention of
plaintiffs legal rights." It is a recognition that, even assuming that DBP and PNB exercised control over NMIC, there is no evidence that the
juridical personality of NMIC was used by DBP and PNB to commit a fraud or to do a wrong against HRCC.
There being a total absence of evidence pointing to a fraudulent, illegal or unfair act committed against HRCC by DBP and PNB under the
guise of NMIC, there is no basis to hold that NMIC was a mere alter ego of DBP and PNB. As this Court ruled in Ramoso v. Court of
Appeals82:
The complaint as against Development Bank of the Philippines, the Philippine National Bank, and the Asset Privatization Trust, now the
Privatization and Management Office, is DISMISSED for lack of merit. The Asset Privatization Trust, now the Privatization and
Management Office, as trustee of Nonoc Mining and Industrial Corporation, now the Philnico Processing Corporation, is DIRECTED to
ensure compliance by the Nonoc Mining and Industrial Corporation, now the Philnico Processing Corporation, with this Decision.
SO ORDERED.
G.R. No. 192571
As a general rule, a corporation will be looked upon as a legal entity, unless and until sufficient reason to the contrary appears. 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. Also, the corporate entity may be disregarded in the interest of justice in such cases as fraud
that may work inequities among members of the corporation internally, involving no rights of the public or third persons. In both
instances, there must have been fraud, and proof of it. For the separate juridical personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly established. It cannot be presumed.
July 23, 2013
ABBOTT LABORATORIES, PHILIPPINES, CECILLE A. TERRIBLE, EDWIN D. FEIST, MARIA OLIVIA T. YABUTMISA, TERESITA C. BERNARDO, AND
ALLAN G. ALMAZAR, Petitioners,
vs.
PEARLIE ANN F. ALCARAZ, Respondent.
As regards the third element, in the absence of both control by DBP and PNB of NMIC and fraud or fundamental unfairness perpetuated
by DBP and PNB through the corporate cover of NMIC, no harm could be said to have been proximately caused by DBP and PNB on HRCC
for which HRCC could hold DBP and PNB solidarily liable with NMIC.1wphi1
DECISION
PERLAS-BERNABE, J.:
Considering that, under the deeds of transfer executed by DBP and PNB, the liability of the APT as transferee of the rights, titles and
interests of DBP and PNB in NMIC will attach only if DBP and PNB are held liable, the APT incurs no liability for the judgment indebtedness
of NMIC. Even HRCC recognizes that "as assignee of DBP and PNB 's loan receivables," the APT simply "stepped into the shoes of DBP and
PNB with respect to the latter's rights and obligations" in NMIC.83 As such assignee, therefore, the APT incurs no liability with respect to
NMIC other than whatever liabilities may be imputable to its assignors, DBP and PNB.
Even under Section 2.02 of the respective deeds of transfer executed by DBP and PNB which HRCC invokes, the APT cannot be held liable.
The contingent liability for which the National Government, through the APT, may be held liable under the said provision refers to
contingent liabilities of DBP and PNB. Since DBP and PNB may not be held solidarily liable with NMIC, no contingent liability may be
imputed to the APT as well. Only NMIC as a distinct and separate legal entity is liable to pay its corporate obligation to HRCC in the
amount of P8,370,934.74, with legal interest thereon from date of demand.
As trustee of the. assets of NMIC, however, the APT should ensure compliance by NMIC of the judgment against it. The APT itself
acknowledges this.84
Assailed in this petition for review on certiorari1 are the Decision2 dated December 10,2009 and Resolution3 dated June 9, 2010 of the
Court of Appeals (CA) in CA-G.R. SP No. 101045 which pronounced that the National Labor Relations Commission (NLRC) did not gravely
abuse its discretion when it ruled that respondent Pearlie Ann F. Alcaraz (Alcaraz) was illegally dismissed from her employment.
The Facts
On June 27, 2004, petitioner Abbott Laboratories, Philippines (Abbott) caused the publication in a major broadsheet newspaper of its
need for a Medical and Regulatory Affairs Manager (Regulatory Affairs Manager) who would: (a) be responsible for drug safety
surveillance operations, staffing, and budget; (b) lead the development and implementation of standard operating procedures/policies for
drug safety surveillance and vigilance; and (c) act as the primary interface with internal and external customers regarding safety
operations and queries.4 Alcaraz - who was then a Regulatory Affairs and Information Manager at Aventis Pasteur Philippines,
Incorporated (another pharmaceutical company like Abbott) showed interest and submitted her application on October 4, 2004.5
WHEREFORE, the petitions are hereby GRANTED.
CMV
72
On December 7, 2004, Abbott formally offered Alcaraz the abovementioned position which was an item under the companys Hospira
Affiliate Local Surveillance Unit (ALSU) department.6 In Abbotts offer sheet.7 it was stated that Alcaraz was to be employed on a
probationary basis.8 Later that day, she accepted the said offer and received an electronic mail (e-mail) from Abbotts Recruitment
Officer, petitioner Teresita C. Bernardo (Bernardo), confirming the same. Attached to Bernardos e-mail were Abbotts organizational
chart and a job description of Alcarazs work.9
On February 12, 2005, Alcaraz signed an employment contract which stated, inter alia, that she was to be placed on probation for a period
of six (6) months beginning February 15, 2005 to August 14, 2005. The said contract was also signed by Abbotts General Manager,
petitioner Edwin Feist (Feist):10
PROBATIONARY EMPLOYMENT
Dear Pearl,
After having successfully passed the pre-employment requirements, you are hereby appointed as follows:
It is understood that you agree to abide by all existing policies, rules and regulations of the company, as well as those, which may be
hereinafter promulgated.
Unless renewed, probationary appointment expires on the date indicated subject to earlier termination by the Company for any justifiable
reason.
If you agree to the terms and conditions of your employment, please signify your conformity below and return a copy to HRD.
Welcome to Abbott!
Very truly yours,
Sgd.
EDWIN D. FEIST
Position Title : Regulatory Affairs Manager
Department : Hospira
The terms of your employment are:
General Manager
CONFORME:
Sgd.
PEARLIE ANN FERRER-ALCARAZ
Nature of Employment : Probationary
Effectivity : February 15, 2005 to August 14, 2005
Basic Salary : P110,000.00/ month
CMV
During Alcarazs pre-employment orientation, petitioner Allan G. Almazar (Almazar), Hospiras Country Transition Manager, briefed her on
her duties and responsibilities as Regulatory Affairs Manager, stating that: (a) she will handle the staff of Hospira ALSU and will directly
report to Almazar on matters regarding Hopiras local operations, operational budget, and performance evaluation of the Hospira ALSU
Staff who are on probationary status; (b) she must implement Abbotts Code of Good Corporate Conduct (Code of Conduct), office policies
on human resources and finance, and ensure that Abbott will hire people who are fit in the organizational discipline; (c) petitioner Kelly
Walsh (Walsh), Manager of the Literature Drug Surveillance Drug Safety of Hospira, will be her immediate supervisor; (d) she should
always coordinate with Abbotts human resource officers in the management and discipline of the staff; (e) Hospira ALSU will spin off
from Abbott in early 2006 and will be officially incorporated and known as Hospira, Philippines. In the interim, Hospira ALSU operations
will still be under Abbotts management, excluding the technical aspects of the operations which is under the control and supervision of
Walsh; and (f) the processing of information and/or raw material data subject of Hospira ALSU operations will be strictly confined and
controlled under the computer system and network being maintained and operated from the United States. For this purpose, all those
73
involved in Hospira ALSU are required to use two identification cards: one, to identify them as Abbotts employees and another, to
identify them as Hospira employees.11
On March 3, 2005, petitioner Maria Olivia T. Yabut-Misa (Misa), Abbotts Human Resources (HR) Director, sent Alcaraz an e-mail which
contained an explanation of the procedure for evaluating the performance of probationary employees and further indicated that Abbott
had only one evaluation system for all of its employees. Alcaraz was also given copies of Abbotts Code of Conduct and Probationary
Performance Standards and Evaluation (PPSE) and Performance Excellence Orientation Modules (Performance Modules) which she had to
apply in line with her task of evaluating the Hospira ALSU staff.12
Abbotts PPSE procedure mandates that the job performance of a probationary employee should be formally reviewed and discussed with
the employee at least twice: first on the third month and second on the fifth month from the date of employment. The necessary
Performance Improvement Plan should also be made during the third-month review in case of a gap between the employees
performance and the standards set. These performance standards should be discussed in detail with the employee within the first two (2)
weeks on the job. It was equally required that a signed copy of the PPSE form must be submitted to Abbotts Human Resources
Department (HRD) and shall serve as documentation of the employees performance during his/her probationary period. This shall form
the basis for recommending the confirmation or termination of the probationary employment.13
During the course of her employment, Alcaraz noticed that some of the staff had disciplinary problems. Thus, she would reprimand them
for their unprofessional behavior such as non-observance of the dress code, moonlighting, and disrespect of Abbott officers. However,
Alcarazs method of management was considered by Walsh to be "too strict."14 Alcaraz approached Misa to discuss these concerns and
was told to "lie low" and let Walsh handle the matter. Misa even assured her that Abbotts HRD would support her in all her management
decisions.15
On April 12, 2005, Alcaraz received an e-mail from Misa requesting immediate action on the staffs performance evaluation as their
probationary periods were about to end. This Alcaraz eventually submitted.16
On April 20, 2005, Alcaraz had a meeting with petitioner Cecille Terrible (Terrible), Abbotts former HR Director, to discuss certain issues
regarding staff performance standards. In the course thereof, Alcaraz accidentally saw a printed copy of an e-mail sent by Walsh to some
staff members which essentially contained queries regarding the formers job performance. Alcaraz asked if Walshs action was the
normal process of evaluation. Terrible said that it was not.17
On May 16, 2005, Alcaraz was called to a meeting with Walsh and Terrible where she was informed that she failed to meet the
regularization standards for the position of Regulatory Affairs Manager.18 Thereafter, Walsh and Terrible requested Alcaraz to tender her
resignation, else they be forced to terminate her services. She was also told that, regardless of her choice, she should no longer report for
work and was asked to surrender her office identification cards. She requested to be given one week to decide on the same, but to no
avail.19
CMV
On May 17, 2005, Alcaraz told her administrative assistant, Claude Gonzales (Gonzales), that she would be on leave for that day. However,
Gonzales told her that Walsh and Terrible already announced to the whole Hospira ALSU staff that Alcaraz already resigned due to health
reasons.20
On May 23, 2005, Walsh, Almazar, and Bernardo personally handed to Alcaraz a letter stating that her services had been terminated
effective May 19, 2005.21 The letter detailed the reasons for Alcarazs termination particularly, that Alcaraz: (a) did not manage her
time effectively; (b) failed to gain the trust of her staff and to build an effective rapport with them; (c) failed to train her staff effectively;
and (d) was not able to obtain the knowledge and ability to make sound judgments on case processing and article review which were
necessary for the proper performance of her duties.22 On May 27, 2005, Alcaraz received another copy of the said termination letter via
registered mail.23
Alcaraz felt that she was unjustly terminated from her employment and thus, filed a complaint for illegal dismissal and damages against
Abbott and its officers, namely, Misa, Bernardo, Almazar, Walsh, Terrible, and Feist.24 She claimed that she should have already been
considered as a regular and not a probationary employee given Abbotts failure to inform her of the reasonable standards for her
regularization upon her engagement as required under Article 29525 of the Labor Code. In this relation, she contended that while her
employment contract stated that she was to be engaged on a probationary status, the same did not indicate the standards on which her
regularization would be based.26 She further averred that the individual petitioners maliciously connived to illegally dismiss her when: (a)
they threatened her with termination; (b) she was ordered not to enter company premises even if she was still an employee thereof; and
(c) they publicly announced that she already resigned in order to humiliate her.27
On the contrary, petitioners maintained that Alcaraz was validly terminated from her probationary employment given her failure to satisfy
the prescribed standards for her regularization which were made known to her at the time of her engagement.28
The LA Ruling
In a Decision dated March 30, 2006,29 the LA dismissed Alcarazs complaint for lack of merit.
The LA rejected Alcarazs argument that she was not informed of the reasonable standards to qualify as a regular employee considering
her admissions that she was briefed by Almazar on her work during her pre-employment orientation meeting30 and that she received
copies of Abbotts Code of Conduct and Performance Modules which were used for evaluating all types of Abbott employees.31 As
Alcaraz was unable to meet the standards set by Abbott as per her performance evaluation, the LA ruled that the termination of her
probationary employment was justified.32 Lastly, the LA found that there was no evidence to conclude that Abbotts officers and
employees acted in bad faith in terminating Alcarazs employment.33
74
Displeased with the LAs ruling, Alcaraz filed an appeal with the National Labor Relations Commission (NLRC).
The NLRC Ruling
On September 15, 2006, the NLRC rendered a Decision,34 annulling and setting aside the LAs ruling, the dispositive portion of which
reads:
The NLRC reversed the findings of the LA and ruled that there was no evidence showing that Alcaraz had been apprised of her
probationary status and the requirements which she should have complied with in order to be a regular employee.36 It held that Alcarazs
receipt of her job description and Abbotts Code of Conduct and Performance Modules was not equivalent to her being actually informed
of the performance standards upon which she should have been evaluated on.37 It further observed that Abbott did not comply with its
own standard operating procedure in evaluating probationary employees.38 The NLRC was also not convinced that Alcaraz was
terminated for a valid cause given that petitioners allegation of Alcarazs "poor performance" remained unsubstantiated.39
Petitioners filed a motion for reconsideration which was denied by the NLRC in a Resolution dated July 31, 2007.40
WHEREFORE, the Decision of the Labor Arbiter dated 31 March 2006 [sic] is hereby reversed, annulled and set aside and judgment is
hereby rendered:
1. Finding respondents Abbot [sic] and individual respondents to have committed illegal dismissal;
2. Respondents are ordered to immediately reinstate complainant to her former position without loss of seniority rights immediately
upon receipt hereof;
3. To jointly and severally pay complainant backwages computed from 16 May 2005 until finality of this decision. As of the date hereof the
backwages is computed at
a. Backwages for 15 months -
PhP 1,650,000.00
b. 13th month pay - 110,000.00

TOTAL
Aggrieved, petitioners filed with the CA a Petition for Certiorari with Prayer for Issuance of a Temporary Restraining Order and/or Writ of
Preliminary Injunction, docketed as CA G.R. SP No. 101045 (First CA Petition), alleging grave abuse of discretion on the part of NLRC when
it ruled that Alcaraz was illegally dismissed.41
Pending resolution of the First CA Petition, Alcaraz moved for the execution of the NLRCs Decision before the LA, which petitioners
strongly opposed. The LA denied the said motion in an Order dated July 8, 2008 which was, however, eventually reversed on appeal by
the NLRC.42 Due to the foregoing, petitioners filed another Petition for Certiorari with the CA, docketed as CA G.R. SP No. 111318 (Second
CA Petition), assailing the propriety of the execution of the NLRC decision.43
The CA Ruling
With regard to the First CA Petition, the CA, in a Decision44 dated December 10, 2009, affirmed the ruling of the NLRC and held that the
latter did not commit any grave abuse of discretion in finding that Alcaraz was illegally dismissed.
PhP 1,760,000.00
4. Respondents are ordered to pay complainant moral damages of P50,000.00 and exemplary damages of P50,000.00.
5. Respondents are also ordered to pay attorneys fees of 10% of the total award.
It observed that Alcaraz was not apprised at the start of her employment of the reasonable standards under which she could qualify as a
regular employee.45 This was based on its examination of the employment contract which showed that the same did not contain any
standard of performance or any stipulation that Alcaraz shall undergo a performance evaluation before she could qualify as a regular
employee.46 It also found that Abbott was unable to prove that there was any reasonable ground to terminate Alcarazs employment.47
Abbott moved for the reconsideration of the aforementioned ruling which was, however, denied by the CA in a Resolution48 dated June
9, 2010.
6. All other claims are dismissed for lack of merit.

The CA likewise denied the Second CA Petition in a Resolution dated May 18, 2010 (May 18, 2010 Resolution) and ruled that the NLRC was
correct in upholding the execution of the NLRC Decision.49 Thus, petitioners filed a motion for reconsideration.
SO ORDERED.35
CMV
75
While the petitioners motion for reconsideration of the CAs May 18, 2010 Resolution was pending, Alcaraz again moved for the issuance
of a writ of execution before the LA. On June 7, 2010, petitioners received the LAs order granting Alcarazs motion for execution which
they in turn appealed to the NLRC through a Memorandum of Appeal dated June 16, 2010 (June 16, 2010 Memorandum of Appeal ) on
the ground that the implementation of the LAs order would render its motion for reconsideration moot and academic.50
avoidance of the act of forum shopping itself. There is a difference in the treatment between failure to comply with the certification
requirement and violation of the prohibition against forum shopping not only in terms of imposable sanctions but also in the manner of
enforcing them. The former constitutes sufficient cause for the dismissal without prejudice to the filing of the complaint or initiatory
pleading upon motion and after hearing, while the latter is a ground for summary dismissal thereof and for direct contempt. x x x. 56
Meanwhile, petitioners motion for reconsideration of the CAs May 18, 2010 Resolution in the Second CA Petition was denied via a
Resolution dated October 4, 2010.51 This attained finality on January 10, 2011 for petitioners failure to timely appeal the same.52 Hence,
as it stands, only the issues in the First CA petition are left to be resolved.
As to the first, forum shopping takes place when a litigant files multiple suits involving the same parties, either simultaneously or
successively, to secure a favorable judgment. It exists where the elements of litis pendentia are present, namely: (a) identity of parties, or
at least such parties who represent the same interests in both actions; (b) identity of rights asserted and relief prayed for, the relief being
founded on the same facts; and (c) the identity with respect to the two preceding particulars in the two (2) cases is such that any
judgment that may be rendered in the pending case, regardless of which party is successful, would amount to res judicata in the other
case.57
Incidentally, in her Comment dated November 15, 2010, Alcaraz also alleges that petitioners were guilty of forum shopping when they
filed the Second CA Petition pending the resolution of their motion for reconsideration of the CAs December 10, 2009 Decision i.e., the
decision in the First CA Petition.53 She also contends that petitioners have not complied with the certification requirement under Section
5, Rule 7 of the Rules of Court when they failed to disclose in the instant petition the filing of the June 16, 2010 Memorandum of Appeal
filed before the NLRC.54
The Issues Before the Court
The following issues have been raised for the Courts resolution: (a) whether or not petitioners are guilty of forum shopping and have
violated the certification requirement under Section 5, Rule 7 of the Rules of Court; (b) whether or not Alcaraz was sufficiently informed of
the reasonable standards to qualify her as a regular employee; (c) whether or not Alcaraz was validly terminated from her employment;
and (d) whether or not the individual petitioners herein are liable.
The Courts Ruling
In this case, records show that, except for the element of identity of parties, the elements of forum shopping do not exist. Evidently, the
First CA Petition was instituted to question the ruling of the NLRC that Alcaraz was illegally dismissed. On the other hand, the Second CA
Petition pertains to the propriety of the enforcement of the judgment award pending the resolution of the First CA Petition and the
finality of the decision in the labor dispute between Alcaraz and the petitioners. Based on the foregoing, a judgment in the Second CA
Petition will not constitute res judicata insofar as the First CA Petition is concerned. Thus, considering that the two petitions clearly cover
different subject matters and causes of action, there exists no forum shopping.
As to the second, Alcaraz further imputes that the petitioners violated the certification requirement under Section 5, Rule 7 of the Rules of
Court58 by not disclosing the fact that it filed the June 16, 2010 Memorandum of Appeal before the NLRC in the instant petition.
In this regard, Section 5(b), Rule 7 of the Rules of Court requires that a plaintiff who files a case should provide a complete statement of
the present status of any pending case if the latter involves the same issues as the one that was filed. If there is no such similar pending
case, Section 5(a) of the same rule provides that the plaintiff is obliged to declare under oath that to the best of his knowledge, no such
other action or claim is pending.
A. Forum Shopping and

Violation of Section 5, Rule 7
of the Rules of Court.
At the outset, it is noteworthy to mention that the prohibition against forum shopping is different from a violation of the certification
requirement under Section 5, Rule 7 of the Rules of Court. In Sps. Ong v. CA,55 the Court explained that:
Records show that the issues raised in the instant petition and those in the June 16, 2010 Memorandum of Appeal filed with the NLRC
likewise cover different subject matters and causes of action. In this case, the validity of Alcarazs dismissal is at issue whereas in the said
Memorandum of Appeal, the propriety of the issuance of a writ of execution was in question.
Thus, given the dissimilar issues, petitioners did not have to disclose in the present petition the filing of their June 16, 2010 Memorandum
of Appeal with the NLRC. In any event, considering that the issue on the propriety of the issuance of a writ of execution had been resolved
in the Second CA Petition which in fact had already attained finality the matter of disclosing the June 16, 2010 Memorandum of Appeal
is now moot and academic.
x x x The distinction between the prohibition against forum shopping and the certification requirement should by now be too elementary
to be misunderstood. To reiterate, compliance with the certification against forum shopping is separate from and independent of the
CMV
76
Having settled the foregoing procedural matter, the Court now proceeds to resolve the substantive issues.
the duties and responsibilities which have been clearly made known to him constitutes a justifiable basis for a probationary employees
non-regularization.
B. Probationary employment;
grounds for termination.
A probationary employee, like a regular employee, enjoys security of tenure. However, in cases of probationary employment, aside from
just or authorized causes of termination, an additional ground is provided under Article 295 of the Labor Code, i.e., the probationary
employee may also be terminated for failure to qualify as a regular employee in accordance with the reasonable standards made known
by the employer to the employee at the time of the engagement.59 Thus, the services of an employee who has been engaged on
probationary basis may be terminated for any of the following: (a) a just or (b) an authorized cause; and (c) when he fails to qualify as a
regular employee in accordance with reasonable standards prescribed by the employer.60
Corollary thereto, Section 6(d), Rule I, Book VI of the Implementing Rules of the Labor Code provides that if the employer fails to inform
the probationary employee of the reasonable standards upon which the regularization would be based on at the time of the engagement,
then the said employee shall be deemed a regular employee, viz.:
(d) In all cases of probationary employment, the employer shall make known to the employee the standards under which he will qualify as
a regular employee at the time of his engagement. Where no standards are made known to the employee at that time, he shall be
deemed a regular employee.
In this case, petitioners contend that Alcaraz was terminated because she failed to qualify as a regular employee according to Abbotts
standards which were made known to her at the time of her engagement. Contrarily, Alcaraz claims that Abbott never apprised her of
these standards and thus, maintains that she is a regular and not a mere probationary employee.
The Court finds petitioners assertions to be well-taken.
A punctilious examination of the records reveals that Abbott had indeed complied with the above-stated requirements. This conclusion is
largely impelled by the fact that Abbott clearly conveyed to Alcaraz her duties and responsibilities as Regulatory Affairs Manager prior to,
during the time of her engagement, and the incipient stages of her employment. On this score, the Court finds it apt to detail not only the
incidents which point out to the efforts made by Abbott but also those circumstances which would show that Alcaraz was well-apprised of
her employers expectations that would, in turn, determine her regularization:
(a) On June 27, 2004, Abbott caused the publication in a major broadsheet newspaper of its need for a Regulatory Affairs Manager,
indicating therein the job description for as well as the duties and responsibilities attendant to the aforesaid position; this prompted
Alcaraz to submit her application to Abbott on October 4, 2004;
(b) In Abbotts December 7, 2004 offer sheet, it was stated that Alcaraz was to be employed on a probationary status;
In other words, the employer is made to comply with two (2) requirements when dealing with a probationary employee: first, the
employer must communicate the regularization standards to the probationary employee; and second, the employer must make such
communication at the time of the probationary employees engagement. If the employer fails to comply with either, the employee is
deemed as a regular and not a probationary employee.
Keeping with these rules, an employer is deemed to have made known the standards that would qualify a probationary employee to be a
regular employee when it has exerted reasonable efforts to apprise the employee of what he is expected to do or accomplish during the
trial period of probation. This goes without saying that the employee is sufficiently made aware of his probationary status as well as the
length of time of the probation.
(c) On February 12, 2005, Alcaraz signed an employment contract which specifically stated, inter alia, that she was to be placed on
probation for a period of six (6) months beginning February 15, 2005 to August 14, 2005;
(d) On the day Alcaraz accepted Abbotts employment offer, Bernardo sent her copies of Abbotts organizational structure and her job
description through e-mail;
(e) Alcaraz was made to undergo a pre-employment orientation where Almazar informed her that she had to implement Abbotts Code of
Conduct and office policies on human resources and finance and that she would be reporting directly to Walsh;
The exception to the foregoing is when the job is self-descriptive in nature, for instance, in the case of maids, cooks, drivers, or
messengers.61 Also, in Aberdeen Court, Inc. v. Agustin,62 it has been held that the rule on notifying a probationary employee of the
standards of regularization should not be used to exculpate an employee who acts in a manner contrary to basic knowledge and common
sense in regard to which there is no need to spell out a policy or standard to be met. In the same light, an employees failure to perform
CMV
(f) Alcaraz was also required to undergo a training program as part of her orientation;
77
(g) Alcaraz received copies of Abbotts Code of Conduct and Performance Modules from Misa who explained to her the procedure for
evaluating the performance of probationary employees; she was further notified that Abbott had only one evaluation system for all of its
employees; and
(h) Moreover, Alcaraz had previously worked for another pharmaceutical company and had admitted to have an "extensive training and
background" to acquire the necessary skills for her job.63
Considering the totality of the above-stated circumstances, it cannot, therefore, be doubted that Alcaraz was well-aware that her
regularization would depend on her ability and capacity to fulfill the requirements of her position as Regulatory Affairs Manager and that
her failure to perform such would give Abbott a valid cause to terminate her probationary employment.
Verily, basic knowledge and common sense dictate that the adequate performance of ones duties is, by and of itself, an inherent and
implied standard for a probationary employee to be regularized; such is a regularization standard which need not be literally spelled out
or mapped into technical indicators in every case. In this regard, it must be observed that the assessment of adequate duty performance
is in the nature of a management prerogative which when reasonably exercised as Abbott did in this case should be respected. This is
especially true of a managerial employee like Alcaraz who was tasked with the vital responsibility of handling the personnel and important
matters of her department.
A different procedure is applied when terminating a probationary employee; the usual two-notice rule does not govern.65 Section 2, Rule
I, Book VI of the Implementing Rules of the Labor Code states that "if the termination is brought about by the x x x failure of an employee
to meet the standards of the employer in case of probationary employment, it shall be sufficient that a written notice is served the
employee, within a reasonable time from the effective date of termination."
As the records show, Alcaraz's dismissal was effected through a letter dated May 19, 2005 which she received on May 23, 2005 and again
on May 27, 2005. Stated therein were the reasons for her termination, i.e., that after proper evaluation, Abbott determined that she
failed to meet the reasonable standards for her regularization considering her lack of time and people management and decision-making
skills, which are necessary in the performance of her functions as Regulatory Affairs Manager.66 Undeniably, this written notice
sufficiently meets the criteria set forth above, thereby legitimizing the cause and manner of Alcarazs dismissal as a probationary
employee under the parameters set by the Labor Code.67
D. Employers violation of
company policy and
procedure.
In fine, the Court rules that Alcarazs status as a probationary employee and her consequent dismissal must stand. Consequently, in
holding that Alcaraz was illegally dismissed due to her status as a regular and not a probationary employee, the Court finds that the NLRC
committed a grave abuse of discretion.
Nonetheless, despite the existence of a sufficient ground to terminate Alcarazs employment and Abbotts compliance with the Labor
Code termination procedure, it is readily apparent that Abbott breached its contractual obligation to Alcaraz when it failed to abide by its
own procedure in evaluating the performance of a probationary employee.
To elucidate, records show that the NLRC based its decision on the premise that Alcarazs receipt of her job description and Abbotts Code
of Conduct and Performance Modules was not equivalent to being actually informed of the performance standards upon which she
should have been evaluated on.64 It, however, overlooked the legal implication of the other attendant circumstances as detailed herein
which should have warranted a contrary finding that Alcaraz was indeed a probationary and not a regular employee more particularly
the fact that she was well-aware of her duties and responsibilities and that her failure to adequately perform the same would lead to her
non-regularization and eventually, her termination.
Veritably, a company policy partakes of the nature of an implied contract between the employer and employee. In Parts Depot, Inc. v.
Beiswenger,68 it has been held that:
Accordingly, by affirming the NLRCs pronouncement which is tainted with grave abuse of discretion, the CA committed a reversible error
which, perforce, necessitates the reversal of its decision.
Employer statements of policy . . . can give rise to contractual rights in employees without evidence that the parties mutually agreed that
the policy statements would create contractual rights in the employee, and, hence, although the statement of policy is signed by neither
party, can be unilaterally amended by the employer without notice to the employee, and contains no reference to a specific employee, his
job description or compensation, and although no reference was made to the policy statement in pre-employment interviews and the
employee does not learn of its existence until after his hiring. Toussaint, 292 N.W .2d at 892. The principle is akin to estoppel. Once an
employer establishes an express personnel policy and the employee continues to work while the policy remains in effect, the policy is
deemed an implied contract for so long as it remains in effect. If the employer unilaterally changes the policy, the terms of the implied
contract are also thereby changed.1wphi1 (Emphasis and underscoring supplied.)
C. Probationary employment;
termination procedure.
CMV
Hence, given such nature, company personnel policies create an obligation on the part of both the employee and the employer to abide
by the same.
78
Records show that Abbotts PPSE procedure mandates, inter alia, that the job performance of a probationary employee should be
formally reviewed and discussed with the employee at least twice: first on the third month and second on the fifth month from the date
of employment. Abbott is also required to come up with a Performance Improvement Plan during the third month review to bridge the
gap between the employees performance and the standards set, if any.69 In addition, a signed copy of the PPSE form should be
submitted to Abbotts HRD as the same would serve as basis for recommending the confirmation or termination of the probationary
employment.70
In this case, it is apparent that Abbott failed to follow the above-stated procedure in evaluating Alcaraz. For one, there lies a hiatus of
evidence that a signed copy of Alcarazs PPSE form was submitted to the HRD. It was not even shown that a PPSE form was completed to
formally assess her performance. Neither was the performance evaluation discussed with her during the third and fifth months of her
employment. Nor did Abbott come up with the necessary Performance Improvement Plan to properly gauge Alcarazs performance with
the set company standards.
While it is Abbotts management prerogative to promulgate its own company rules and even subsequently amend them, this right equally
demands that when it does create its own policies and thereafter notify its employee of the same, it accords upon itself the obligation to
faithfully implement them. Indeed, a contrary interpretation would entail a disharmonious relationship in the work place for the laborer
should never be mired by the uncertainty of flimsy rules in which the latters labor rights and duties would, to some extent, depend.
In this light, while there lies due cause to terminate Alcarazs probationary employment for her failure to meet the standards required for
her regularization, and while it must be further pointed out that Abbott had satisfied its statutory duty to serve a written notice of
termination, the fact that it violated its own company procedure renders the termination of Alcarazs employment procedurally infirm,
warranting the payment of nominal damages. A further exposition is apropos.
It was explained that if the dismissal is based on a just cause under Article 282 of the Labor Code (now Article 296) but the employer failed
to comply with the notice requirement, the sanction to be imposed upon him should be tempered because the dismissal process was, in
effect, initiated by an act imputable to the employee; if the dismissal is based on an authorized cause under Article 283 (now Article 297)
but the employer failed to comply with the notice requirement, the sanction should be stiffer because the dismissal process was initiated
by the employers exercise of his management prerogative.75 Hence, in Jaka, where the employee was dismissed for an authorized cause
of retrenchment76 as contradistinguished from the employee in Agabon who was dismissed for a just cause of neglect of duty77 the
Court ordered the employer to pay the employee nominal damages at the higher amount of P50,000.00.
Evidently, the sanctions imposed in both Agabon and Jaka proceed from the necessity to deter employers from future violations of the
statutory due process rights of employees.78 In similar regard, the Court deems it proper to apply the same principle to the case at bar for
the reason that an employers contractual breach of its own company procedure albeit not statutory in source has the parallel effect
of violating the laborers rights. Suffice it to state, the contract is the law between the parties and thus, breaches of the same impel
recompense to vindicate a right that has been violated. Consequently, while the Court is wont to uphold the dismissal of Alcaraz because
a valid cause exists, the payment of nominal damages on account of Abbotts contractual breach is warranted in accordance with Article
2221 of the Civil Code.79
Anent the proper amount of damages to be awarded, the Court observes that Alcarazs dismissal proceeded from her failure to comply
with the standards required for her regularization. As such, it is undeniable that the dismissal process was, in effect, initiated by an act
imputable to the employee, akin to dismissals due to just causes under Article 296 of the Labor Code. Therefore, the Court deems it
appropriate to fix the amount of nominal damages at the amount of P30,000.00, consistent with its rulings in both Agabon and Jaka.
E. Liability of individual
petitioners as corporate
officers.
Case law has settled that an employer who terminates an employee for a valid cause but does so through invalid procedure is liable to pay
the latter nominal damages.
In Agabon v. NLRC (Agabon),71 the Court pronounced that where the dismissal is for a just cause, the lack of statutory due process should
not nullify the dismissal, or render it illegal, or ineffectual. However, the employer should indemnify the employee for the violation of his
statutory rights.72 Thus, in Agabon, the employer was ordered to pay the employee nominal damages in the amount of P30,000.00.73
It is hornbook principle that personal liability of corporate directors, trustees or officers attaches only when: (a) they assent to a patently
unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict
of interest resulting in damages to the corporation, its stockholders or other persons; (b) they consent to the issuance of watered down
stocks or when, having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (c) they
agree to hold themselves personally and solidarily liable with the corporation; or (d) they are made by specific provision of law personally
answerable for their corporate action.80
Proceeding from the same ratio, the Court modified Agabon in the case of Jaka Food Processing Corporation v. Pacot (Jaka)74 where it
created a distinction between procedurally defective dismissals due to a just cause, on one hand, and those due to an authorized cause,
on the other.
In this case, Alcaraz alleges that the individual petitioners acted in bad faith with regard to the supposed crude manner by which her
probationary employment was terminated and thus, should be held liable together with Abbott. In the same vein, she further attributes
the loss of some of her remaining belongings to them.81
CMV
79
Alcarazs contention fails to persuade.
A judicious perusal of the records show that other than her unfounded assertions on the matter, there is no evidence to support the fact
that the individual petitioners herein, in their capacity as Abbotts officers and employees, acted in bad faith or were motivated by ill will
in terminating
Alcarazs services. The fact that Alcaraz was made to resign and not allowed to enter the workplace does not necessarily indicate bad faith
on Abbotts part since a sufficient ground existed for the latter to actually proceed with her termination. On the alleged loss of her
personal belongings, records are bereft of any showing that the same could be attributed to Abbott or any of its officers. It is a wellsettled rule that bad faith cannot be presumed and he who alleges bad faith has the onus of proving it. All told, since Alcaraz failed to
prove any malicious act on the part of Abbott or any of its officers, the Court finds the award of moral or exemplary damages
unwarranted.
WHEREFORE, the petition is GRANTED. The Decision dated December 10, 2009 and Resolution dated June 9, 2010 of the Court of Appeals
in CA-G.R. SP No. 101045 are hereby REVERSED and SET ASIDE. Accordingly, the Decision dated March 30, 2006 of the Labor Arbiter is
REINSTATED with the MODIFICATION that petitioner Abbott Laboratories, Philippines be ORDERED to pay respondent Pearlie Ann F.
Alcaraz nominal damages in the amount of P30,000.00 on account of its breach of its own company procedure.
SO ORDERED.
G.R. No. 186433
November 27, 2013
G.R. CV. No. 87879. The CA decision affirmed the December 15, 2004 decision4 of the Regional Trial Court RTC) of Makati City, Branch
136, in Civil Case No. 00-594. The CA subsequently denied the petitioners motion for reconsideration.
The Factual Antecedents
On July 22, 1996, the respondent granted a loan to NSI. The loan was made pursuant to the Memorandum of Agreement and Promissory
Note (MOA)5 between the respondent and NSI, represented by Nuccio. It was agreed that the respondent would extend a credit line with
a limit of P500,000.00 to NSI, to be paid within thirty (30) days from the time of the signing of the document. The loan carried an interest
rate of 17% per annum, or at an adjusted rate of 25% per annum if payment is beyond the stipulated period. The petitioners received a
total amount of P300,000.00 and certain machineries intended for their fertilizer processing plant business (business). The proposed
business, however, failed to materialize.
On several occasions, Nuccio made personal payments amounting to P600,000.00. However, as of December 16, 1999, the petitioners
allegedly had an outstanding balance of P460,505.86. When the petitioners defaulted in the payment of the loan, the respondent filed a
collection suit with the RTC, alleging mainly that the petitioners still owe him the value of the machineries as shown by the Breakdown of
Account6 he presented.
The petitioners refuted the respondents allegation and insisted that they have already paid the loan, evidenced by the respondents
receipt for the amount of P600,000.00. They submitted that their remaining obligation to pay the machineries value, if any, had long
been extinguished by their business failure to materialize. They posited that, even assuming without conceding that they are liable, the
amount being claimed is inaccurate, the penalty and the interest imposed are unconscionable, and an independent accounting is needed
to determine the exact amount of their liability.
NUCCIO SAVERIO and NS INTERNATIONAL INC., Petitioners,

The RTC Ruling
vs.
ALFONSO G. PUYAT, Respondent.
DECISION
BRION, J.:
In its decision dated December 15, 2004, the RTC found that aside from the cash loan, the petitioners obligation to the respondent also
covered the payment of the machineries value. The RTC also brushed aside the petitioners claim of partnership. The RTC thus ruled that
the payment of P600,000.00 did not completely extinguish the petitioners obligation.
The RTC also found merit in the respondents contention that the petitioners are one and the same. Based on Nuccios act of entering a
loan with the respondent for purposes of financing NSIs proposed business and his own admission during cross-examination that the
word "NS" in NSIs name stands for "Nuccio Saverio," the RTC found that the application of the doctrine of piercing the veil of corporate
fiction was proper.
We resolve the petition for review on certiorari,1 filed by petitioners Nuccio Saverio and NS International, Inc. (NS) against respondent
Alfonso G. Puyat, challenging the October 27, 2008 decision2 and the February 10, 2009 resolution3 of the Court of Appeals (CA) in CA-
CMV
80
The RTC, moreover, concluded that the interest rates stipulated in the MOA were not usurious and that the respondent is entitled to
attorneys fees on account of the petitioners willful breach of the loan obligation. Thus, principally relying on the submitted Breakdown of
Account, the RTC ordered the petitioners, jointly and severally, to pay the balance of P460,505.86, at 12% interest, and attorneys fees
equivalent to 25% of the total amount due.
The CA Ruling
The petitioners appealed the RTC ruling to the CA. There, they argued that in view of the lack of proper accounting and the respondents
failure to substantiate his claims, the exact amount of their indebtedness had not been proven. Nuccio also argued that by virtue of NSIs
separate and distinct personality, he cannot be made solidarily liable with NSI.
The Case for the Respondent
The respondent counters that the issues raised by the petitioners in the present petition pertaining to the correctness of the calibration
of the documentary and testimonial evidence by the RTC, as affirmed by the CA, in awarding the money claims are essentially factual,
not legal. These issues, therefore, cannot, as a general rule, be reviewed by the Supreme Court in an appeal by certiorari. In other words,
the resolution of the assigned errors is beyond the ambit of a Rule 45 petition.
The Issue
The case presents to us the issue of whether the CA committed a reversible error in affirming the RTCs decision holding the petitioners
jointly and severally liable for the amount claimed.
On October 27, 2008, the CA rendered a decision7 declaring the petitioners jointly and severally liable for the amount that the respondent
sought. The appellate court likewise held that since the petitioners neither questioned the delivery of the machineries nor their valuation,
their obligation to pay the amount of P460,505.86 under the Breakdown of Account remained unrefuted.
The CA also affirmed the RTC ruling that petitioners are one and the same for the following reasons: (1) Nuccio owned forty percent (40%)
of NSI; (2) Nuccio personally entered into the loan contract with the respondent because there was no board resolution from NSI; (3) the
petitioners were represented by the same counsel; (4) the failure of NSI to object to Nuccios acts shows the latters control over the
corporation; and (5) Nuccios control over NSI was used to commit a wrong or fraud. It further adopted the RTCs findings of bad faith and
willful breach of obligation on the petitioners part, and affirmed its award of attorneys fees.
Our Ruling
After a review of the parties contentions, we hold that a remand of the case to the court of origin for a complete accounting and
determination of the actual amount of the petitioners indebtedness is called for.
The determination of questions of fact is improper in a Rule 45 proceeding; Exceptions.

The Petition
The petitioners submit that the CA gravely erred in ruling that a proper accounting was not necessary. They argue that the Breakdown of
Account - which the RTC used as a basis in awarding the claim, as affirmed by the CA - is hearsay since the person who prepared it,
Ramoncito P. Puyat, was not presented in court to authenticate it. They also point to the absence of the awards computation in the RTC
ruling, arguing that assuming they are still indebted to the respondent, the specific amount of their indebtedness remains undetermined,
thus the need for an accounting to determine their exact liability.
They further question the CAs findings of solidary liability. They submit that in the absence of any showing that corporate fiction was
used to defeat public convenience, justify a wrong, protect fraud or defend a crime, or where the corporation is a mere alter ego or
business conduit of a person, Nuccios mere ownership of forty percent (40%) does not justify the piercing of the separate and distinct
personality of NSI.
CMV
The respondent questions the present petitions propriety, and contends that in a petition for review on certiorari under Rule 45 of the
Rules of Court, only questions of law may be raised. He argues that the petitioners are raising factual issues that are not permissible under
the present petition and these issues have already been extensively passed upon by the RTC and the CA. The petitioners, on the other
hand, assert that the exact amount of their indebtedness has not been determined with certainty. They insist that the amount of
P460,505.86 awarded in favor of the respondent has no basis because the latter failed to substantiate his claim. They also maintain that
the Breakdown of Account used by the lower courts in arriving at the collectible amount is unreliable for the respondents failure to
adduce supporting documents for the alleged additional expenses charged against them. With no independent determination of the
actual amount of their indebtedness, the petitioners submit that an order for a proper accounting is imperative.
We agree with the petitioners. While we find the fact of indebtedness to be undisputed, the determination of the extent of the adjudged
money award is not, because of the lack of any supporting documentary and testimonial evidence. These evidentiary issues, of course, are
necessarily factual, but as we held in The Insular Life Assurance Company, Ltd. v. Court of Appeals,8 this Court may take cognizance even
of factual issues under exceptional circumstances. In this cited case, we held:
81
It is a settled rule that in the exercise of the Supreme Court's power of review, the Court is not a trier of facts and does not normally
undertake the re-examination of the evidence presented by the contending parties during the trial of the case considering that the
findings of facts of the CA are conclusive and binding on the Court. However, the Court had recognized several exceptions to this rule, to
wit: (1) when the findings are grounded entirely on speculation, surmises or conjectures; (2) when the inference made is manifestly
mistaken, absurd or impossible; (3) when there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of
facts; (5) when the findings of facts are conflicting; (6) when in making its findings the Court of Appeals went beyond the issues of the
case, or its findings are contrary to the admissions of both the appellant and the appellee; (7) when the findings are contrary to the trial
court; (8) when the findings are conclusions without citation of specific evidence on which they are based; (9) when the facts set forth in
the petition as well as in the petitioner's main and reply briefs are not disputed by the respondent; (10) when the findings of fact are
premised on the supposed absence of evidence and contradicted by the evidence on record; and (11) when the Court of Appeals
manifestly overlooked certain relevant facts not disputed by the parties, which, if properly considered, would justify a different
conclusion.
We note in this regard that the RTC, in awarding the amount of P460,505.86 in favor of the respondent, principally relied on the
Breakdown of Account. Under this document, numerous entries, including the cash loan, were enumerated and identified with their
corresponding amounts. It included the items of expenses allegedly chargeable to the petitioners, the value of the machineries, the
amount credited as paid, and the interest and penalty allegedly incurred.
dark as to how their indebtedness of P300,000.00, after making a payment of P600,000.00, ballooned to P460,505.86. Worse,
unsubstantiated expenses, appearing in the Breakdown of Account, were charged to them.
We, therefore, hold it inescapable that the prayer for proper accounting to determine the petitioners actual remaining indebtedness
should be granted. As this requires presentation of additional evidence, a remand of the case is only proper and in order.
Piercing the veil of corporate fiction is not justified. The petitioners are not one and the same.
At the outset, we note that the question of whether NSI is an alter ego of Nuccio is a factual one. This is also true with respect to the
question of whether the totality of the evidence adduced by the respondent warrants the application of the piercing the veil of corporate
fiction doctrine. As we did in the issue of accounting, we hold that the Court may properly wade into the piercing the veil issue although
purely factual questions are involved.
After a careful study of the records and the findings of both the RTC and the CA, we hold that their conclusions, based on the given
findings, are not supported by the evidence on record.
A careful perusal of the records, however, reveals that the entries in the Breakdown of Account and their corresponding amounts are not
supported by the respondents presented evidence. The itemized expenses, as repeatedly pointed out by the petitioners, were not
proven, and the remaining indebtedness, after the partial payment of P600,000.00, was merely derived by the RTC from the Breakdown of
Account.
Significantly, the RTC ruling neither showed how the award was computed nor how the interest and penalty were calculated. In fact, it
merely declared the petitioners liable for the amount claimed by the respondent and adopted the breakdown of liability in the Breakdown
of Account. This irregularity is even aggravated by the RTCs explicit refusal to explain why the payment of P600,000.00 did not extinguish
the debt. While it may be true that the petitioners indebtedness, aside from the cash loan of P300,000.00, undoubtedly covered the
value of the machineries, the RTC decision was far from clear and instructive on the actual remaining indebtedness (inclusive of the
machineries value, penalties and interests) after the partial payment was made and how these were all computed.
We, thus, find it unacceptable for the RTC to simply come up with a conclusion that the payment of P600,000.00 did not extinguish the
debt, or, assuming it really did not, that the remaining amount of indebtedness amounts exactly to P460,505.86, without any showing of
how this balance was arrived at. To our mind, the RTCs ruling, in so far as the determination of the actual indebtedness is concerned, is
incomplete.
What happened at the RTC likewise transpired at the CA when the latter affirmed the appealed decision; the CA merely glossed over the
contention of the petitioners, and adopted the RTCs findings without giving any enlightenment. To reiterate, nowhere in the decisions of
the RTC and the CA did they specify how the award, including the penalty and interest, was determined. The petitioners were left in the
CMV
The rule is settled that a corporation is vested by law with a personality separate and distinct from the persons composing it. Following
this principle, a stockholder, generally, is not answerable for the acts or liabilities of the corporation, and vice versa. The obligations
incurred by the corporate officers, or other persons acting as corporate agents, are the direct accountabilities of the corporation they
represent, and not theirs. A director, officer or employee of a corporation is generally not held personally liable for obligations incurred by
the corporation9 and while there may be instances where solidary liabilities may arise, these circumstances are exceptional.10
Incidentally, we have ruled that mere ownership by a single stockholder or by another corporation of all or nearly all of the capital stocks
of the corporation is not, by itself, a sufficient ground for disregarding the separate corporate personality. Other than mere ownership of
capital stocks, circumstances showing that the corporation is being used to commit fraud or proof of existence of absolute control over
the corporation have to be proven. In short, before the corporate fiction can be disregarded, alter-ego elements must first be sufficiently
established.
In Hi-Cement Corporation v. Insular Bank of Asia and America (later PCI-Bank, now Equitable PCI-Bank),11 we refused to apply the piercing
the veil doctrine on the ground that the corporation was a mere alter ego because mere ownership by a stockholder of all or nearly all of
the capital stocks of a corporation does not, by itself, justify the disregard of the separate corporate personality. In this cited case, we
ruled that in order for the ground of corporate ownership to stand, the following circumstances should also be established: (1) that the
stockholders had control or complete domination of the corporations finances and that the latter had no separate existence with respect
to the act complained of; (2) that they used such control to commit a wrong or fraud; and (3) the control was the proximate cause of the
loss or injury.
82
Applying these principles to the present case, we opine and so hold that the attendant circumstances do not warrant the piercing of the
veil of NSIs corporate fiction.
Aside from the undisputed fact of Nuccios 40% shareholdings with NSI, the RTC applied the piercing the veil doctrine based on the
following reasons. First, there was no board resolution authorizing Nuccio to enter into a contract of loan. Second, the petitioners were
represented by one and the same counsel. Third, NSI did not object to Nuccios act of contracting the loan.
Fourth, the control over NSI was used to commit a wrong or fraud. Fifth, Nuccios admission that "NS" in the corporate name "NSI" means
"Nuccio Saverio."
Under the circumstances of the case, we find the respondents entitlement to attorneys fees to be justified. There is no doubt that he
was forced to litigate to protect his interest, i.e., to recover his money. We find, however, that in view of the partial payment of
P600,000.00, the award of attorneys fees equivalent to 25% should be reduced to 10% of the total amount due. The award of appearance
fee of P3,000.00 and litigation cost of P10,000.00 should, however, stand as these are costs necessarily attendant to litigation.
WHEREFORE, the petition is GRANTED. The October 27, 2008 decision and the February 10, 2009 resolution of the Court of Appeals in CAG.R. CV. No. 87879 are REVERSED AND SET ASIDE. The case is REMANDED to the Regional Trial Court of Makati City, Branch 136, for
proper accounting and reception of such evidence as may be needed to determine the actual amount of petitioner NS International, Inc.s
indebtedness, and to adjudicate respondent Alfonso G. Puyats claims as such evidence may warrant.
SO ORDERED.
PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and ROGELIO S. PANTALEON,
We are not convinced of the sufficiency of these cited reasons. In our view, the RTC failed to provide a clear and convincing explanation
why the doctrine was applied. It merely declared that its application of the doctrine of piercing the veil of corporate fiction has a basis,
specifying for this purpose the act of Nuccios entering into a contract of loan with the respondent and the reasons stated above.
The records of the case, however, do not show that Nuccio had control or domination over NSIs finances.1wphi1 The mere fact that it
was Nuccio who, in behalf of the corporation, signed the MOA is not sufficient to prove that he exercised control over the corporations
finances. Neither the absence of a board resolution authorizing him to contract the loan nor NSIs failure to object thereto supports this
conclusion. These may be indicators that, among others, may point the proof required to justify the piercing the veil of corporate fiction,
but by themselves, they do not rise to the level of proof required to support the desired conclusion. It should be noted in this regard that
while Nuccio was the signatory of the loan and the money was delivered to him, the proceeds of the loan were unquestionably intended
for NSIs proposed business plan. That the business did not materialize is not also sufficient proof to justify a piercing, in the absence of
proof that the business plan was a fraudulent scheme geared to secure funds from the respondent for the petitioners undisclosed goals.
Considering that the basis for holding Nuccio liable for the payment of the loan has been proven to be insufficient, we find no justification
for the RTC to hold him jointly and solidarily liable for NSIs unpaid loan. Similarly, we find that the CA ruling is wanting in sufficient
explanation to justify the doctrines application and affirmation of the RTCs ruling. With these points firmly in mind, we hold that NSIs
liability should not attach to Nuccio.
Petitioners,
versus -
ARTHUR F. MENCHAVEZ ,
Respondent.
G.R. No. 160545

On the final issue of the award of attorneys fees, Article 1229 of the New Civil Code provides:
Article 1229. The judge shall equitably reduce the penalty when the principal obligation has been partly or irregularly complied with by
the debtor. Even if there has been no performance, the penalty may also be reduced by the courts if it is iniquitous or unconscionable.
CMV
Present:
83
*NACHURA, J.,
BRION, Acting Chairperson,
DEL CASTILLO,
On December 8, 1993, Pantaleon, the President and Chairman of the Board of PRISMA, obtained a P1,000,000.00[4] loan from the
respondent, with a monthly interest of P40,000.00 payable for six months, or a total obligation of P1,240,000.00 to be paid within six (6)
months,[5] under the following schedule of payments:
ABAD, and
PEREZ, JJ.
January 8, 1994 . P40,000.00

February 8, 1994 ... P40,000.00
March 8, 1994 ... P40,000.00
April 8, 1994 . P40,000.00
Promulgated:
May 8, 1994 .. P40,000.00

June 8, 1994 P1,040,000.00*6+
March 9, 2010
Total
P1,240,000.00
To secure the payment of the loan, Pantaleon issued a promissory note[7] that states:
x------------------------------------------------------------------------------------------x
DECISION
BRION, J.:
I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION TWO HUNDRED FORTY THOUSAND PESOS (P1,240,000),
Philippine Currency, from Mr. Arthur F. Menchavez, representing a six-month loan payable according to the following schedule:
January 8, 1994 . P40,000.00

February 8, 1994 ... P40,000.00
We resolve in this Decision the petition for review on certiorari[1] filed by petitioners Prisma Construction & Development
Corporation (PRISMA) and Rogelio S. Pantaleon (Pantaleon) (collectively, petitioners) who seek to reverse and set aside the Decision[2]
dated May 5, 2003 and the Resolution[3] dated October 22, 2003 of the Former Ninth Division of the Court of Appeals (CA) in CA-G.R. CV
No. 69627. The assailed CA Decision affirmed the Decision of the Regional Trial Court (RTC), Branch 73, Antipolo City in Civil Case No. 974552 that held the petitioners liable for payment of P3,526,117.00 to respondent Arthur F. Menchavez (respondent), but modified the
interest rate from 4% per month to 12% per annum, computed from the filing of the complaint to full payment. The assailed CA
Resolution denied the petitioners Motion for Reconsideration.
March 8, 1994 ... P40,000.00

April 8, 1994 . P40,000.00
May 8, 1994 .. P40,000.00
June 8, 1994 P1,040,000.00
The checks corresponding to the above amounts are hereby acknowledged.[8]

FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly summarized below.
CMV
and six (6) postdated checks corresponding to the schedule of payments. Pantaleon signed the promissory note in his personal
capacity,[9] and as duly authorized by the Board of Directors of PRISMA.[10] The petitioners failed to completely pay the loan within the
stipulated six (6)-month period.
84
From September 8, 1994 to January 4, 1997, the petitioners paid the following amounts to the respondent:
September 8, 1994 P320,000.00

October 8, 1995.P600,000.00
The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to a 4% monthly interest principally based on the
board resolution that authorized Pantaleon to transact a loan with an approved interest of not more than 4% per month. The appellate
court, however, noted that the interest of 4% per month, or 48% per annum, was unreasonable and should be reduced to 12% per
annum. The CA affirmed the RTCs finding that PRISMA was a mere instrumentality of Pantaleon that justified the piercing of the veil of
corporate fiction. Thus, the CA modified the RTC Decision by imposing a 12% per annum interest, computed from the filing of the
complaint until finality of judgment, and thereafter, 12% from finality until fully paid.[17]
November 8, 1995.....P158,772.00
January 4, 1997 P30,000.00*11+
After the CA's denial[18] of their motion for reconsideration,[19] the petitioners filed the present petition for review on certiorari
under Rule 45 of the Rules of Court.
THE PETITION
As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00. However, the respondent found that the petitioners still
had an outstanding balance of P1,364,151.00 as of January 4, 1997, to which it applied a 4% monthly interest.[12] Thus, on August 28,
1997, the respondent filed a complaint for sum of money with the RTC to enforce the unpaid balance, plus 4% monthly interest,
P30,000.00 in attorneys fees, P1,000.00 per court appearance and costs of suit.[13]
In their Answer dated October 6, 1998, the petitioners admitted the loan of P1,240,000.00, but denied the stipulation on the 4%
monthly interest, arguing that the interest was not provided in the promissory note. Pantaleon also denied that he made himself
personally liable and that he made representations that the loan would be repaid within six (6) months.[14]
The petitioners submit that the CA mistakenly relied on their board resolution to conclude that the parties agreed to a 4% monthly
interest because the board resolution was not an evidence of a loan or forbearance of money, but merely an authorization for Pantaleon
to perform certain acts, including the power to enter into a contract of loan. The expressed mandate of Article 1956 of the Civil Code is
that interest due should be stipulated in writing, and no such stipulation exists. Even assuming that the loan is subject to 4% monthly
interest, the interest covers the six (6)-month period only and cannot be interpreted to apply beyond it. The petitioners also point out the
glaring inconsistency in the CA Decision, which reduced the interest from 4% per month or 48% per annum to 12% per annum, but failed
to consider that the amount of P3,526,117.00 that the RTC ordered them to pay includes the compounded 4% monthly interest.
THE RTC RULING
THE CASE FOR THE RESPONDENT
The RTC rendered a Decision on October 27, 2000 finding that the respondent issued a check for P1,000,000.00 in favor of the
petitioners for a loan that would earn an interest of 4% or P40,000.00 per month, or a total of P240,000.00 for a 6-month period. It
noted that the petitioners made several payments amounting to P1,228,772.00, but they were still indebted to the respondent for
P3,526,117.00 as of February 11,[15] 1999 after considering the 4% monthly interest. The RTC observed that PRISMA was a one-man
corporation of Pantaleon and used this circumstance to justify the piercing of the veil of corporate fiction. Thus, the RTC ordered the
petitioners to jointly and severally pay the respondent the amount of P3,526,117.00 plus 4% per month interest from February 11, 1999
until fully paid.[16]
The respondent counters that the CA correctly ruled that the loan is subject to a 4% monthly interest because the board resolution is
attached to, and an integral part of, the promissory note based on which the petitioners obtained the loan. The respondent further
contends that the petitioners are estopped from assailing the 4% monthly interest, since they agreed to pay the 4% monthly interest on
the principal amount under the promissory note and the board resolution.
The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of the Rules of Court, insisting that there was no
express stipulation on the 4% monthly interest.
THE ISSUE
The core issue boils down to whether the parties agreed to the 4% monthly interest on the loan. If so, does the rate of interest apply
to the 6-month payment period only or until full payment of the loan?
THE CA RULING
CMV
85
OUR RULING
We find the petition meritorious.
We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61,[27] Sulit v. Court of Appeals,[28] Crismina Garments,
Inc. v. Court of Appeals,[29] Eastern Assurance and Surety Corporation v. Court of Appeals,[30] Sps. Catungal v. Hao,[31] Yong v. Tiu,[32]
and Sps. Barrera v. Sps. Lorenzo.[33] Thus, the RTC and the CA misappreciated the facts of the case; they erred in finding that the parties
agreed to a 4% interest, compounded by the application of this interest beyond the promissory notes six (6)-month period. The facts
show that the parties agreed to the payment of a specific sum of money of P40,000.00 per month for six months, not to a 4% rate of
interest payable within a six (6)-month period.
Interest due should be stipulated in writing; otherwise, 12% per annum

Medel v. Court of Appeals not applicable
Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good
faith.[20] When the terms of a contract are clear and leave no doubt as to the intention of the contracting parties, the literal meaning of
its stipulations governs.[21] In such cases, courts have no authority to alter the contract by construction or to make a new contract for the
parties; a court's duty is confined to the interpretation of the contract the parties made for themselves without regard to its wisdom or
folly, as the court cannot supply material stipulations or read into the contract words the contract does not contain.[22] It is only when
the contract is vague and ambiguous that courts are permitted to resort to the interpretation of its terms to determine the parties intent.
In the present case, the respondent issued a check for P1,000,000.00.[23] In turn, Pantaleon, in his personal capacity and as
authorized by the Board, executed the promissory note quoted above.
Thus, the P1,000,000.00 loan shall be payable within six (6)
months, or from January 8, 1994 up to June 8, 1994. During this period, the loan shall earn an interest of P40,000.00 per month, for a
total obligation of P1,240,000.00 for the six-month period. We note that this agreed sum can be computed at 4% interest per month, but
no such rate of interest was stipulated in the promissory note; rather a fixed sum equivalent to this rate was agreed upon.
Article 1956 of the Civil Code specifically mandates that no interest shall be due unless it has been expressly stipulated in writing.
Under this provision, the payment of interest in loans or forbearance of money is allowed only if: (1) there was an express stipulation for
the payment of interest; and (2) the agreement for the payment of interest was reduced in writing. The concurrence of the two conditions
is required for the payment of interest at a stipulated rate. Thus, we held in Tan v. Valdehueza[24] and Ching v. Nicdao[25] that collection
of interest without any stipulation in writing is prohibited by law.
Applying this provision, we find that the interest of P40,000.00 per month corresponds only to the six (6)-month period of the loan,
or from January 8, 1994 to June 8, 1994, as agreed upon by the parties in the promissory note. Thereafter, the interest on the loan should
be at the legal interest rate of 12% per annum, consistent with our ruling in Eastern Shipping Lines, Inc. v. Court of Appeals:[26]
When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or forbearance of money, the interest due
should be that which may have been stipulated in writing. Furthermore, the interest due shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code. (Emphasis supplied)
CMV
The CA misapplied Medel v. Court of Appeals[34] in finding that a 4% interest per month was unconscionable.
In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5% per month, a service charge of 2% per annum, and
a penalty charge of 1% per month, plus attorneys fee equivalent to 25% of the amount due, until the loan is fully paid. Taken in
conjunction with the stipulated service charge and penalty, we found the interest rate of 5.5% to be excessive, iniquitous, unconscionable,
exorbitant and hence, contrary to morals, thereby rendering the stipulation null and void.
Applying Medel, we invalidated and reduced the stipulated interest in Spouses Solangon v. Salazar[35] of 6% per month or 72% per
annum interest on a P60,000.00 loan; in Ruiz v. Court of Appeals,[36] of 3% per month or 36% per annum interest on a P3,000,000.00
loan; in Imperial v. Jaucian,[37] of 16% per month or 192% per annum interest on a P320,000.00 loan; in Arrofo v. Quio,[38] of 7%
interest per month or 84% per annum interest on a P15,000.00 loan; in Bulos, Jr. v. Yasuma,[39] of 4% per month or 48% per annum
interest on a P2,500,000.00 loan; and in Chua v. Timan,[40] of 7% and 5% per month for loans totalling P964,000.00. We note that in all
these cases, the terms of the loans were open-ended; the stipulated interest rates were applied for an indefinite period.
Medel finds no application in the present case where no other stipulation exists for the payment of any extra amount except a specific
sum of P40,000.00 per month on the principal of a loan payable within six months. Additionally, no issue on the excessiveness of the
stipulated amount of P40,000.00 per month was ever put in issue by the petitioners;[41] they only assailed the application of a 4%
interest rate, since it was not agreed upon.
It is a familiar doctrine in obligations and contracts that the parties are bound by the stipulations, clauses, terms and conditions they have
agreed to, which is the law between them, the only limitation being that these stipulations, clauses, terms and conditions are not contrary
to law, morals, public order or public policy.[42] The payment of the specific sum of money of P40,000.00 per month was voluntarily
agreed upon by the petitioners and the respondent. There is nothing from the records and, in fact, there is no allegation showing that
petitioners were victims of fraud when they entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00 per month for a period of six (6) months, or from
December 8, 1993 to June 8, 1994, for a total principal and interest amount of P1,240,000.00. Thereafter, interest at the rate of 12% per
annum shall apply. The amounts already paid by the petitioners during the pendency of the suit, amounting to P1,228,772.00 as of
86
February 12, 1999,[43] should be deducted from the total amount due, computed as indicated above. We remand the case to the trial
court for the actual computation of the total amount due.
liability and in the absence of any representation on the part of PRISMA that the obligation is all its own because of its separate corporate
identity, we see no occasion to consider piercing the corporate veil as material to the case.
Doctrine of Estoppel not applicable
WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the Decision dated May 5, 2003 of the Court of Appeals
in CA-G.R. CV No. 69627. The petitioners loan of P1,000,000.00 shall bear interest of P40,000.00 per month for six (6) months from
December 8, 1993 as indicated in the promissory note. Any portion of this loan, unpaid as of the end of the six-month payment period,
shall thereafter bear interest at 12% per annum. The total amount due and unpaid, including accrued interests, shall bear interest at 12%
per annum from the finality of this Decision. Let this case be REMANDED to the Regional Trial Court, Branch 73, Antipolo City for the
proper computation of the amount due as herein directed, with due regard to the payments the petitioners have already remitted. Costs
against the respondent.
The respondent submits that the petitioners are estopped from disputing the 4% monthly interest beyond the six-month stipulated
period, since they agreed to pay this interest on the principal amount under the promissory note and the board resolution.
We disagree with the respondent s contention.

SO ORDERED.
We cannot apply the doctrine of estoppel in the present case since the facts and circumstances, as established by the record, negate
its application. Under the promissory note,[44] what the petitioners agreed to was the payment of a specific sum of P40,000.00 per
month for six months not a 4% rate of interest per month for six (6) months on a loan whose principal is P1,000,000.00, for the total
amount of P1,240,000.00. Thus, no reason exists to place the petitioners in estoppel, barring them from raising their present defenses
against a 4% per month interest after the six-month period of the agreement. The board resolution,[45] on the other hand, simply
authorizes Pantaleon to contract for a loan with a monthly interest of not more than 4%. This resolution merely embodies the extent of
Pantaleons authority to contract and does not create any right or obligation except as between Pantaleon and the board. Again, no cause
exists to place the petitioners in estoppel.
Piercing the corporate veil unfounded
G.R. No. 86932
June 27, 1990
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
NATIONAL LABOR RELATIONS COMMISSION and DOROTHY S. ANCHETA, MA. MAGDALENA Y. ARMARILLE, CONSTANTE A. ANCHETA,
CONSTANTE B. BANAYOS, EVELYN BARRIENTOS, JOSE BENAVIDEZ, LEONARDO BUENAAGUA, BENJAMIN BAROT, ERNESTO S. CANTILLER,
EDUARDO CANDA, ARMANDO CANDA, AIDA DE LUNA, PACIFICO M. DE JESUS, ALFREDO ESTRERA, AURELIO A. FARINAS, FRANCISCO
GREGORIO, DOMELINA GONZALES, JUANA JALANDONI, MANUEL MALUBAY, FELICIANO OCAMPO, MABEL PADO, GEMINIANO PLETA,
ERNESTO S. SALAMAT, JULIAN TRAQUENA, JUSFIEL SILVERIO, JAMES CRISTALES, FRANCISCO BAMBIO, JOSE T. MARCELO, JR., SUSAN M.
OLIVAR, ERNESTO JULIO, CONSTANTE ANCHETA, JR., ENRIQUE NABUA and JAVIER P. MATARO, respondents.
We find it unfounded and unwarranted for the lower courts to pierce the corporate veil of PRISMA.
The Legal Counsel for petitioner.
The doctrine of piercing the corporate veil applies only in three (3) basic instances, namely: a) when the separate and distinct
corporate personality defeats public convenience, as when the corporate fiction is used as a vehicle for the evasion of an existing
obligation; b) in fraud cases, or when the corporate entity is used to justify a wrong, protect a fraud, or defend a crime; or c) is used in
alter ego cases, i.e., where a corporation is essentially 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 so conducted as to make it merely an instrumentality, agency, conduit or adjunct
of another corporation.[46] 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.[47]
CA. Ancheta & C.B. Banayos for private respondents.
REGALADO, J.:
In the present case, we see no competent and convincing evidence of any wrongful, fraudulent or unlawful act on the part of
PRISMA to justify piercing its corporate veil. While Pantaleon denied personal liability in his Answer, he made himself accountable in the
promissory note in his personal capacity and as authorized by the Board Resolution of PRISMA.*48+ With this statement of personal
CMV
87
The present petition for certiorari seeks the reversal of the decision of the National Labor Relations Commission (NLRC) in, NLRC-NCR Case
No. 00-07-02500-87, dated January 16, 1986, 1 which dismissed the appeal of the Development Bank of the Philippines (DBP) from the
decision of the labor arbiter ordering it to pay the unpaid wages, 13th month pay, incentive pay and separation pay of herein private
respondents.
Philippine Smelters Corporation (PSC), a corporation registered under Philippine law, obtained a loan in 1983 from the Development Bank
of the Philippines, a government-owned financial institution created and operated in accordance with Executive Order No. 81, to finance
its iron smelting and steel manufacturing business. To secure said loan, PSC mortgaged to DBP real properties with all the buildings and
improvements thereon and chattels, with its President, Jose T. Marcelo, Jr., as co-obligor.
By virtue of the said loan agreement, DBP became the majority stockholder of PSC, with stockholdings in the amount of P31,000,000.00 of
the total P60,226,000.00 subscribed and paid up capital stock. Subsequently, it took over the management of PSC.
When PSC failed to pay its obligation with DBP, which amounted to P75,752,445.83 as of March 31, 1986, DBP foreclosed and acquired
the mortgaged real estate and chattels of PSC in the auction sales held on February 25, 1987 and March 4, 1987.
On February 10, 1987, forty (40) petitioners filed a Petition for Involuntary Insolvency in the Regional Trial Court, Branch 61 at Makati,
Metropolitan Manila, docketed therein as Special Proceeding No. M-1359, 2 against PSC and DBP, impleading as co-respondents therein
Olecram Mining Corporation, Jose Panganiban Ice Plant and Cold Storage, Inc. and PISO Bank, with said petitioners representing
themselves as unpaid employees of said private respondents, except PISO Bank.
DBP contends that the labor arbiter and the NLRC committed a grave abuse of discretion (1) in assuming jurisdiction over DBP; (2) in
applying the provisions of Article 110 of the Labor Code, as amended; and (3) in not enforcing and applying Section 14 of Executive Order
No. 81.
We find merit in the petition.
It is to be noted that in their comment, private respondents tried to prove the existence of employer-employee relationship based on the
fact that DBP is the majority stockholder of PSC and that the majority of the members of the board of directors of PSC are from DBP. 5 We
do not believe that these circumstances are sufficient indicia of the existence of an employer-employee relationship as would confer
jurisdiction over the case on the labor arbiter, especially in the light of the express declaration of said labor arbiter and the NLRC that DBP
is being held liable as a foreclosing creditor. At any rate, this jurisdictional defect was cured when DBP appealed the labor arbiter's
decision to the NLRC and thereby submitted to its jurisdiction.
The pivotal issue for resolution is whether DBP, as foreclosing creditor, could be held liable for the unpaid wages, 13th month pay,
incentive leave pay and separation pay of the employees of PSC.
We rule in the negative.
During the dates material to the foregoing proceedings, Article 110 of the Labor Code read:
On February 13, 1987, herein private respondents filed a complaint with the Department of Labor against PSC for nonpayment of salaries,
13th month pay, incentive leave pay and separation pay. On February 20, 1987, the complaint was amended to include DBP as party
respondent. The case was thereafter indorsed to the Arbitration Branch of the National Labor Relations Commission (NLRC). DBP filed its
position paper on September 7, 1987, invoking the absence of employer-employee relationship between private respondents and DBP
and submitting that when DBP foreclosed the assets of PSC, it did so as a foreclosing creditor.
On January 30, 1988, the labor arbiter rendered a decision, the dispositive portion of which directed that "DBP as foreclosing creditor is
hereby ordered to pay all the unpaid wages and benefits of the workers which remain unpaid due to PSC's foreclosure." 3
On appeal by DBP, the NLRC sustained the ruling of the labor arbiter, holding DBP liable for unpaid wages of private respondents "not as a
majority stockholder of respondent PSC, but as the foreclosing creditor who possesses the assets of said PSC by virtue of the auction sale
it held in 1987." In addition, the NLRC held that the labor arbiter is correct in assuming jurisdiction because "the worker's preference to
the amount secured by DBP by virtue of said foreclosure sales of PSC properties arose out of or are connected or interwoven with the
labor dispute brought forth by appellees against PSC and DBP. 4 Hence, the present petition by DBP.
CMV
Art. 110. Worker preference in case of bankruptcy. In the event of bankruptcy or liquidation of an employer's business, his workers
shall enjoy first preference as regards wages due them for services rendered during the period prior to the bankruptcy or liquidation, any
provision of law to the contrary notwithstanding. Unpaid wages shall be paid in full before other creditors may establish any claim to a
share in the assets of the employer.
In conjunction therewith, Section 10, Rule VIII, Book III of the Implementing Rules and Regulations of the Labor Code provided:
Sec. 10. Payment of wages in mm of bankruptcy.-Unpaid wages earned by the employees before the declaration of bankruptcy or
judicial liquidation of the employer's business shall be given first preference and shall be paid in full before other creditors may establish
any claim to a share in the assets of the employer.
88
Interpreting the above provisions, this Court, in Development Bank of the Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., 6
explicated as follows:
Art. 110. Worker preference in case of bankruptcy. In the event of bankruptcy or liquidation of an employer's business, his workers
shall enjoy first preference as regards their unpaid wages and other monetary claims, any provision of law to the contrary
notwithstanding. Such unpaid wages and monetary claims shall be paid in full before the claims of the Government and other creditors
may be paid.
It is quite clear from the provisions that a declaration of bankruptcy or a judicial liquidation must be present before the worker's
preference may be enforced. ... .
As a consequence, Section 1 0, Rule VIII, Book III of the Implementing Rules and Regulations of the Labor Code was likewise amended, to
wit:
xxx
xxx
xxx
Moreover, the reason behind the necessity for a judicial proceeding or a proceeding in rem before the concurrence and preference of
credits may be applied was explained by this Court in the case of Philippine Savings Bank v. Lantin (124 SCRA 476 [1983]). We said:
The proceedings in the court below do not partake of the nature of the insolvency proceedings or settlement of a decedent's estate. The
action filed by Ramos was only to collect the unpaid cost of the construction of the duplex apartment. It is far from being a general
liquidation of the estate of the Tabligan spouses.
Insolvency proceedings and settlement of a decedent's estate are both proceedings in rem which are binding against the whole world. All
persons having interest in the subject matter involved, whether they were notified or not, are equally bound. Consequently, a liquidation
of similar import or 'other equivalent general liquidation must also necessarily be a proceeding in rem so that all interested persons
whether known to the parties or not may be bound by such proceeding.
Sec. 10. Payment of wages and other monetary claims in case of bankruptcy. In case of bankruptcy or liquidation of the employer's
business, the unpaid wages and other monetary claims of the employees shall be given first preference and shall be paid in full before the
claims of government and other creditors may be paid.
Despite said amendments, however, the same interpretation of Article 110 as applied in the aforesaid case of Development Bank of the
Philippines vs. Hon. Labor Arbiter Ariel C. Santos, et al., supra, was adopted by this Court in the recent case of Development Bank of the
Philippines vs. National Labor Relations Commission, et. al., 7 For facility of reference, especially the rationalization for the conclusions
reached therein, we reproduce the salient portions of the decision in this later case.
Notably, the terms "declaration" of bankruptcy or "judicial" liquidation have been eliminated. Does this means then that liquidation
proceedings have been done away with?
We opine m the negative, upon the following considerations:

In the case at bar, although the lower court found that 'there were no known creditors other than the plaintiff and the defendant herein,'
this can not be conclusive. It will not bar other creditors in the event they show up and present their claim against the petitioner bank,
claiming that they also have preferred liens against the property involved. Consequently, Transfer Certificate of Title No. 101864 issued in
favor of the bank which is supposed to be indefeasible would remain constantly unstable and questionable. Such could not have been the
intention of Article 2243 of the Civil Code although it considers claims and credits under Article 2242 as statutory fines. Neither does the
De Barreto case ...
The claims of all creditors whether preferred or non- preferred, the Identification of the preferred ones and the totality of the employer's
asset should be brought into the picture. There can then be an authoritative, fair, and binding adjudication instead of the piece meal
settlement which would result from the questioned decision in this case.
Republic Act No. 6715, which took effect on March 21, 1989, amended Article 110 of the Labor Code to read as follows:
CMV
1.
Because of its impact on the entire system of credit, Article 110 of the Labor Code cannot be viewed in isolation but must be
read in relation to the Civil Code scheme on classification and preference of credits.
Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation. Rather, Article 110 must be read in
relation to the provisions of the Civil Code concerning the classification, concurrence and preference of credits which provisions find
particular application in insolvency proceedings where the claims of all creditors, preferred or non-preferred, may be adjudicated in a
binding manner ... (Republic vs. Peralta (G.R. No. L-56568, May 20, 1987, 150 SCRA 37).
2.
In the same way that the Civil Code provisions on classification of credits and the Insolvency Law have been brought into
harmony, so also must the kindred provisions of the Labor Law be made to harmonize with those laws.
89
3.
In the event of insolvency, a principal objective should be to effect an equitable distribution of the insolvent's property among
his creditors. To accomplish this there must first be some proceeding where notice to all of the insolvent's creditors may be given and
where the claims of preferred creditors may be bindingly adjudicated (De Barretto vs. Villanueva, No. L-14938, December 29, 1962, 6
SCRA 928). The rationale therefor has been expressed in the recent case of DBP vs. Secretary of Labor (G.R. No. 79351, 28 November
1989), which we quote:
A preference of credit bestows upon the preferred creditor an advantage of having his credit satisfied first ahead of other claims which
may be established against the debtor. Logically, it becomes material only when the properties and assets of the debtors are insufficient
to pay his debts in full; for if the debtor is amply able to pay his various creditors, in full, how can the necessity exist to determine which of
his creditors shall be paid first or whether they shall be paid out of the proceeds of the sale of the debtor's specific property? Indubitably,
the preferential right of credit attains significance only after the properties of the debtor have been inventoried and liquidated, and the
claims held by his various creditors have been established (Kuenzle & Streiff [Ltd.] vs. Villanueva, 41 Phil. 611 [1916]; Barretto vs.
Villanueva, G.R. No. 14038, 29 December 1962, 6 SCRA 928; Philippine Savings Bank vs. Lantin, G.R. 33929, 2 September 1983,124 SCRA
476).
4.
A distinction should be made between a preference of credit and a lien. A preference applies only to claims which do not
attach to specific properties. A hen creates a charge on a particular property. The right of first preference as regards unpaid wages
recognize by Article 110 does not constitute a hen on the property of the insolvent debtor in favor of workers. It is but a preference of
credit in their favor, a preference in application. It is a met-hod adopted to determine and specify the order in which credits should be
paid in the final distribution of the proceeds of the insolvent's assets- It is a right to a first preference in the discharge of the funds of the
judgment debtor. in the words of Republic vs. Peralta, supra:
Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for unpaid wages either upon all of the
properties or upon any particular property owned by their employer. Claims for unpaid wages do not therefore fall at all within the
category of specially preferred claims established under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for
unpaid wages are already covered by Article 2241, number 6: 'claims for laborers' wages, on the goods manufactured or the work done;
or by Article 2242, number 3: 'claims of laborers and other workers engaged in the construction, reconstruction or repair of buildings,
canals and other works, upon said buildings, canals or other works.' To the extent that claims for unpaid wages fall outside the scope of
Article 2241, number 6 and Article 2242, number 3, they would come within the ambit of the category of ordinary preferred credits under
Article 2244.'
In fact, under the Insolvency Law (Section 29) a creditor holding a mortgage or hen of any kind as security is not permitted to vote in the
election of the assignee in insolvency proceedings unless the value of his security is first fixed or he surrenders all such property to the
receiver of the insolvent's estate.
6.
Even if Article 110 and its Implementing Rule, as amended, should be interpreted to mean 'absolute preference,' the same
should be given only prospective effect in line with the cardinal rule that laws shall have no retroactive effect, unless the contrary is
provided (Article 4, Civil Code). Thereby, any infringement on the constitutional guarantee on non-impairment of obligation of contracts
(Section 10, Article III, 1987 Constitution) is also avoided. In point of fact, DBP's mortgage credit antedated by several years the
amendatory law, RA No. 6715. To give Article 110 retroactive effect would be to wipe out the mortgage in DBPs favor and expose it to a
risk which it sought to protect itself against by requiring a collateral in the form of real property.
In fine, the right to preference given to workers under Article 110 of the Labor Code cannot exist in any effective way prior to the time of
its presentation in distribution proceedings. It will find application when, in proceedings such as insolvency, such unpaid wages shall be
paid in full before the 'claims of the Government and other creditors' may be paid. But, for an orderly settlement of a debtor's assets, all
creditors must be convened, their claims ascertained and inventoried, and thereafter the preference determined in the course of judicial
proceedings which have for their object the subjection of the property of the debtor to the payment of his debts or other lawful
obligations. Thereby, an orderly determination of preference of creditors' claims is assured (Philippine Savings Bank vs. Lantin, No. L33929, September 2, 1983, 124 SCRA 476); the adjudication made will be binding on all parties-in-interest, since those proceedings are
proceedings in rem; and the legal scheme of classification, concurrence and preference of credits in the Civil Code, the Insolvency Law,
and the Labor Code is preserved in harmony.
On the foregoing considerations and it appearing that an involuntary insolvency proceeding has been instituted against PSC, private
respondents should properly assert their respective claims in said proceeding. .
WHEREFORE, the petition is GRANTED. The decision of public respondent is hereby ANNULLED and SET ASIDE.
SO ORDERED.
G.R. No. 82797
5.
The DBP anchors its claim on a mortgage credit. A mortgage directly and immediately subjects the property upon which it is
imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted (Article 2176, Civil
Code). It creates a real right which is enforceable against the whole world. It is a lien on an Identified immovable property, which a
preference is not. A recorded mortgage credit is a special preferred credit under Article 2242 (5) of the Civil Code on classification of
credits. The preference given by Article 110, when not falling within Article 2241 (6) and Article 2242 (3) of the Civil Code and not attached
to any specific property, is an ordinary preferred credit although its impact is to move it from second priority to first priority in the order
of preference established by Article 2244 of the Civil Code (Republic vs. Peralta, supra).
CMV
February 27, 1991
GOOD EARTH EMPORIUM INC., and LIM KA PING, petitioners,

vs.
HONORABLE COURT OF APPEALS and ROCES-REYES REALTY INC., respondents.
90
A.E. Dacanay for petitioners.
On May 16, 1984, Roces filed a motion for execution which was opposed by GEE on May 28, 1984 simultaneous with the latter's filing of a
Notice of Appeal (Rollo, p. 112, Ibid.). On June 13, 1984, the trial court resolved such motion ruling:
Antonio Quintos Law Office for private respondent.

After considering the motion for the issuance of a writ of execution filed by counsel for the plaintiff (herein respondents) and the
opposition filed in relation thereto and finding that the defendant failed to file the necessary supersedeas bond, this court resolved to
grant the same for being meritorious. (Rollo, p. 112)
PARAS, J.:p
This is a petition for review on certiorari of the December 29, 1987 decision * of the Court of Appeals in CA-G.R. No. 11960 entitled
"ROCES-REYES REALTY, INC. vs. HONORABLE JUDGE REGIONAL TRIAL COURT OF MANILA, BRANCH 44, GOOD EARTH EMPORIUM, INC. and
LIM KA PING" reversing the decision of respondent Judge ** of the Regional Trial Court of Manila, Branch 44 in Civil Case No. 85-30484,
which reversed the resolution of the Metropolitan Trial Court Of Manila, Branch 28 in Civil Case No. 09639, *** denying herein
petitioners' motion to quash the alias writ of execution issued against them.
As gathered from the records, the antecedent facts of this case, are as follows:
A Lease Contract, dated October 16, 1981, was entered into by and between ROCES-REYES REALTY, INC., as lessor, and GOOD EARTH
EMPORIUM, INC., as lessee, for a term of three years beginning November 1, 1981 and ending October 31, 1984 at a monthly rental of
P65,000.00 (Rollo, p. 32; Annex "C" of Petition). The building which was the subject of the contract of lease is a five-storey building located
at the corner of Rizal Avenue and Bustos Street in Sta. Cruz, Manila.
On June 14, 1984, a writ of execution was issued by the lower court. Meanwhile, the appeal was assigned to the Regional Trial Court
(Manila) Branch XLVI. However, on August 15, 1984, GEE thru counsel filed with the Regional Trial Court of Manila, a motion to withdraw
appeal citing as reason that they are satisfied with the decision of the Metropolitan Trial Court of Manila, Branch XXVIII, which said court
granted in its Order of August 27, 1984 and the records were remanded to the trial court (Rollo, p. 32; CA Decision). Upon an ex-parte
Motion of ROCES, the trial court issued an Alias Writ of Execution dated February 25, 1985 (Rollo, p. 104; Annex "D" of Petitioner's
Memorandum), which was implemented on February 27, 1985. GEE thru counsel filed a motion to quash the writ of execution and notice
of levy and an urgent Ex-parte Supplemental Motion for the issuance of a restraining order, on March 7, and 20, 1985, respectively. On
March 21, 1985, the lower court issued a restraining order to the sheriff to hold the execution of the judgment pending hearing on the
motion to quash the writ of execution (Rollo, p. 22; RTC Decision). While said motion was pending resolution, GEE filed a Petition for
Relief from judgment before another court, Regional Trial Court of Manila, Branch IX, which petition was docketed as Civil Case No. 8030019, but the petition was dismissed and the injunctive writ issued in connection therewith set aside. Both parties appealed to the Court
of Appeals; GEE on the order of dismissal and Roces on denial of his motion for indemnity, both docketed as CA-G.R. No. 15873-CV. Going
back to the original case, the Metropolitan Trial Court after hearing and disposing some other incidents, promulgated the questioned
Resolution, dated April 8, 1985, the dispositive portion of which reads as follows:
Premises considered, the motion to quash the writ is hereby denied for lack of merit.
The restraining orders issued on March 11 and 23, 1985 are hereby recalled, lifted and set aside. (Rollo, p. 20, MTC Decision)
From March 1983, up to the time the complaint was filed, the lessee had defaulted in the payment of rentals, as a consequence of which,
private respondent ROCES-REYES REALTY, INC., (hereinafter designated as ROCES for brevity) filed on October 14, 1984, an ejectment case
(Unlawful Detainer) against herein petitioners, GOOD EARTH EMPORIUM, INC. and LIM KA PING, hereinafter designated as GEE, (Rollo, p.
21; Annex "B" of the Petition). After the latter had tendered their responsive pleading, the lower court (MTC, Manila) on motion of Roces
rendered judgment on the pleadings dated April 17, 1984, the dispositive portion of which states:
Judgment is hereby rendered ordering defendants (herein petitioners) and all persons claiming title under him to vacate the premises and
surrender the same to the plaintiffs (herein respondents); ordering the defendants to pay the plaintiffs the rental of P65,000.00 a month
beginning March 1983 up to the time defendants actually vacate the premises and deliver possession to the plaintiff; to pay attorney's
fees in the amount of P5,000.00 and to pay the costs of this suit. (Rollo, p. 111; Memorandum of Respondents)
GEE appealed and by coincidence. was raffled to the same Court, RTC Branch IX. Roces moved to dismiss the appeal but the Court denied
the motion. On certiorari, the Court of Appeals dismissed Roces' petition and remanded the case to the RTC. Meantime, Branch IX became
vacant and the case was re-raffled to Branch XLIV.
On April 6, 1987, the Regional Trial Court of Manila, finding that the amount of P1 million evidenced by Exhibit "I" and another P1 million
evidenced by the pacto de retro sale instrument (Exhibit "2") were in full satisfaction of the judgment obligation, reversed the decision of
the Municipal Trial Court, the dispositive portion of which reads:
Premises considered, judgment is hereby rendered reversing the Resolution appealed from quashing the writ of execution and ordering
the cancellation of the notice of levy and declaring the judgment debt as having been fully paid and/or Liquidated. (Rollo, p. 29).
CMV
91
On further appeal, the Court of Appeals reversed the decision of the Regional Trial Court and reinstated the Resolution of the
Metropolitan Trial Court of Manila, the dispositive portion of which is as follows:
Notably, in private respondents' (petitioners') Motion to Quash the Writ of Execution and Notice of Levy dated March 7, 1985, there is
absolutely no reference to the alleged payment of one million pesos as evidenced by Exhibit 1 dated September 20, 1984. As pointed out
by petitioner (respondent corporation) this was brought out by Linda Panutat, Manager of Good Earth only in the course of the latter's
testimony. (Rollo, p. 37)
WHEREFORE, the judgment appealed from is hereby REVERSED and the Resolution dated April 8, 1985, of the Metropolitan Trial Court of
Manila Branch XXXIII is hereby REINSTATED. No pronouncement as to costs. (Rollo, p. 40).
Article 1240 of the Civil Code of the Philippines provides that:
GEE's Motion for Reconsideration of April 5, 1988 was denied (Rollo, p. 43). Hence, this petition.
Payment shall be made to the person in whose favor the obligation has been constituted, or his successor in interest, or any person
authorized to receive it.
The main issue in this case is whether or not there was full satisfaction of the judgment debt in favor of respondent corporation which
would justify the quashing of the Writ of Execution.
A careful study of the common exhibits (Exhibits 1/A and 2/B) shows that nowhere in any of said exhibits was there any writing alluding to
or referring to any settlement between the parties of petitioners' judgment obligation (Rollo, pp. 45-48).
In the case at bar, the supposed payments were not made to Roces-Reyes Realty, Inc. or to its successor in interest nor is there positive
evidence that the payment was made to a person authorized to receive it. No such proof was submitted but merely inferred by the
Regional Trial Court (Rollo, p. 25) from Marcos Roces having signed the Lease Contract as President which was witnessed by Jesus Marcos
Roces. The latter, however, was no longer President or even an officer of Roces-Reyes Realty, Inc. at the time he received the money
(Exhibit "1") and signed the sale with pacto de retro (Exhibit "2"). He, in fact, denied being in possession of authority to receive payment
for the respondent corporation nor does the receipt show that he signed in the same capacity as he did in the Lease Contract at a time
when he was President for respondent corporation (Rollo, p. 20, MTC decision).
Moreover, there is no indication in the receipt, Exhibit "1", that it was in payment, full or partial, of the judgment obligation. Likewise,
there is no indication in the pacto de retro sale which was drawn in favor of Jesus Marcos Roces and Marcos V. Roces and not the
respondent corporation, that the obligation embodied therein had something to do with petitioners' judgment obligation with
respondent corporation.
On the other hand, Jesus Marcos Roces testified that the amount of P1 million evidenced by the receipt (Exhibit "1") is the payment for a
loan extended by him and Marcos Roces in favor of Lim Ka Ping. The assertion is home by the receipt itself whereby they acknowledged
payment of the loan in their names and in no other capacity.
Finding that the common exhibit, Exhibit 1/A had been signed by persons other than judgment creditors (Roces-Reyes Realty, Inc.)
coupled with the fact that said exhibit was not even alleged by GEE and Lim Ka Ping in their original motion to quash the alias writ of
execution (Rollo, p. 37) but produced only during the hearing (Ibid.) which production resulted in petitioners having to claim belatedly
that there was an "overpayment" of about half a million pesos (Rollo, pp. 25-27) and remarking on the utter absence of any writing in
Exhibits "1/A" and "2/B" to indicate payment of the judgment debt, respondent Appellate Court correctly concluded that there was in fact
no payment of the judgment debt. As aptly observed by the said court:
A corporation has a personality distinct and separate from its individual stockholders or members. Being an officer or stockholder of a
corporation does not make one's property also of the corporation, and vice-versa, for they are separate entities (Traders Royal Bank v. CAG.R. No. 78412, September 26, 1989; Cruz v. Dalisay, 152 SCRA 482). Shareowners are in no legal sense the owners of corporate property
(or credits) which is owned by the corporation as a distinct legal person (Concepcion Magsaysay-Labrador v. CA-G.R. No. 58168, December
19, 1989). As a consequence of the separate juridical personality of a corporation, the corporate debt or credit is not the debt or credit of
the stockholder, nor is the stockholder's debt or credit that of the corporation (Prof. Jose Nolledo's "The Corporation Code of the
Philippines, p. 5, 1988 Edition, citing Professor Ballantine).
What immediately catches one's attention is the total absence of any writing alluding to or referring to any settlement between the
parties of private respondents' (petitioners') judgment obligation. In moving for the dismissal of the appeal Lim Ka Ping who was then
assisted by counsel simply stated that defendants (herein petitioners) are satisfied with the decision of the Metropolitan Trial Court
(Records of CA, p. 54).
CMV
The absence of a note to evidence the loan is explained by Jesus Marcos Roces who testified that the IOU was subsequently delivered to
private respondents (Rollo, pp. 97-98). Contrary to the Regional Trial Court's premise that it was incumbent upon respondent corporation
to prove that the amount was delivered to the Roces brothers in the payment of the loan in the latter's favor, the delivery of the amount
to and the receipt thereof by the Roces brothers in their names raises the presumption that the said amount was due to them. There is a
disputable presumption that money paid by one to the other was due to the latter (Sec. 5(f) Rule 131, Rules of Court). It is for GEE and Lim
Ka Ping to prove otherwise. In other words, it is for the latter to prove that the payments made were for the satisfaction of their judgment
debt and not vice versa.
92
The fact that at the time payment was made to the two Roces brothers, GEE was also indebted to respondent corporation for a larger
amount, is not supportive of the Regional Trial Court's conclusions that the payment was in favor of the latter, especially in the case at bar
where the amount was not receipted for by respondent corporation and there is absolutely no indication in the receipt from which it can
be reasonably inferred, that said payment was in satisfaction of the judgment debt. Likewise, no such inference can be made from the
execution of the pacto de retro sale which was not made in favor of respondent corporation but in favor of the two Roces brothers in
their individual capacities without any reference to the judgment obligation in favor of respondent corporation.
SO ORDERED.
G.R. No. 101699
March 13, 1996
BENJAMIN A. SANTOS, petitioner,

vs.
In addition, the totality of the amount covered by the receipt (Exhibit "1/A") and that of the sale with pacto de retro (Exhibit "2/B") all in
the sum of P2 million, far exceeds petitioners' judgment obligation in favor of respondent corporation in the sum of P1,560,000.00 by
P440,000.00, which militates against the claim of petitioner that the aforesaid amount (P2M) was in full payment of the judgment
obligation.
Petitioners' explanation that the excess is interest and advance rentals for an extension of the lease contract (Rollo, pp. 25-28) is belied by
the absence of any interest awarded in the case and of any agreement as to the extension of the lease nor was there any such pretense in
the Motion to Quash the Alias Writ of Execution.
Petitioners' averments that the respondent court had gravely abused its discretion in arriving at the assailed factual findings as contrary to
the evidence and applicable decisions of this Honorable Court are therefore, patently unfounded. Respondent court was correct in stating
that it "cannot go beyond what appears in the documents submitted by petitioners themselves (Exhibits "1" and "2") in the absence of
clear and convincing evidence" that would support its claim that the judgment obligation has indeed been fully satisfied which would
warrant the quashal of the Alias Writ of Execution.
It has been an established rule that when the existence of a debt is fully established by the evidence (which has been done in this case),
the burden of proving that it has been extinguished by payment devolves upon the debtor who offers such a defense to the claim of the
plaintiff creditor (herein respondent corporation) (Chua Chienco v. Vargas, 11 Phil. 219; Ramos v. Ledesma, 12 Phil. 656; Pinon v. De
Osorio, 30 Phil. 365). For indeed, it is well-entrenched in Our jurisprudence that each party in a case must prove his own affirmative
allegations by the degree of evidence required by law (Stronghold Insurance Co. v. CA, G.R. No. 83376, May 29,1989; Tai Tong Chuache &
Co. v. Insurance Commission, 158 SCRA 366).
NATIONAL LABOR RELATIONS COMMISSION, HON. LABOR ARBITER FRUCTUOSO T. AURELLANO and MELVIN D. MILLENA, respondents.
VITUG, J.:p
In a petition for certiorari under Rule 65 of the Rules of Court, petitioner Benjamin A. Santos, former President of the Mana Mining and
Development Corporation ("MMDC"), questions the resolution of the National Labor Relations Commission ("NLRC") affirming the
decision of Labor Arbiter Fructuoso T. Aurellano who, having held illegal the termination of employment of private respondent Melvin D.
Millena, has ordered petitioner MMDC, as well as its president (herein petitioner) and the executive vice-president in their personal
capacities, to pay Millena his monetary claims.
Private respondent, on 01 October 1985, was hired to be the project accountant for MMDC's mining operations in Gatbo, Bacon,
Sorsogon. On 12 August 1986, private respondent sent to Mr. Gil Abao, the MMDC corporate treasurer, a memorandum calling the
latter's attention to the failure of the company to comply with the withholding tax requirements of, and to make the corresponding
monthly remittances to, the Bureau of Internal Revenue ("BIR") on account of delayed payments of accrued salaries to the company's
laborers and employees. 1
In a letter, dated 08 September 1986, Abao advised private respondent thusly:

The appellate court cannot, therefore, be said to have gravely abused its discretion in finding lack of convincing and reliable evidence to
establish payment of the judgment obligation as claimed by petitioner. The burden of evidence resting on the petitioners to establish the
facts upon which their action is premised has not been satisfactorily discharged and therefore, they have to bear the consequences.
PREMISES CONSIDERED, the petition is hereby DENIED and the Decision of the Respondent court is hereby AFFIRMED, reinstating the April
8, 1985 Resolution of the Metropolitan Trial Court of Manila.
CMV
Regarding Gatbo operations, as you also are aware, the rainy season is now upon us and the peace and order condition in Sorsogon has
deteriorated. It is therefore, the board's decision that it would be useless for us to continue operations, especially if we will always be in
the "hole," so to speak. Our first funds receipts will be used to pay all our debts. We will stop production until the advent of the dry
season, and until the insurgency problem clears. We will undertake only necessary maintenance and repair work and will keep our
overhead down to the minimum manageable level. Until we resume full-scale operations, we will not need a project accountant as there
will be very little paper work at the site, which can be easily handled at Makati.
93
We appreciate the work you have done for Mana and we will not hesitate to take you back when we resume work at Gatbo. However it
would be unfair to you if we kept you in the payroll and deprive you of the opportunity to earn more, during this period of Mana's crisis. 2
WHEREFORE, the respondents are hereby ordered to pay the petitioner the amount of P37,132.25 corresponding to the latter's unpaid
salaries and advances; P5,400.00 for petitioner's 13th month pay; P3,340.95 as service incentive leave pay; and P5,400.00 as separation
pay. The respondents are further ordered to pay the petitioner 10% of the monetary awards as attorney's fees.
All other claims are dismissed for lack of sufficient evidence.

Private respondent expressed "shock" over the termination of his employment. He complained that he would not have resigned from the
Sycip, Gorres & Velayo accounting firm, where he was already a senior staff auditor, had it not been for the assurance of a "continuous
job" by MMDC's Engr. Rodillano E. Velasquez. Private respondent requested that he be reimbursed the "advances" he had made for the
company and be paid his "accrued salaries/claims. 3
The claim was not heeded; on 20 October 1986, private respondent filed with the NLRC Regional Arbitration, Branch No. V, in Legazpi City,
a complaint for illegal dismissal, unpaid salaries, 13th month pay, overtime pay, separation pay and incentive leave pay against MMDC
and its two top officials, namely, herein petitioner Benjamin A. Santos (the President) and Rodillano A. Velasquez (the executive vicepresident). in his complaint-affidavit (position paper), submitted on 27 October 1986, Millena alleged, among other things, that his
dismissal was merely an offshoot of his letter of 12 August 1986 to Abao about the company's inability to pay its workers and to remit
withholding taxes to the BIR. 4
A copy of the notice and summons was served on therein respondents (MMDC, Santos and Velasquez) on 29 October 1986. 5 At the initial
hearing on 14 November 1986 before the Labor Arbiter, only the complainant, Millena, appeared; however, Atty. Romeo Perez, in
representation of the respondents, requested by telegram that the hearing be reset to 01 December 1986. Although the request was
granted by the Labor Arbiter, private respondent was allowed, nevertheless, to present his evidence ex parte at that initial hearing.
The scheduled 01st December 1986 hearing was itself later reset to 19 December 1986. On 05 December 1986, the NLRC in Legazpi City
again received a telegram from Atty. Perez asking for fifteen (15) days within which to submit the respondents' position paper. On 19
December 1986, Atty. Perez sent yet another telegram seeking a further postponement of the hearing and asking for a period until 15
January 1987 within which to submit the position paper.
On 15 January 1987, Atty. Perez advised the NLRC in Legazpi City that the position paper had finally been transmitted through the mail
and that he was submitting the case for resolution without further hearing. The position paper was received by the Legazpi City NLRC
office on 19 January 1987. Complainant Millena filed, on 26 February 1987, his rejoinder to the position paper.
On 27 July 1988, Labor Arbiter Fructuoso T. Aurellano, finding no valid cause for terminating complainant's employment, ruled, citing this
Court's pronouncement in Construction & Development Corporation of the Philippines vs. Leogardo, Jr. 6 that a partial closure of an
establishment due to losses was a retrenchment measure that rendered the employer liable for unpaid salaries and other monetary
claims. The Labor Arbiter adjudged
CMV
SO ORDERED. 7
Alleging abuse of discretion by the Labor Arbiter, the company and its co-respondents filed a "motion for reconsideration and/or appeal. 8
The motion/appeal was forthwith indorsed to the Executive Director of the NLRC in Manila.
In a resolution, dated 04 September 1989, the NLRC 9 affirmed the decision of the Labor Arbiter. It held that the reasons relied upon by
MMDC and its co-respondents in the dismissal of Millena, i.e., the rainy season, deteriorating peace and order situation and little
paperwork, were "not causes mentioned under Article 282 of the Labor Code of the Philippines" and that Millena, being a regular
employee, was "shielded by the tenurial clause mandated under the law. 10
A writ of execution correspondingly issued; however, it was returned unsatisfied for the failure of the sheriff to locate the offices of the
corporation in the address indicated. Another writ of execution and an order of garnishment was thereupon served on petitioner at his
residence.
Contending that he had been denied due process, petitioner filed a motion for reconsideration of the NLRC's resolution along with a
prayer for the quashal of the writ of execution and order of garnishment. He averred that he had never received any notice, summons or
even a copy of the complaint; hence, he said, the Labor Arbiter at no time had acquired jurisdiction over him.
On 16 August 1991, the NLRC 11 dismissed the motion for reconsideration. Citing Section 2, Rule 13, 12 and Section 13, Rule 14, 13 of the
Rules of Court, it ruled that the Regional Arbitration office had not, in fact, been remiss in the observance of the legal processes for
acquiring jurisdiction over the case and over the persons of the respondents therein. The NLRC was also convinced that Atty. Perez had
been the authorized counsel of MMDC and its two most ranking officers.
In holding petitioner personally liable for private respondent's claim, the NLRC cited Article 289 14 of the Labor Code and the ruling in A.C.
Ransom Labor Union-CCLU vs. NLRC 15 to the effect that "(t)he responsible officer of an employer corporation (could) be held personally,
not to say even criminally, liable for non-payment of backwages," and that of Gudez vs. NLRC 16 which amplified that "where the
employer corporation (was) no longer existing and unable to satisfy the judgment in favor of the employee, the officer should be liable for
acting on behalf of the corporation.
94
(2)
He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
In the instant petition for certiorari, petitioner Santos reiterates that he should not have been adjudged personally liable by public
respondents, the latter not having validly acquired jurisdiction over his person whether by personal service of summons or by substituted
service under Rule 19 of the Rules of Court.
Petitioner's contention is unacceptable. The fact that Atty. Romeo B. Perez has been able to timely ask for a deferment of the initial
hearing on 14 November 1986, coupled with his subsequent active participation in the proceedings, should disprove the supposed want
of service of legal process. Although as a rule, modes of service of summons are strictly followed in order that the court may acquire
jurisdiction over the person of a defendant, 17 such procedural modes, however, are liberally construed in quasi-judicial proceedings,
substantial compliance with the same being considered adequate. 18 Moreover, jurisdiction over the person of the defendant in civil
cases is acquired not only by service of summons but also by voluntary appearance in court and submission to its authority. 19
"Appearance" by a legal advocate is such "voluntary submission to a court's jurisdiction." 20 It may be made not only by actual physical
appearance but likewise by the submission of pleadings in compliance with the order of the court or tribunal.
To say that petitioner did not authorize Atty. Perez to represent him in the case 21 is to unduly tax credulity. Like the Solicitor General, the
Court likewise considers it unlikely that Atty. Perez would have been so irresponsible as to represent petitioner if he were not, in fact,
authorized. 22 Atty. Perez is an officer of the court, and he must be presumed to have acted with due propriety. The employment of a
counsel or the authority to employ an attorney, it might be pointed out, need not be proved in writing; such fact could be inferred from
circumstantial evidence. 23 Petitioner was not just an ordinary official of the MMDC; he was the President of the company.
Petitioner, in any event, argues that public respondents have gravely abused their discretion "in finding petitioner solidarily liable with
MMDC even (in) the absence of bad faith and malice on his part." 24 There is merit in this plea.
A corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and, in general, from
the people comprising it. The rule is that obligations incurred by the corporation, acting through its directors, officers and employees, are
its sole liabilities. Nevertheless, being a mere fiction of law, peculiar situations or valid grounds can exist to warrant, albeit done sparingly,
the disregard of its independent being and the lifting of the corporate veil. 25 As a rule, this situation might arise when a corporation is
used to evade a just and due obligation or to justify a wrong, 26 to shield or perpetrate fraud, 27 to carry out similar other unjustifable
aims or intentions, or as a subterfuge to commit injustice and so circumvent the law. 28 In Tramat Mercantile, Inc., vs. Court of Appeals,
29 the Court has collated the settled instances when, without necessarily piercing the veil of corporate fiction, personal civil liability can
also be said to lawfully attach to a corporate director, trustee or officer; to wit: When
(1)
He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c)
for conflict of interest, resulting in damages to the corporation, its stockholders or other persons;
(3)
He agrees to hold himself personally and solidarily liable with the corporation; or
(4)
He is made, by a specific provision of law, to personally answer for his corporate action.
The case of petitioner is way off these exceptional instances. It is not even shown that petitioner has had a direct hand in the dismissal of
private respondent enough to attribute to him (petitioner) a patently unlawful act while acting for the corporation. Neither can Article 289
30 of the Labor Code be applied since this law specifically refers only to the imposition of penalties under the Code. It is undisputed that
the termination of petitioner's employment has, instead, been due, collectively, to the need for a further mitigation of losses, the onset of
the rainy season, the insurgency problem in Sorsogon and the lack of funds to further support the mining operation in Gatbo.
It is true, there were various cases when corporate officers were themselves held by the Court to be personally accountable for the
payment of wages and money claims to its employees. In A.C. Ransom Labor Union-CCLU vs. NLRC, 31 for instance, the Court ruled that
under the Minimum Wage Law, the responsible officer of an employer corporation could be held personally liable for nonpayment of
backwages for "(i)f the policy of the law were otherwise, the corporation employer (would) have devious ways for evading payment of
back wages." In the absence of a clear identification of the officer directly responsible for failure to pay the backwages, the Court
considered the President of the corporation as such officer. The case was cited in Chua vs. NLRC 32 in holding personally liable the vicepresident of the company, being the highest and most ranking official of the corporation next to the President who was dismissed, for the
latter's claim for unpaid wages.
A review of the above exceptional cases would readily disclose the attendance of facts and circumstances that could rightly sanction
personal liability an the part of the company officer. In A.C. Ransom, the corporate entity was a family corporation and execution against
it could not be implemented because of the disposition posthaste of its leviable assets evidently in order to evade its just and due
obligations. The doctrine of "piercing the veil of corporate fiction" was thus clearly appropriate. Chua likewise involved another family
corporation, and this time the conflict was between two brothers occupying the highest ranking positions in the company. There were
incontrovertible facts which pointed to extreme personal animosity that resulted, evidently in bad faith, in the easing out from the
company of one of the brothers by the other.
The basic rule is still that which can be deduced from the Court's pronouncement in Sunio vs. National Labor Relations Commission; 33
thus:
We come now to the personal liability of petitioner, Sunio, who was made jointly and severally responsible with petitioner company and
CIPI for the payment of the backwages of private respondents. This is reversible error. The Assistant Regional Director's Decision failed to
CMV
95
disclose the reason why he was made personally liable. Respondents, however, alleged as grounds thereof, his the being owner of onehalf (1/2) interest of said corporation, and his alleged arbitrary dismissal of private respondents.
Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of petitioner corporation. There appears to be no
evidence on record that he acted maliciously or in bad faith in terminating the services of private respondents. His act, therefore, was
within the scope of his authority and was a corporate act.
It is basic that a corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as
from that of any other legal entity to which it may be related. Mere ownership by a single stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.
Petitioner Sunio, therefore, should not have been made personally answerable for the payment of private respondents' back salaries.
M. GREENFIELD, INC. (B) a corporation duly organized in accordance with the laws of the Republic of the Philippines with office address at
Km. 14, Merville Road, Paraaque, Metro Manila, represented in this act by its General manager, Mr. Carlos T. Javelosa, hereinafter
referred to as the Company;
-and-
MALAYANG SAMAHAN NG MGA MANGGAGAWA SA M. GREENFIELD (B) (MSMG)/UNITED LUMBER AND GENERAL WORKERS OF THE
PHILIPPINES (ULGWP), a legitimate labor organization with address at Suite 404, Trinity Building, T. M. Kalaw Street, Manila, represented
in this act by a Negotiating Committee headed by its National President, Mr. Godofredo Paceno, Sr., referred to in this Agreement as the
UNION.1
The CBA includes, among others, the following pertinent provisions:

The Court, to be sure, did appear to have deviated somewhat in Gudez vs. NLRC; 34 however, it should be clear from our recent
pronouncement in Mam Realty Development Corporation and Manuel Centeno vs. NLRC 35 that the Sunio doctrine still prevails.
Art. II-Union Security
WHEREFORE, the instant petition for certiorari is given DUE COURSE and the decision of the Labor Arbiter, affirmed by the NLRC, is hereby
MODIFIED insofar as it holds herein petitioner Benjamin Santos personally liable with Mana Mining and Development Corporation, which
portion of the questioned judgment is now SET ASIDE. In all other respects, the questioned decision remains unaffected. No costs.
SO ORDERED.
Sec. 1. Coverage and Scope. All employees who are covered by this Agreement and presently members of the UNION shall remain
members of the UNION for the duration of this Agreement as a condition precedent to continued employment with the COMPANY.
xxx
xxx
xxx
Malayang Samahan ng mga Manggagawa sa M. Greenfield (MSMG-UWP) vs Ramos

At bar is a Petition for Certiorari under Rule 65 of the Revised Rules of Court to annul the decision of the National Labor Relations
Commission in an unfair labor practice case instituted by a local union against its employer company and the officers of its national
federation.
The petitioner, Malayang Samahan ng mga Manggagawa sa M. Greenfield, Inc., (B) (MSMG), hereinafter referred to as the "local union", is
an affiliate of the private respondent, United Lumber and General Workers of the Philippines (ULGWP), referred to as the "federation".
The collective bargaining agreement between MSMG and M. Greenfield, Inc., names the parties as follows:
Sec. 4. Dismissal. Any such employee mentioned in Section 2 hereof, who fails to maintain his membership in the UNION for non-payment
of UNION dues, for resignation and for violation of UNION's Constitution and By-Laws and any new employee as defined in Section 2 of
this Article shall upon written notice of such failure to join or to maintain membership in the UNION and upon written recommendation to
the COMPANY by the UNION, be dismissed from the employment by the COMPANY; provided, however, that the UNION shall hold the
COMPANY free and blameless from any and all liabilities that may arise should the dismissed employee question, in any manner, his
dismissal; provided, further that the matter of the employee's dismissal under this Article may be submitted as a grievance under Article
XIII and, provided, finally, that no such written recommendation shall be made upon the COMPANY nor shall COMPANY be compelled to
act upon any such recommendation within the period of sixty (60) days prior to the expiry date of this Agreement conformably to law.
This agreement made and entered into by and between:
Art. IX
Sec. 4. Program Fund The Company shall provide the amount of P10,000.00 a month for a continuing labor education program which
shall be remitted to the Federation . . .2
CMV
96
On September 12, 1986, a local union election was held under the auspices of the ULGWP wherein the herein petitioner, Beda Magdalena
Villanueva, and the other union officers were proclaimed as winners. Minutes of the said election were duly filed with the Bureau of Labor
Relations on September 29, 1986.
In connection with Section 4 Article II of our existing Collective Bargaining Agreement, please deduct the amount of P50.00 from each of
the union members named in said annexes on the payroll of July 2-8, 1988 as fine for their failure to attend said general membership
meeting.4
In a Memorandum dated July 3, 1988, the Secretary General of the national federation, Godofredo Paceo, Jr. disapproved the resolution
of the local union imposing the P50.00 fine. The union officers protested such action by the Federation in a Reply dated July 4, 1988.
On March 21, 1987, a Petition for Impeachment was filed with the national federation ULGWP by the defeated candidates in the
aforementioned election.
On June 16, 1987, the federation conducted an audit of the local union funds. The investigation did not yield any unfavorable result and
the local union officers were cleared of the charges of anomaly in the custody, handling and disposition of the union funds.1wphi1.nt
The 14 defeated candidates filed a Petition for Impeachment/Expulsion of the local union officers with the DOLE NCR on November 5,
1987, docketed as NCR-OD-M-11-780-87. However, the same was dismissed on March 2, 1988, by Med-Arbiter Renato Parungo for failure
to substantiate the charges and to present evidence in support of the allegations.
On April 17, 1988, the local union held a general membership meeting at the Caruncho Complex in Pasig. Several union members failed to
attend the meeting, prompting the Executive Board to create a committee tasked to investigate the non-attendance of several union
members in the said assembly, pursuant to Sections 4 and 5, Article V of the Constitution and By-Laws of the union, which read:
Seksyon 4. Ang mga kinukusang hindi pagdalo o hindi paglahok sa lahat ng hakbangin ng unyon ng sinumang kasapi o pinuno ay maaaring
maging sanhi ng pagtitiwalag o pagpapataw ng multa ng hindi hihigit sa P50.00 sa bawat araw na nagkulang.
Seksyon 5. Ang sinumang dadalo na aalis ng hindi pa natatapos ang pulong ay ituturing na pagliban at maparusahan itong alinsunod sa
Article V, Seksyong 4 ng Saligang Batas na ito. Sino mang kasapi o pisyales na mahuli and dating sa takdang oras ng di lalampas sa isang
oras ay magmumulta ng P25.00 at babawasin sa sahod sa pamamagitan ng salary deduction at higit sa isang oras ng pagdating ng huli ay
ituturing na pagliban.3
On June 27, 1988, the local union wrote respondent company a letter requesting it to deduct the union fines from the wages/salaries of
those union members who failed to attend the general membership meeting. A portion of the said letter stated:
xxx
xxx
CMV
xxx
On July 11, 1988, the Federation wrote respondent company a letter advising the latter not to deduct the fifty-peso fine from the salaries
of the union members requesting that:
. . . any and all future representations by MSMG affecting a number of members be first cleared from the federation before corresponding
action by the Company.5
The following day, respondent company sent a reply to petitioner union's request in a letter, stating that it cannot deduct fines from the
employees' salary without going against certain laws. The company suggested that the union refer the matter to the proper government
office for resolution in order to avoid placing the company in the middle of the issue.
The imposition of P50.00 fine became the subject of bitter disagreement between the Federation and the local union culminating in the
latter's declaration of general autonomy from the former through Resolution No. 10 passed by the local executive board and ratified by
the general membership on July 16, 1988.
In retaliation, the national federation asked respondent company to stop the remittance of the local union's share in the education funds
effective August 1988. This was objected to by the local union which demanded that the education fund be remitted to it in full.
The company was thus constrained to file a Complaint for Interpleader with a Petition for Declaratory Relief with the Med-Arbitration
Branch of the Department of Labor and Employment, docketed as Case No. OD-M-8-435-88. This was resolved on October 28, 1988, by
Med-Arbiter Anastacio Bactin in an Order, disposing thus:
WHEREFORE, premises considered, it is hereby ordered:
1. That the United Lumber and General Workers of the Philippines (ULGWP) through its local union officers shall administer the collective
bargaining agreement (CBA).
97
2. That petitioner company shall remit the P10,000.00 monthly labor education program fund to the ULGWP subject to the condition that
it shall use the said amount for its intended purpose.
3. That the Treasurer of the MSMG shall be authorized to collect from the 356 union members the amount of P50.00 as penalty for their
failure to attend the general membership assembly on April 17, 1988.
(a) Questioning the validity of the alleged National Executive Board Resolution placing their union under trusteeship;
(b) Justifying the action of their union in declaring a general autonomy from ULGWP due to the latter's inability to give proper
educational, organizational and legal services to its affiliates and the pendency of the audit of the federation funds;
(c) Advising that their union did not commit any act of disloyalty as it has remained an affiliate of ULGWP;
However, if the MSMG Officers could present the individual written authorizations of the 356 union members, then the company is
obliged to deduct from the salaries of the 356 union members the P50.00 fine.6
(d) Giving ULGWP a period of five (5) days to cease and desist from further committing acts of coercion, intimidation and harassment.8
On appeal, Director Pura-Ferrer Calleja issued a Resolution dated February 7, 1989, which modified in part the earlier disposition, to wit:
However, as early as November 21, 1988, the officers were expelled from the ULGWP. The termination letter read:
WHEREFORE, premises considered, the appealed portion is hereby modified to the extent that the company should remit the amount of
five thousand pesos (P5,000.00) of the P10,000.00 monthly labor education program fund to ULGWP and the other P5,000.00 to MSMG,
both unions to use the same for its intended purpose.7
Meanwhile, on September 2, 1988, several local unions (Top Form, M. Greenfield, Grosby, Triumph International, General Milling, and
Vander Hons chapters) filed a Petition for Audit and Examination of the federation and education funds of ULGWP which was granted by
Med-Arbiter Rasidali Abdullah on December 25, 1988 in an Order which directed the audit and examination of the books of account of
ULGWP.
On September 30, 1988, the officials of ULGWP called a Special National Executive Board Meeting at Nasipit, Agusan del Norte where a
Resolution was passed placing the MSMG under trusteeship and appointing respondent Cesar Clarete as administrator.
On October 27, 1988, the said administrator wrote the respondent company informing the latter of its designation of a certain Alfredo
Kalingking as local union president and "disauthorizing" the incumbent union officers from representing the employees. This action by the
national federation was protested by the petitioners in a letter to respondent company dated November 11, 1988.
On November 13, 1988, the petitioner union officers received identical letters from the administrator requiring them to explain within 72
hours why they should not be removed from their office and expelled from union membership.
On November 26, 1988, petitioners replied:
CMV
Effective today, November 21, 1988, you are hereby expelled from UNITED LUMBER AND GENERAL WORKERS OF THE PHILIPPINES
(ULGWP) for committing acts of disloyalty and/or acts inimical to the interest and violative to the Constitution and by-laws of your
federation.
You failed and/or refused to offer an explanation inspite of the time granted to you.
Since you are no longer a member of good standing, ULGWP is constrained to recommend for your termination from your employment,
and provided in Article II Section 4, known as UNION SECURITY, in the Collective Bargaining agreement.9
On the same day, the federation advised respondent company of the expulsion of the 30 union officers and demanded their separation
from employment pursuant to the Union Security Clause in their collective bargaining agreement. This demand was reiterated twice,
through letters dated February 21 and March 4, 1989, respectively, to respondent company.
Thereafter, the Federation filed a Notice of Strike with the National Conciliation and Mediation Board to compel the company to effect
the immediate termination of the expelled union officers.
On March 7, 1989, under the pressure of a threatened strike, respondent company terminated the 30 union officers from employment,
serving them identical copies of the termination letter reproduced below:
98
We received a demand letter dated 21 November 1988 from the United Lumber and General Workers of the Philippines (ULGWP)
demanding for your dismissal from employment pursuant to the provisions of Article II, Section 4 of the existing Collective Bargaining
Agreement (CBA). In the said demand letter, ULGWP informed us that as of November 21, 1988, you were expelled from the said
federation "for committing acts of disloyalty and/or acts inimical to the interest of ULGWP and violative to its Constitution and By-laws
particularly Article V, Section 6, 9, and 12, Article XIII, Section 8.
In subsequent letters dated 21 February and 4 March 1989, the ULGWP reiterated its demand for your dismissal, pointing out that
notwithstanding your expulsion from the federation, you have continued in your employment with the company in violation of Sec. 1 and
4 of Article II of our CBA, and of existing provisions of law.
In view thereof, we are left with no alternative but to comply with the provisions of the Union Security Clause of our CBA. Accordingly, we
hereby serve notice upon you that we are dismissing you from your employment with M. Greenfield, Inc., pursuant to Sections 1 and 4,
Article II of the CBA effective immediately.10
On that same day, the expelled union officers assigned in the first shift were physically or bodily brought out of the company premises by
the company's security guards. Likewise, those assigned to the second shift were not allowed to report for work. This provoked some of
the members of the local union to demonstrate their protest for the dismissal of the said union officers. Some union members left their
work posts and walked out of the company premises.
On the other hand, the Federation, having achieved its objective, withdrew the Notice of Strike filed with the NCMB.
On March 8, 1989, the petitioners filed a Notice of Strike with the NCMB, DOLE, Manila, docketed as Case No. NCMB-NCR-NS-03-216-89,
alleging the following grounds for the strike:
(a) Discrimination
(e) Union busting
The following day, March 9, 1989, a strike vote referendum was conducted and out of 2, 103 union members who cast their votes, 2,086
members voted to declare a strike.
On March 10, 1989, the thirty (30) dismissed union officers filed an urgent petition, docketed as Case No. NCMB-NCR-NS-03-216-89, with
the Office of the Secretary of the Department of Labor and Employment praying for the suspension of the effects of their termination
from employment. However, the petition was dismissed by then Secretary Franklin Drilon on April 11, 1989, the pertinent portion of
which stated as follows:
At this point in time, it is clear that the dispute at M. Greenfield is purely an intra-union matter. No mass lay-off is evident as the
terminations have been limited to those allegedly leading the secessionist group leaving MSMG-ULGWP to form a union under the KMU. .
..
xxx
xxx
xxx
WHEREFORE, finding no sufficient jurisdiction to warrant the exercise of our extraordinary authority under Article 277 (b) of the Labor
Code, as amended, the instant Petition is hereby DISMISSED for lack of merit.
SO ORDERED.11
On March 13 and 14, 1989, a total of 78 union shop stewards were placed under preventive suspension by respondent company. This
prompted the union members to again stage a walk-out and resulted in the official declaration of strike at around 3:30 in the afternoon of
March 14, 1989. The strike was attended with violence, force and intimidation on both sides resulting to physical injuries to several
employees, both striking and non-striking, and damage to company properties.
(b) Interference in union activities
(c) Mass dismissal of union officers and shop stewards
The employees who participated in the strike and allegedly figured in the violent incident were placed under preventive suspension by
respondent company. The company also sent return-to-work notices to the home addresses of the striking employees thrice successively,
on March 27, April 8 and April 31, 1989, respectively. However, respondent company admitted that only 261 employees were eventually
accepted back to work. Those who did not respond to the return-to-work notice were sent termination letters dated May 17, 1989,
reproduced below:
(d) Threats, coercion and intimidation
CMV
99
M. Greenfield Inc., (B)
After the filing of the complaint, the lease contracts on the respondent company's office and factory at Merville Subdivision, Paraaque
expired and were not renewed. Upon demand of the owners of the premises, the company was compelled to vacate its office and factory.
Km. 14, Merville Rd., Paraaque, M.M.

Thereafter, the company transferred its administration and account/client servicing department at AFP-RSBS Industrial Park in Taguig,
Metro Manila. For failure to find a suitable place in Metro Manila for relocation of its factory and manufacturing operations, the company
was constrained to move the said departments to Tacloban, Leyte. Hence, on April 16, 1990, respondent company accordingly notified its
employees of a temporary shutdown in operations. Employees who were interested in relocating to Tacloban were advised to enlist on or
before April 23, 1990.
May 17, 1989
xxx
xxx
xxx
The complaint for unfair labor practice was assigned to Labor Arbiter Manuel Asuncion but was thereafter reassigned to Labor Arbiter
Cresencio Ramos when respondents moved to inhibit him from acting on the case.
On March 14, 1989, without justifiable cause and without due notice, you left your work assignment at the prejudice of the Company's
operations. On March 27, April 11, and April 21, 1989, we sent you notices to report to the Company. Inspite of your receipt of said
notices, we have not heard from you up to this date.
Accordingly, for your failure to report, it is construed that you have effectively abandoned your employment and the Company is,
therefore, constrained to dismiss you for said cause.
Very truly yours,
M. GREENFIELD, INC., (B)
On December 15, 1992, finding the termination to be valid in compliance with the union security clause of the collective bargaining
agreement, Labor Arbiter Cresencio Ramos dismissed the complaint.
Petitioners then appealed to the NLRC. During its pendency, Commissioner Romeo Putong retired from the service, leaving only two
commissioners, Commissioner Vicente Veloso III and Hon. Chairman Bartolome Carale in the First Division. When Commissioner Veloso
inhibited himself from the case, Commissioner Joaquin Tanodra of the Third Division was temporarily designated to sit in the First Division
for the proper disposition of the case.
The First Division affirmed the Labor Arbiter's disposition. With the denial of their motion for reconsideration on January 28, 1994,
petitioners elevated the case to this Court, attributing grave abuse of discretion to public respondent NLRC in:
By:
I. UPHOLDING THE DISMISSAL OF THE UNION OFFICERS BY RESPONDENT COMPANY AS VALID;
WENZEL STEPHEN LIGOT
II. HOLDING THAT THE STRIKE STAGED BY THE PETITIONERS AS ILLEGAL;
Asst. HRD Manager12
On August 7, 1989, the petitioners filed a verified complaint with the Arbitration Branch, National Capital Region, DOLE, Manila, docketed
as Case No. NCR-00-09-04199-89, charging private respondents of unfair labor practice which consists of union busting, illegal dismissal,
illegal suspension, interference in union activities, discrimination, threats, intimidation, coercion, violence, and oppression.
III. HOLDING THAT THE PETITIONER EMPLOYEES WERE DEEMED TO HAVE ABANDONED THEIR WORK AND HENCE, VALIDLY DISMISSED BY
RESPONDENT COMPANY; AND
IV. NOT FINDING RESPONDENT COMPANY AND RESPONDENT FEDERATION OFFICERS GUILTY OF ACTS OF UNFAIR LABOR PRACTICE.
CMV
100
Notwithstanding the several issues raised by the petitioners and respondents in the voluminous pleadings presented before the NLRC and
this Court, they revolve around and proceed from the issue of whether or not respondent company was justified in dismissing petitioner
employees merely upon the labor federation's demand for the enforcement of the union security clause embodied in their collective
bargaining agreement.
Before delving into the main issue, the procedural flaw pointed out by the petitioners should first be resolved.
Petitioners contend that the decision rendered by the First Division of the NLRC is not valid because Commissioner Tanodra, who is from
the Third Division, did not have any lawful authority to sit, much less write the ponencia, on a case pending before the First Division. It is
claimed that a commissioner from one division of the NLRC cannot be assigned or temporarily designated to another division because
each division is assigned a particular territorial jurisdiction. Thus, the decision rendered did not have any legal effect at all for being
irregularly issued.
Petitioners' argument is misplaced. Article 213 of the Labor Code in enumerating the powers of the Chairman of the National Labor
Relations Commission provides that:
The concurrence of two (2) Commissioners of a division shall be necessary for the pronouncement of a judgment or resolution. Whenever
the required membership in a division is not complete and the concurrence of two (2) commissioners to arrive at a judgment or resolution
cannot be obtained, the Chairman shall designate such number of additional Commissioners from the other divisions as may be
necessary.
It must be remembered that during the pendency of the case in the First Division of the NLRC, one of the three commissioners,
Commissioner Romeo Putong, retired, leaving Chairman Bartolome Carale and Commissioner Vicente Veloso III. Subsequently,
Commissioner Veloso inhibited himself from the case because the counsel for the petitioners was his former classmate in law school. The
First Division was thus left with only one commissioner. Since the law requires the concurrence of two commissioners to arrive at a
judgment or resolution, the Commission was constrained to temporarily designate a commissioner from another division to complete the
First Division. There is nothing irregular at all in such a temporary designation for the law empowers the Chairman to make temporary
assignments whenever the required concurrence is not met. The law does not say that a commissioner from the first division cannot be
temporarily assigned to the second or third division to fill the gap or vice versa. The territorial divisions do not confer exclusive jurisdiction
to each division and are merely designed for administrative efficiency.
Going into the merits of the case, the court finds that the Complaint for unfair labor practice filed by the petitioners against respondent
company which charges union busting, illegal dismissal, illegal suspension, interference in union activities, discrimination, threats,
intimidation, coercion, violence, and oppression actually proceeds from one main issue which is the termination of several employees by
respondent company upon the demand of the labor federation pursuant to the union security clause embodied in their collective
bargaining agreement.
CMV
Petitioners contend that their dismissal from work was effected in an arbitrary, hasty, capricious and illegal manner because it was
undertaken by the respondent company without any prior administrative investigation; that, had respondent company conducted prior
independent investigation it would have found that their expulsion from the union was unlawful similarly for lack of prior administrative
investigation; that the federation cannot recommend the dismissal of the union officers because it was not a principal party to the
collective bargaining agreement between the company and the union; that public respondents acted with grave abuse of discretion when
they declared petitioners' dismissals as valid and the union strike as illegal and in not declaring that respondents were guilty of unfair
labor practice.
Private respondents, on the other hand, maintain that the thirty dismissed employees who were former officers of the federation have no
cause of action against the company, the termination of their employment having been made upon the demand of the federation
pursuant to the union security clause of the CBA; the expelled officers of the local union were accorded due process of law prior to their
expulsion from their federation; that the strike conducted by the petitioners was illegal for noncompliance with the requirements; that
the employees who participated in the illegal strike and in the commission of violence thereof were validly terminated from work; that
petitioners were deemed to have abandoned their employment when they did not respond to the three return to work notices sent to
them; that petitioner labor union has no legal personality to file and prosecute the case for and on behalf of the individual employees as
the right to do so is personal to the latter; and that, the officers of respondent company cannot be liable because as mere corporate
officers, they acted within the scope of their authority.
Public respondent, through the Labor Arbiter, ruled that the dismissed union officers were validly and legally terminated because the
dismissal was effected in compliance with the union security clause of the CBA which is the law between the parties. And this was
affirmed by the Commission on appeal. Moreover, the Labor Arbiter declared that notwithstanding the lack of a prior administrative
investigation by respondent company, under the union security clause provision in the CBA, the company cannot look into the legality or
illegality of the recommendation to dismiss by the union nd the obligation to dismiss is ministerial on the part of the company.13
This ruling of the NLRC is erroneous. Although this Court has ruled that union security clauses embodied in the collective bargaining
agreement may be validly enforced and that dismissals pursuant thereto may likewise be valid, this does not erode the fundamental
requirement of due process. The reason behind the enforcement of union security clauses which is the sanctity and inviolability of
contracts14 cannot override one's right to due process.
In the case of Cario vs. National Labor Relations Commission,15 this Court pronounced that while the company, under a maintenance of
membership provision of the collective bargaining agreement, is bound to dismiss any employee expelled by the union for disloyalty upon
its written request, this undertaking should not be done hastily and summarily. The company acts in bad faith in dismissing a worker
without giving him the benefit of a hearing.
The power to dismiss is a normal prerogative of the employer. However, this is not without limitation. The employer is bound to exercise
caution in terminating the services of his employees especially so when it is made upon the request of a labor union pursuant to the
Collective Bargaining Agreement, . . . Dismissals must not be arbitrary and capricious. Due process must be observed in dismissing an
101
employee because it affects not only his position but also his means of livelihood. Employers should respect and protect the rights of their
employees, which include the right to labor.
In the case under scrutiny, petitioner union officers were expelled by the federation for allegedly committing acts of disloyalty and/or
inimical to the interest of ULGWP and in violation of its Constitution and By-laws. Upon demand of the federation, the company
terminated the petitioners without conducting a separate and independent investigation. Respondent company did not inquire into the
cause of the expulsion and whether or not the federation had sufficient grounds to effect the same. Relying merely upon the federation's
allegations, respondent company terminated petitioners from employment when a separate inquiry could have revealed if the federation
had acted arbitrarily and capriciously in expelling the union officers. Respondent company's allegation that petitioners were accorded due
process is belied by the termination letters received by the petitioners which state that the dismissal shall be immediately effective.
As held in the aforecited case of Cario, "the right of an employee to be informed of the charges against him and to reasonable
opportunity to present his side in a controversy with either the company or his own union is not wiped away by a union security clause or
a union shop clause in a collective bargaining agreement. An employee is entitled to be protected not only from a company which
disregards his rights but also from his own union the leadership of which could yield to the temptation of swift and arbitrary expulsion
from membership and mere dismissal from his job.
While respondent company may validly dismiss the employees expelled by the union for disloyalty under the union security clause of the
collective bargaining agreement upon the recommendation by the union, this dismissal should not be done hastily and summarily thereby
eroding the employees' right to due process, self-organization and security of tenure. The enforcement of union security clauses is
authorized by law provided such enforcement is not characterized by arbitrariness, and always with due process.16 Even on the
assumption that the federation had valid grounds to expel the union officers, due process requires that these union officers be accorded a
separate hearing by respondent company.
. . . Bad faith on the part of the respondent company may be gleaned from the fact that the petitioner workers were dismissed hastily and
summarily. At best, it was guilty of a tortious act, for which it must assume solidary liability, since it apparently chose to summarily dismiss
the workers at the union's instance secure in the union's contractual undertaking that the union would hold it "free from any liability"
arising from such dismissal.
Thus, notwithstanding the fact that the dismissal was at the instance of the federation and that it undertook to hold the company free
from any liability resulting from such a dismissal, the company may still be held liable if it was remiss in its duty to accord the would-be
dismissed employees their right to be heard on the matter.
Anent petitioners contention that the federation was not a principal party to the collective bargaining agreement between the company
and the union, suffice it to say that the matter was already ruled upon in the Interpleader case filed by respondent company. Med-Arbiter
Anastacio Bactin thus ruled:
After a careful examination of the facts and evidences presented by the parties, this Officer hereby renders its decision as follows:
1.) It appears on record that in Collective Bargaining Agreement (CBA) which took effect on July 1, 1986, the contracting parties are M.
Greenfield, Inc. (B) and Malayang Samahan ng Mga Manggagawa sa M. Greenfield, Inc. (B) (MSMG)/United Lumber and General Workers
of the Philippines (ULGWP). However, MSMG was not yet registered labor organization at the time of the signing of the CBA. Hence, the
union referred to in the CBA is the ULGWP.18
Likewise on appeal, Director Pura Ferrer-Calleja put the issue to rest as follows:
In its decision, public respondent also declared that if complainants (herein petitioners) have any recourse in law, their right of action is
against the federation and not against the company or its officers, relying on the findings of the Labor Secretary that the issue of expulsion
of petitioner union officers by the federation is a purely intra-union matter.
Again, such a contention is untenable. While it is true that the issue of expulsion of the local union officers is originally between the local
union and the federation, hence, intra-union in character, the issue was later on converted into a termination dispute when the company
dismissed the petitioners from work without the benefit of a separate notice and hearing. As a matter of fact, the records reveal that the
termination was effective on the same day that the termination notice was served on the petitioners.
In the case of Liberty Cotton Mills Workers Union vs. Liberty Cotton Mills, Inc.17, the Court held the company liable for the payment of
backwages for having acted in bad faith in effecting the dismissal of the employees.
CMV
It is undisputed that ULGWP is the certified sole and exclusive collective bargaining agent of all the regular rank-and-file workers of the
company, M. Greenfield, Inc. (pages 31-32 of the records).
It has been established also that the company and ULGWP signed a 3-year collective bargaining agreement effective July 1, 1986 up to
June 30, 1989.19
Although the issue of whether or not the federation had reasonable grounds to expel the petitioner union officers is properly within the
original and exclusive jurisdiction of the Bureau of Labor Relations, being an intra-union conflict, this Court deems it justifiable that such
issue be nonetheless ruled upon, as the Labor Arbiter did, for to remand the same to the Bureau of Labor Relations would be to
intolerably delay the case.
102
The Labor Arbiter found that petitioner union officers were justifiably expelled from the federation for committing acts of disloyalty when
it "undertook to disaffiliate from the federation by charging ULGWP with failure to provide any legal, educational or organizational
support to the local. . . . and declared autonomy, wherein they prohibit the federation from interfering in any internal and external affairs
of the local union."20
It is well-settled that findings of facts of the NLRC are entitled to great respect and are generally binding on this Court, but it is equally
well-settled that the Court will not uphold erroneous conclusions of the NLRC as when the Court finds insufficient or insubstantial
evidence on record to support those factual findings. The same holds true when it is perceived that far too much is concluded, inferred or
deduced from the bare or incomplete facts appearing of record.21
In its decision, the Labor Arbiter declared that the act of disaffiliation and declaration of autonomy by the local union was part of its "plan
to take over the respondent federation." This is purely conjecture and speculation on the part of public respondent, totally unsupported
by the evidence.
A local union has the right to disaffiliate from its mother union or declare its autonomy. A local union, being a separate and voluntary
association, is free to serve the interests of all its members including the freedom to disaffiliate or declare its autonomy from the
federation to which it belongs when circumstances warrant, in accordance with the constitutional guarantee of freedom of association.22
The purpose of affiliation by a local union with a mother union or a federation.
. . . is to increase by collective action the bargaining power in respect of the terms and conditions of labor. Yet the locals remained the
basic units of association, free to serve their own and the common interest of all, subject to the restraints imposed by the Constitution
and By-Laws of the Association, and free also to renounce the affiliation for mutual welfare upon the terms laid down in the agreement
which brought it into existence.23
Thus, a local union which has affiliated itself with a federation is free to sever such affiliation anytime and such disaffiliation cannot be
considered disloyalty. In the absence of specific provisions in the federation's constitution prohibiting disaffiliation or the declaration of
autonomy of a local union, a local may dissociate with its parent union.24
The evidence on hand does not show that there is such a provision in ULGWP's constitution. Respondents' reliance upon Article V, Section
6, of the federation's constitution is not right because said section, in fact, bolsters the petitioner union's claim of its right to declare
autonomy:
Sec. 6. The autonomy of a local union affiliated with ULGWP shall be respected insofar as it pertains to its internal affairs, except as
provided elsewhere in this Constitution.
There is no disloyalty to speak of, neither is there any violation of the federation's constitution because there is nothing in the said
constitution which specifically prohibits disaffiliation or declaration of autonomy. Hence, there cannot be any valid dismissal because
Article II, Section 4 of the union security clause in the CBA limits the dismissal to only three (3) grounds, to wit: failure to maintain
membership in the union (1) for non-payment of union dues, (2) for resignation; and (3) for violation of the union's Constitution and ByLaws.
To support the finding of disloyalty, the Labor Arbiter gave weight to the fact that on February 26, 1989, the petitioners declared as vacant
all the responsible positions of ULGWP, filled these vacancies through an election and filed a petition for the registration of UWP as a
national federation. It should be pointed out, however, that these occurred after the federation had already expelled the union officers.
The expulsion was effective November 21, 1988. Therefore, the act of establishing a different federation, entirely separate from the
federation which expelled them, is but a normal retaliatory reaction to their expulsion.
With regard to the issue of the legality or illegality of the strike, the Labor Arbiter held that the strike was illegal for the following reasons:
(1) it was based on an intra-union dispute which cannot properly be the subject of a strike, the right to strike being limited to cases of
bargaining deadlocks and unfair labor practice (2) it was made in violation of the "no strike, no lock-out" clause in the CBA, and (3) it was
attended with violence, force and intimidation upon the persons of the company officials, other employees reporting for work and third
persons having legitimate business with the company, resulting to serious physical injuries to several employees and damage to company
property.
On the submission that the strike was illegal for being grounded on a non-strikeable issue, that is, the intra-union conflict between the
federation and the local union, it bears reiterating that when respondent company dismissed the union officers, the issue was
transformed into a termination dispute and brought respondent company into the picture. Petitioners believed in good faith that in
dismissing them upon request by the federation, respondent company was guilty of unfair labor practice in that it violated the petitioner's
right to self-organization. The strike was staged to protest respondent company's act of dismissing the union officers. Even if the
allegations of unfair labor practice are subsequently found out to be untrue, the presumption of legality of the strike prevails.25
Another reason why the Labor Arbiter declared the strike illegal is due to the existence of a no strike no lockout provision in the CBA.
Again, such a ruling is erroneous. A no strike, no lock out provision can only be invoked when the strike is economic in nature, i.e. to force
wage or other concessions from the employer which he is not required by law to grant.26 Such a provision cannot be used to assail the
legality of a strike which is grounded on unfair labor practice, as was the honest belief of herein petitioners. Again, whether or not there
was indeed unfair labor practice does not affect the strike.
On the allegation of violence committed in the course of the strike, it must be remembered that the Labor Arbiter and the Commission
found that "the parties are agreed that there were violent incidents . . . resulting to injuries to both sides, the union and management."27
CMV
103
The evidence on record show that the violence cannot be attributed to the striking employees alone for the company itself employed
hired men to pacify the strikers. With violence committed on both sides, the management and the employees, such violence cannot be a
ground for declaring the strike as illegal.
With respect to the dismissal of individual petitioners, the Labor Arbiter declared that their refusal to heed respondent's recall to work
notice is a clear indication that they were no longer interested in continuing their employment and is deemed abandonment. It is
admitted that three return to work notices were sent by respondent company to the striking employees on March 27, April 11, and April
21, 1989 and that 261 employees who responded to the notice were admitted back to work.
However, jurisprudence holds that for abandonment of work to exist, it is essential (1) that the employee must have failed to report for
work or must have been absent without valid or justifiable reason; and (2) that there must have been a clear intention to sever the
employer-employee relationship manifested by some overt acts.28 Deliberate and unjustified refusal on the part of the employee to go
back to his work post amd resume his employment must be established. Absence must be accompanied by overt acts unerringly pointing
to the fact that the employee simply does not want to work anymore.29 And the burden of proof to show that there was unjustified
refusal to go back to work rests on the employer.
In the present case, respondents failed to prove that there was a clear intention on the part of the striking employees to sever their
employer-employee relationship. Although admittedly the company sent three return to work notices to them, it has not been
substantially proven that these notices were actually sent and received by the employees. As a matter of fact, some employees deny that
they ever received such notices. Others alleged that they were refused entry to the company premises by the security guards and were
advised to secure a clearance from ULGWP and to sign a waiver. Some employees who responded to the notice were allegedly told to
wait for further notice from respondent company as there was lack of work.
Furthermore, this Court has ruled that an employee who took steps to protest his lay-off cannot be said to have abandoned his work.30
The filing of a complaint for illegal dismissal is inconsistent with the allegation of abandonment. In the case under consideration, the
petitioners did, in fact, file a complaint when they were refused reinstatement by respondent company.
Anent public respondent's finding that there was no unfair labor practice on the part of respondent company and federation officers, the
Court sustains the same. As earlier discussed, union security clauses in collective bargaining agreements, if freely and voluntarily entered
into, are valid and binding. Corollary, dismissals pursuant to union security clauses are valid and legal subject only to the requirement of
due process, that is, notice and hearing prior to dismissal. Thus, the dismissal of an employee by the company pursuant to a labor union's
demand in accordance with a union security agreement does not constitute unfair labor practice.31
Lastly, the Court is of the opinion, and so holds, that respondent company officials cannot be held personally liable for damages on
account of the employees' dismissal because the employer corporation has a personality separate and distinct from its officers who
merely acted as its agents.
It has come to the attention of this Court that the 30-day prior notice requirement for the dismissal of employees has been repeatedly
violated and the sanction imposed for such violation enunciated in Wenphil Corporation vs. NLRC32 has become an ineffective deterrent.
Thus, the Court recently promulgated a decision to reinforce and make more effective the requirement of notice and hearing, a procedure
that must be observed before termination of employment can be legally effected.
In Ruben Serrano vs. NLRC and Isetann Department Store (G.R. No. 117040, January 27, 2000), the Court ruled that an employee who is
dismissed, whether or not for just or authorized cause but without prior notice of his termination, is entitled to full backwages from the
time he was terminated until the decision in his case becomes final, when the dismissal was for cause; and in case the dismissal was
without just or valid cause, the backwages shall be computed from the time of his dismissal until his actual reinstatement. In the case at
bar, where the requirement of notice and hearing was not complied with, the aforecited doctrine laid down in the Serrano case applies.
WHEREFORE, the Petition is GRANTED; the decision of the National Labor Relations Commission in Case No. NCR-00-09-04199-89 is
REVERSED and SET ASIDE; and the respondent company is hereby ordered to immediately reinstate the petitioners to their respective
positions. Should reinstatement be not feasible, respondent company shall pay separation pay of one month salary for every year of
service. Since petitioners were terminated without the requisite written notice at least 30 days prior to their termination, following the
recent ruling in the case of Ruben Serrano vs. National Labor Relations Commission and Isetann Department Store, the respondent
company is hereby ordered to pay full backwages to petitioner-employees while the Federation is also ordered to pay full backwages to
petitioner-union officers who were dismissed upon its instigation. Since the dismissal of petitioners was without cause, backwages shall
be computed from the time the herein petitioner employees and union officers were dismissed until their actual reinstatement. Should
reinstatement be not feasible, their backwages shall be computed from the time petitioners were terminated until the finality of this
decision. Costs against the respondent company.1wphi1.nt
SO ORDERED.
[G.R. No. 150978. April 3, 2003]
POWTON CONGLOMERATE[1], INC., and PHILIP C. CHIEN, petitioners, vs. JOHNNY AGCOLICOL, respondent.
DECISION
However, the dismissal was invalidated in this case because of respondent company's failure to accord petitioners with due process, that
is, notice and hearing prior to their termination. Also, said dismissal was invalidated because the reason relied upon by respondent
Federation was not valid. Nonetheless, the dismissal still does not constitute unfair labor practice.
CMV
YNARES-SANTIAGO, J.:
104
In a contract to build a structure or any other work for a stipulated price, the contractor cannot demand an increase in the contract price
on account of higher cost of labor or materials, unless there has been a change in the plan and specification which was authorized in
writing by the other party and the price has been agreed upon in writing by both parties.[2]
SO ORDERED.[11]
Aggrieved, petitioners appealed to the Court of Appeals which, however, affirmed the decision of the trial court.[12] The motion for
reconsideration was likewise denied.[13]
This is a petition for review on certiorari assailing the September 3, 2001 Decision[3] of the Court of Appeals in CA-G.R. CV No. 65100, and
its December 5, 2001 Resolution*4+ denying petitioners motion for reconsideration.
Hence, the instant petition.
Sometime in November 1990, respondent Johnny Agcolicol, proprietor of Japerson Engineering, entered into an Electrical Installation
Contract with Powton Conglomerate, Inc. (Powton), thru its President and Chairman of the Board, Philip C. Chien. For a contract price of
P5,300,000.00, respondent undertook to provide electrical works as well as the necessary labor and materials for the installation of
electrical facilities at the Ciano Plaza Building owned by Powton, located along M. Reyes Street, corner G. Mascardo Street, Bangkal,
Makati, Metro Manila.*5+ In August 1992, the City Engineers Office of Makati inspected the electrical installations at the Ciano Plaza
Building and certified that the same were in good condition. Hence, it issued the corresponding certificate of electrical inspection.
Is the petitioner liable to pay the balance of the contract price and the increase in costs brought about by the revision of the structural
design of the Ciano Plaza Building?
The petition is partly meritorious.

On December 16, 1994, respondent filed with the Regional Trial Court of Pasay City, Branch 115, the instant complaint for sum of money
against the petitioners.[6] He alleged that despite the completion of the electrical works at Ciano Plaza Building, the latter only paid the
amount of P5,031,860.40, which is equivalent to more than 95% of the total contract price, thereby leaving a balance of P268,139.80.
Respondent likewise claimed the amount of P722,730.38 as additional electrical works which were necessitated by the alleged revisions in
the structural design of the building.[7]
We agree with the findings of both the trial court and the Court of Appeals that petitioners failed to show that the installations made by
respondent were defective and completed beyond the agreed period. The justification cited by petitioners for not paying the balance of
the contract price is the self-serving allegation of petitioner Chien. Pertinent portion of his testimony, reads:
COURT:
In their answer, petitioners contended that they cannot be obliged to pay the balance of the contract price because the electrical
installations were defective and were completed beyond the agreed period.[8] During the trial, petitioner Chien testified that they should
not be held liable for the additional electrical works allegedly performed by the petitioner because they never authorized the same.[9]
At the pre-trial conference, the parties stipulated, inter alia, that the unpaid balance claimed by the respondent is P268,139.60 and the
cost of additional work is P722,730.38.[10]
On August 16, 1999, a decision was rendered awarding the respondent the total award of P990,867.38 representing the unpaid balance
and the costs of additional works. The dispositive portion thereof reads:
Q: You are telling the Court that you did not accept the job because it is not yet complete. That is [a] general statement.
ATTY. FLORENCIO:
Q: Why did you say that the job was not yet complete?
COURT: Specify.
Wherefore, this Court renders its judgment in favor of the plaintiff and orders the defendants Powton Congolmerate and Philip C. Chien to
pay the plaintiff, jointly and severally, the amount of P990,867.38 representing their total unpaid obligations plus legal interest from the
time of the filing of this complaint. No pronouncement as to costs.
CMV
WITNESS:
105
A: I am not an electrical engineer but my menwe also get independent engineer to certify that the job was not complete, your Honor.
(1)
Such change has been authorized by the proprietor in writing; and
(2)
The additional price to be paid to the contractor has been determined in writing by both parties.
COURT:
Q: You mean to say you hired an independent electrical engineer and he certified that the job is not yet complete and there is danger?
Article 1724 of the Civil Code was copied from Article 1593 of the Spanish Civil Code,[15] which provided as follows:
WITNESS:
A: Yes, your Honor.
No architect or contractor who, for a lump sum, undertakes the construction of a building, or any other work to be done in accordance
with a plan agreed upon with the owner of the ground, may demand an increase of the price, even if the costs of the materials or labor
has increased; but he may do so when any change increasing the work is made in the plans, provided the owner has given his consent
thereto.[16]
COURT:
Q: You have to present that engineer.
The present Civil Code added substantive requisites before recovery of the contractor may be validly had. It will be noted that while
under the precursor provision, recovery for additional costs may be allowed if consent to make such additions can be proved, the present
provision clearly requires that the changes should be authorized, such authorization by the proprietor in writing. The evident purpose of
the amendment is to prevent litigation for additional costs incurred by reason of additions or changes in the original plan. Undoubtedly, it
was adopted to serve as a safeguard or a substantive condition precedent to recovery.[17]
ATTY. FLORENCIO:
A: Yes, your Honor.[14]
Notwithstanding the above promise, petitioners never presented the engineer or any other competent witness to testify on the matter of
delay and defects. Having failed to present sufficient proof, petitioners bare assertion of unsatisfactory and delayed installation will not
justify their non-payment of the balance of the contract price. Hence, we affirm the ruling of the trial court and the Court of Appeals
ordering petitioners to pay the balance of P268,139.80.
In Weldon Construction Corporation v. Court of Appeals,[18] involving a contract of supervision of construction of a theater, we denied
the contractors claim to recover costs for additional works. It was held that the contract entered into by the parties was one for a piece
of work for a stipulated price, wherein the right of the contractor to recover the cost of additional works is governed by Article 1724 of
the Civil Code. Thus
In addition to the owner's authorization for any change in the plans and specifications, Article 1724 requires that the additional price to be
paid for the contractor be likewise reduced in writing. Compliance with the two requisites in Article 1724, a specific provision governing
additional works, is a condition precedent to recovery (San Diego v. Sayson, supra.). The absence of one or the other bars the recovery of
additional costs. Neither the authority for the changes made nor the additional price to be paid therefor may be proved by any other
evidence for purposes of recovery.
In awarding additional costs to respondent, both the trial court and the Court of Appeals sweepingly applied the principle of unjust
enrichment without discussing the relevance in the instant case of Article 1724 of the Civil Code, which provides:
Art. 1724. The contractor who undertakes to build a structure or any other work for a stipulated price, in conformity with plans and
specifications agreed upon with the landowner, can neither withdraw from the contract nor demand an increase in the price on account
of the higher cost of labor or materials, save when there has been a change in the plans and specifications, provided:
CMV
In the case before this Court, the records do not yield any written authority for the changes made on the plans and specifications of the
Gay Theater building. Neither can there be found any written agreement on the additional price to be paid for said "extra works." While
the trial court may have found in the instant case that the private respondent admitted his having requested the "extra works" done by
the contractor (Record on Appeal, p. 66 [C.F.I. Decision]), this does not save the day for the petitioner. The private respondent claims that
the contractor agreed to make the additions without additional cost. Expectedly, the petitioner vigorously denies said claim of the private
respondent. This is precisely a misunderstanding between parties to a construction agreement which the lawmakers sought to avoid in
106
prescribing the two requisites under Article 1724 (Report of the Code Commission, p. 148). And this case is a perfect example of a tedious
litigation which had ensued between the parties as a result of such misunderstanding. Again, this is what the law endeavors to prevent
(San Diego v. Sayson, supra.)
In the absence of a written authority by the owner for the changes in the plans and specifications of the building and of a written
agreement between the parties on the additional price to be paid to the contractor, as required by Article 1724, the claim for the cost of
additional works on the Gay Theater building must be denied.[19]
In the instant case, the parties entered into a contract for the execution of all the electrical works at the Ciano Plaza as shown and
described in the plans and specification prepared by RCG Consult (hereinafter referred to as the ARCHITECT/ENGINEER).*20+ The contract
was for a fixed price of P5,300,000, with the stipulation that any addition or reduction in the cost of work shall be mutually agreed in
writing by both the OWNER and [the] CONTRACTOR upon recommendation/advisement of the ARCHITEC/ENGINEERS before
execution.*21+ As admitted by both parties, several revisions and deviations from the original plan and specification of the building were
introduced during the construction thereof.[22] It appears, however, that though respondent was aware of such revisions and of the
consequent increase in the cost of the electrical works, he nevertheless completed the installation of electrical facilities in the constructed
building without first entering into a written agreement with the petitioners for the increase in costs. The fact that petitioner Chien
testified[23] that his Engineer/Architect, the R.C. Gaite & Associates, recommended payment of the increase in costs, does not prove that
he was informed of such increase before the job was completed.[24] The records reveal that the demand letter which in effect notified
the petitioners of the increase in the costs of electrical installations was sent by the respondent to petitioners after the completion of the
project.[25] This was clearly not in accord with the express stipulation of the parties requiring a prior written agreement authorizing the
increased costs, as well as with the provisions of Article 1724.
It must be stressed that the change in the plans and specifications referred to in Article 1724 pertains to the very contract entered into
by the owner of the building and the contractor. While there is a revision of plan and specification in the instant case, the same pertains
to the structural design of the building and not to the electrical installation contract of the parties. The consent given by the petitioners to
the revision of the former will not necessarily extend to the latter. As emphasized in Weldon Construction Corporation, the issue of
consent to the higher cost could have been determined with facility had the respondent complied with the requirement of a written
agreement for additional costs as mandated not only by their contract but also by Article 1724 of the Civil Code. The written consent of
the owner to the increased costs sought by the respondent is not a mere formal requisite, but a vital precondition to the validity of a
subsequent contract authorizing a higher or additional contract price. Moreover, the safeguards enshrined in the provisions of Article
1724 are not only intended to obviate future misunderstandings but also to give the parties a chance to decide whether to bind ones self
to or withdraw from a contract. Had the increase in costs of the electrical installations been disclosed before completion of the project,
petitioners could have opted to bargain with the respondent or hire another contractor for a cheaper price. Respondent, on the other
hand, could have gladly accepted the bargain or simply backed out from the contract instead of gambling on the consequences of
assuming the increased costs without the prior written authorization of the petitioners. Indeed, the principle of unjust enrichment cannot
be validly invoked by the respondent who, through his own act or omission, took the risk of being denied payment for additional costs by
not giving the petitioners prior notice of such costs and/or by not securing their written consent thereto, as required by law and their
contract.
Finally, we note that the trial court held petitioner Chien solidarily liable with petitioner Powton. The settled rule is that, a corporation is
invested by law with a personality separate and distinct from those of the persons composing it, such that, save for certain exceptions,
corporate officers who entered into contracts in behalf of the corporation cannot be held personally liable for the liabilities of the latter.
Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a
rule, only when (1) he assents to a patently unlawful act of the corporation, or when he is guilty of bad faith or gross negligence in
directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its stockholders or other persons; (2)
he consents to the issuance of watered down stocks or who, having knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto; (3) he agrees to hold himself personally and solidarily liable with the corporation; or (4) he is made
by a specific provision of law personally answerable for his corporate action.[26] Considering that none of the foregoing exceptions was
established in the case at bar, petitioner Chien, who entered into a contract with respondent in his capacity as President and Chairman of
the Board of Powton, cannot be held solidarily liable with the latter.
WHEREFORE, in view of all the foregoing, the instant petition is PARTIALLY GRANTED. The Decision of the Court of Appeals in CA-G.R. CV
No. 65100 is MODIFIED. Petitioner Powton Conglomerate, Inc. is ordered to pay respondent Johnny Agcolicol the sum of P268,139.60
representing the unpaid balance in the Electrical Installation Contract between them. Petitioner Philip C. Chien, President and Chairman
of the Board of Powton Conglomerate, Inc. is absolved from personal liability.
SO ORDERED.
LOWE, INC., MARIA ELIZABETH (MARILES) L. GUSTILO, and RAUL M. CASTRO,
Petitioners,
- versus -
COURT OF APPEALS and

IRMA M. MUTUC,
Respondents.
G.R. Nos. 164813 and 174590
CMV
107
Present:
The first case, G.R. No. 164813, is a petition for review[3] of the 23 January 2004 Decision[4] and the 4 August 2004 Resolution[5] of
the Court of Appeals in CA-G.R. SP No. 80531. In its 23 January 2004 Decision, the Court of Appeals affirmed the NLRCs 30 June 2003
Resolution. In its 4 August 2004 Resolution, the Court of Appeals denied Lowes motion for reconsideration.
PUNO, C.J., Chairperson,

CARPIO,
CORONA,
LEONARDO-DE CASTRO, and
The second case, G.R. No. 174590, is a petition for review[6] of the 13 March 2006 Decision[7] and 5 September 2006 Resolution[8]
of the Court of Appeals in CA-G.R. SP No. 80473. In its 13 March 2006 Decision, the Court of Appeals granted Mutucs petition and
partially modified the NLRCs 30 June 2003 Resolution by awarding Mutuc backwages computed from the time of her dismissal up to the
finality of the decision of the Court of Appeals. In its 5 September 2006 Resolution, the Court of Appeals denied Lowes motion for
reconsideration.
BERSAMIN, JJ.
The Facts
Promulgated:
August 14, 2009
Lowe, an advertising agency, is a corporation duly organized and existing under the laws of the Philippines. Petitioner Maria
Elizabeth Mariles L. Gustilo (Gustilo)*9+ is the Chief Executive Officer and President of Lowe, while petitioner Raul M. Castro (Castro) is
the Executive Creative Director of Lowe. Gustilo and Castro were included in the complaint for illegal dismissal in their capacity as officers
of Lowe.
x--------------------------------------------------x
On 23 June 2000, at the height of the influx of advertising projects, Lowe hired Mutuc as a Creative Director to help out the four
other Creative Directors of Lowe. Mutuc was given a salary of P100,000 a month. On 26 February 2001, Mutuc became a regular
employee of Lowe.
DECISION
However, in 2001, most of Lowes clients reduced their advertising budget. In response to the situation, Lowe implemented costcutting measures including a redundancy program. On 31 October 2001, Lowe terminated Mutucs services because her position was
declared redundant.
CARPIO, J.:
Subsequently, Mutuc filed a complaint for illegal dismissal, nonpayment of 13th month pay with prayer for the award of moral and
exemplary damages plus attorneys fees against Lowe.
The Case
On 15 August 2002, the Labor Arbiter dismissed Mutucs complaint and ruled that Lowe validly dismissed Mutuc from the service.
The 15 August 2002 Decision of the Labor Arbiter reads:
Before the Court are the consolidated cases docketed as G.R. Nos. 174590 and 164813. Both cases stemmed from the 30 June 2003
Resolution[1] of the National Labor Relations Commission (NLRC), which declared that respondent Irma M. Mutuc (Mutuc) was illegally
dismissed by petitioner Lowe, Inc. (Lowe).[2]
CMV
WHEREFORE, all foregoing premises considered, judgment is hereby rendered finding complainant to have been validly dismissed
from the service due to the redundancy of her position with respondent company. Accordingly, respondent Lowe Lintas & Partners is
hereby ordered to pay complainant separation pay equivalent to one (1) month salary for every year of service amounting to P100,000.00.
108
Additionally, same respondent is likewise ordered to pay complainant her proportionate 13th Month Pay for the period January 1
September 28, 2001 in the amount of P74,416.67.
Individual respondents Mariles Gustillo and Raul Castro are hereby ordered dropped as party-respondents in this case for reasons
above-discussed.
All other claims are dismissed for lack of factual and/or legal basis.
SO ORDERED.[10]
Lowes petition was docketed as CA-G.R. SP No. 80531. Lowe alleged that the NLRC committed grave abuse of discretion in ruling
that the selection of Mutuc for redundancy was done in bad faith and that Mutuc was dismissed because of professional jealousy. Lowe
also questioned the NLRCs decision holding Gustilo and Castro liable for the monetary awards in favor of Mtutc, including the award of
P10,000 as moral damages.
In its 23 January 2004 Decision, the Court of Appeals dismissed Lowes petition and affirmed the NLRCs 30 June 2003 Resolution.
Lowe filed a motion for reconsideration. In its 4 August 2004 Resolution, the Court of Appeals denied Lowes motion.
Mutucs petition was docketed as CA-G.R. SP No. 80473. Mutuc alleged that the NLRC committed grave abuse of discretion in
awarding her backwages computed only from the time she was unlawfully dismissed up to the promulgation of the NLRCs decision. In its
13 March 2006 Decision, the Court of Appeals granted Mutucs petition and modified the award of backwages. The 13 March 2006
Decision of the Court of Appeals reads:
Feeling aggrieved, Mutuc appealed to the NLRC.

WHEREFORE, premises considered, the instant petition is GRANTED. The Resolution dated June 30, 2003 is hereby MODIFIED. The
award of backwages shall be computed from the time the petitioner was unlawfully dismissed up to the finality of this decision.
In its 30 June 2003 Resolution, the NLRC set aside the Labor Arbiters 15 August 2002 Decision and declared that Mutuc was illegally
dismissed by Lowe. The 30 June 2003 Resolution of the NLRC reads:
SO ORDERED.[13]
ACCORDINGLY, the decision appealed from is SET ASIDE. A new Decision is hereby rendered directing the respondents to pay
[private respondent] separation pay equivalent to one (1) month pay for every year of service, a fraction of six (6) months shall be
considered one (1) year and backwages computed from the time she was unlawfully dismissed up to the promulgation of this Decision.
Moreover, respondents are hereby ordered to pay [private respondent] moral damages in the amount of PHP 10,000.00.
Lowe filed a motion for reconsideration. In its 5 September 2006 Resolution, the Court of Appeals denied Lowes motion.
The 15 August 2002 Decision of the Labor Arbiter

SO ORDERED.[11]
Lowe filed a motion for reconsideration. Mutuc also filed a motion for partial reconsideration. In its 5 September 2003
Resolution,[12] the NLRC denied both motions.
Both Lowe and Mutuc filed petitions for certiorari before the Court of Appeals.
CMV
The Labor Arbiter ruled that Lowe satisfied the requisites for a valid implementation of a redundancy program, namely: (1) there was
notice to Mutuc and the Department of Labor and Employment (DOLE); (2) there was an offer to pay separation pay, which Mutuc refused
to receive since she did not want to process her clearance; (3) that Lowe was motivated by good faith in declaring Mutucs position
redundant; and (4) that the criteria used by Lowe, which were seniority and efficiency, to determine which position was redundant, were
fair and reasonable. The Labor Arbiter found self-serving Mutucs allegation that she was terminated from service due to professional
jealousy.
Since Mutuc was validly dismissed, the Labor Arbiter ruled that Mutuc was not entitled to backwages or reinstatement. However, in
the absence of proof of payment of her proportionate 13th month pay for the period of 1 January to 28 September 2001, the Labor
109
Arbiter ordered Lowe to pay Mutuc P74,416.67. The Labor Arbiter denied Mutucs claim for moral damages and attorneys fees because
there was no evidence of malice or bad faith on the part of Lowe in terminating her services.
Finally, the Labor Arbiter ruled that Gustilo and Castro could not be held liable for the monetary awards to Mutuc since they were
merely acting in the performance of their duties and there was no showing that they acted deliberately or maliciously to evade any
obligation to Mutuc.
The Court of Appeals modified the NLRCs 30 June 2003 Resolution and ruled that Mutucs backwages should be computed from the
time she was unlawfully dismissed until the decision of the Court of Appeals becomes final. According to the Court of Appeals, illegally
dismissed employees are entitled to full backwages, computed from the time their compensation was withheld from them up to the time
of their actual reinstatement. If, as in this case, reinstatement is no longer possible, backwages shall be computed from the time of their
illegal termination up to the finality of the decision.
The Issues
In G.R. No. 164813, Lowe raises the following issues:

The 30 June 2003 Resolution of the NLRC
I.
The NLRC set aside the Labor Arbiters 15 August 2002 Decision and declared that Lowe acted in bad faith in terminating Mutucs
services. The NLRC added that Lowe failed to adopt any fair and reasonable criteria in declaring Mutucs position redundant. The NLRC
said it appeared that Mutuc was singled out and only her position was declared redundant. The NLRC also noted that the other
employees under Mutucs supervision were reassigned to other projects and that Lowe could have also reassigned Mutuc to these
projects. The NLRC added that Lowe should have dismissed Malou Dulce, the Creative Director in-charge of the Unilever account, Lowes
client which greatly reduced its advertising budget. The NLRC also gave credence to Mutucs claim that she was removed because of
professional jealousy. The NLRC concluded that Lowe used redundancy as a guise to get rid of Mutuc even if there was no basis to declare
her position redundant.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH THE LAW WHEN IT RULED THAT THE
PRIVATE RESPONDENT WAS ILLEGALLY DISMISSED FOR REDUNDANCY.
A. THE COURT OF APPEALS DISREGARDED THE EVIDENCE ON RECORD WHEN IT RULED THAT THE SELECTION OF THE PRIVATE
RESPONDENT FOR REDUNDANCY WAS TAINTED WITH BAD FAITH.
B. THE COURT OF APPEALS DISREGARDED THE EVIDENCE ON RECORD WHEN IT RULED THAT THE SELECTION OF THE PRIVATE
RESPONDENT WAS NOT DONE IN ACCORDANCE WITH ANY FAIR AND REASONABLE CRITERIA.
Since Mutuc was illegally dismissed and strained relations made reinstatement impossible, the NLRC ordered Lowe, Gustilo, and
Castro to pay Mutuc backwages and separation pay. The NLRC also awarded Mutuc P10,000 as moral damages because her dismissal was
tainted with bad faith.
The 23 January 2004 Decision of the Court of Appeals
The Court of Appeals agreed with the NLRC that Lowe failed to prove two requisites of a valid redundancy program, namely: (1) good
faith in abolishing the redundant position, and (2) fair and reasonable criteria in ascertaining which positions were to be declared
redundant. While the Court of Appeals declared that Lowe had convincingly presented the alleged losses in its revenues and massive
cutbacks in client spending, the Court of Appeals concluded that Lowe just included Mutucs position in the redundancy program and
that she was being dismissed without cause. The Court of Appeals also said that Lowe should not have made Mutuc a regular employee if
she was incompetent and if her performance was below par.
II.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH THE LAW IN AFFIRMING THE RULING OF
THE NLRC HOLDING THE INDIVIDUAL PETITIONERS RAUL CASTRO AND MARILES GUSTILO LIABLE TO THE PRIVATE RESPONDENT WHEN
THE SAID CORPORATE OFFICERS HAVE PERSONALITIES THAT ARE DISTINCT AND SEPARATE FROM LOWE, AND WHEN THERE IS EVEN NO
EVIDENCE IN THE RECORDS SHOWING THAT THEY EFFECTED THE TERMINATION OF THE PRIVATE RESPONDENT WITH MALICE OR BAD
FAITH.
III.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH THE LAW IN AFFIRMING THE RULING OF
THE NLRC HOLDING THE PETITIONERS LIABLE TO THE PRIVATE RESPONDENT (FOR) MORAL DAMAGES.[14]
In G.R. No. 174590, Lowe raises the sole issue:
The 13 March 2006 Decision of the Court of Appeals
CMV
110
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND THE APPLICABLE DECISIONS OF
THE SUPREME COURT WHEN IT RULED THAT THE PRIVATE RESPONDENT IS ENTITLED TO BACKWAGES COMPUTED FROM THE TIME OF
HER DISMISSAL UP TO THE TIME OF FINALITY OF ITS DECISION.[15]
For a valid implementation of a redundancy program, the employer must comply with the following requisites: (1) written notice
served on both the employee and the DOLE at least one month prior to the intended date of termination; (2) payment of separation pay
equivalent to at least one month pay or at least one month pay for every year of service, whichever is higher; (3) good faith in abolishing
the redundant position; and (4) fair and reasonable criteria in ascertaining what positions are to be declared redundant.[19]
The Courts Ruling
The petitions are meritorious.
As a general rule, a petition for review on certiorari under Rule 45 of the Rules of Court is limited to questions of law. However, this
rule admits of exceptions,[16] such as in this case where the findings of the Labor Arbiter vary from the findings of the NLRC and the Court
of Appeals.
Mutuc was validly dismissed by reason of redundancy
In this case, there is no dispute that, on 28 September 2001, Mutuc was duly advised of the termination of her services on the
ground of redundancy.*20+ On the same date, the DOLE was also served a copy of Mutucs notice of termination.*21+ Likewise, Lowe
made available to Mutuc her separation pay equivalent to one month salary for every year of service and her proportionate 13th month
pay upon completion of her clearance. However, Mutuc did not accomplish her clearance and instead filed a complaint for illegal
dismissal.
The controversy lies on whether Lowe used any fair and reasonable criteria in declaring Mutucs position redundant and whether
there was bad faith in the abolition of her position.
Lowe insists that it used fair and reasonable criteria in declaring Mutucs position redundant. Lowe argues that Mutuc was the most
junior of all the executives of Lowe and that, based on its performance evaluation,[22] Mutuc was also the least efficient among the
Creative Directors.
Redundancy, which is one of the authorized causes for the dismissal of an employee, is governed by Article 283 of the Labor Code
which provides:
Mutuc maintains that she was dismissed from the service because of her rift with Castro. Mutuc claims that Lowe singled her out
and just included her position in the redundancy program to cover up her illegal dismissal.
Art. 283. Closure of establishment and reduction of personnel. - The employer may also terminate the employment of any employee
due to installation of labor-saving devices, redundancy, retrenchment to prevent losses or the closing or cessation of operation of the
establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this Title, by serving a written notice
on the worker and the Department of Labor and Employment at least one (1) month before the intended date thereof. In case of
termination due to installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay
equivalent to at least one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of
retrenchment to prevent losses and in cases of closures or cessation of operations of establishment or undertaking not due to serious
business losses and financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half () month pay for
every year of service, whichever is higher. A fraction of at least six (6) months shall be considered as one (1) whole year.
Redundancy exists when the service of an employee is in excess of what is reasonably demanded by the actual requirements of the
business.[17] A redundant position is one rendered superfluous by any number of factors, such as overhiring of workers, decreased
volume of business, dropping of a particular product line previously manufactured by the company or phasing out of a service activity
formerly undertaken by the enterprise.[18]
CMV
The Court recognizes that a host of relevant factors comes into play in determining who among the employees should be retained
or separated.[23] Among the accepted criteria in implementing a redundancy program are: (1) preferred status; (2) efficiency; and (3)
seniority.[24]
We agree with the Labor Arbiter that Lowe employed fair and reasonable criteria in declaring Mutucs position redundant. Mutuc,
who was hired only on 23 June 2000, did not deny that she was the most junior of all the executices of Lowe. Mutuc also did not present
contrary evidence to disprove that she was the least efficient and least competent among all the Creative Directors.
The determination of the continuing necessity of a particular officer or position in a business corporation is a management
prerogative, and the courts will not interfere unless arbitrary or malicious action on the part of management is shown.[25] It is also within
the exclusive prerogative of management to determine the qualification and fitness of an employee for hiring and firing, promotion or
reassignment.[26] Indeed, an employer has no legal obligation to keep more employees than are necessary for the operation of its
business.[27]
111
Besides, the fact that the functions of Mutuc were simply added to the duties of the other Creative Directors does not affect the
legitimacy of Lowes right to abolish a position when done in the normal exercise of its prerogative to adopt sound business practices in
the management of its affairs.[28]
Considering further that Mutuc held a position which was definitely managerial in character, Lowe had a broad latitude of discretion
in abolishing her position. An employer has a much wider discretion in terminating the employment of managerial personnel as compared
to rank and file employees.[29] The reason is that officers in such key positions perform not only functions which by nature require the
employers full trust and confidence but also functions that spell the success or failure of a business.[30]
To reiterate, a corporation is a juridical entity with legal personality separate and distinct from those acting for and in its behalf and,
in general, from the people comprising it. The rule is that obligations incurred by the corporation, acting through its directors, officers,
and employees are its sole liabilities.
Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to a patently unlawful act of the
corporation, or when they are guilty of bad faith or gross negligence in directing its affairs, or when there is a conflict of interest resulting
in damages to the corporation, its stockholders or other persons; (2) they consent to the issuance of watered down stocks or when,
having knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (3) they agree to hold
themselves personally and solidarily liable with the corporation; or (4) they are made by specific provision of law personally answerable
for their corporate action.[34] (Emphasis supplied)
Aside from Mutucs self-serving statements, we find no evidence to support her conclusion that she was dismissed because of the
rift with Castro. We agree with the Labor Arbiter that Lowe was motivated by good faith in declaring Mutucs position redundant since
it was acting pursuant to a business decision dictated by the prevailing economic environment.
Mutuc is entitled only to separation pay and proportionate 13th month pay
We affirm the award of the Labor Arbiter of separation pay equivalent to one month salary for every year of service amounting to
P100,000. We also affirm the award of the Labor Arbiter of Mutucs proportionate 13th month pay with modification that it be computed
from the period of 1 January 2001 to 31 October 2001 amounting to P83,333.
The issue on the proper computation of Mutucs backwages has been rendered moot by our decision that Mutuc was validly
dismissed. Backwages is a relief given to an illegally dismissed employee.*31+ Since Mutucs dismissal is for an authorized cause, she is
not entitled to backwages.
We likewise delete the award of moral damages as there was no clear and convincing evidence showing that Lowes termination of
Mutucs services was done in an arbitrary, capricious, or malicious manner.
Gustilo and Castro, as corporate officers of Lowe, have personalities which are distinct and separate from that of Lowes. Hence, in
the absence of any evidence showing that they acted with malice or in bad faith in declaring Mutucs position redundant, Gustilo and
Castro are not personally liable for the monetary awards to Mutuc.
WHEREFORE, we GRANT petitioner Lowe, Inc.s petition in G.R. No. 164813 and AFFIRM the 15 August 2002 Decision of the Labor
Arbiter with the MODIFICATION that petitioner Lowe, Inc. is ordered to pay respondent Irma M. Mutuc P83,333.33 representing her
proportionate 13th month pay for the period of 1 January 2001 to 31 October 2001. We DENY petitioner Lowe, Inc.s petition in G.R. No.
174590 for being moot.
SO ORDERED.
[G.R. No. 130998. August 10, 2001]
MARUBENI CORPORATION, RYOICHI TANAKA, RYOHEI KIMURA and SHOICHI ONE, petitioners, vs. FELIX LIRAG, respondent.
Gustilo and Castro are not liable for the monetary awards
DECISION
PARDO, J.:
Gustilo and Castro argue that, in the absence any evidence of bad faith, they should not be made personally liable for the monetary
awards to Mutuc.
It is settled that in the absence of malice, bad faith, or specific provision of law, a director or an officer of a corporation cannot be
made personally liable for corporate liabilities.[32] In Mcleod v. NLRC,[33] we said:
CMV
The case is an appeal via certiorari to annul and set aside the decision[1] of the Court of Appeals finding petitioners Ryoichi Tanaka,
Ryohei Kimura and Shoichi One, as officers of petitioner Marubeni Corporation, jointly and severally liable with the corporation for the
112
commission claimed by respondent Felix Lirag in the amount of six million (P6,000,000.00) pesos arising from an oral consultancy
agreement.
Petitioner Marubeni Corporation (hereafter, Marubeni) is a foreign corporation organized and existing under the laws of Japan. It was
doing business in the Philippines through its duly licensed, wholly owned subsidiary, Marubeni Philippines Corporation. Petitioners
Ryoichi Tanaka, Ryohei Kimura and Shoichi One were officers of Marubeni assigned to its Philippine branch.[2]
On January 27, 1989, respondent Felix Lirag filed with the Regional Trial Court, Makati a complaint[3] for specific performance and
damages claiming that petitioners owed him the sum of P6,000,000.00 representing commission pursuant to an oral consultancy
agreement with Marubeni. Lirag claimed that on February 2, 1987, petitioner Ryohei Kimura hired his consultancy group for the purpose
of obtaining government contracts of various projects. Petitioner Kimura authorized him to work on the following projects: (1) National
Telephone Project, (2) Regional Telecommunications Project; (3) Cargo Handling Equipment; (4) Maritime Communications; (5) Philippine
National Railways Depot; and (6) Bureau of Posts (Phase II).[4] Petitioners promised to pay him six percent (6%) consultancy fee based on
the total costs of the projects obtained.
The consultancy agreement was not reduced into writing because of the mutual trust between Marubeni and the Lirag family.[5] Their
close business and personal relationship dates back to 1960, when respondents family was engaged in the textile fabric manufacturing
business, in which Marubeni supplied the needed machinery, equipment, spare parts and raw materials.[6]
In compliance with the agreement, respondent Lirag made representations with various government officials, arranged for meetings and
conferences, relayed pertinent information as well as submitted feasibility studies and project proposals, including pertinent documents
required by petitioners. As petitioners had been impressed with respondents performance, six (6) additional projects were given to his
group under the same undertaking.[7]
respondent Lirag any of the matters alleged in the complaint, nor agreed to the payment of commission. Moreover, Marubeni did not
participate in the bidding for the Bureau of Post project, nor benefited from the supposed project. Thus, petitioners moved for the
dismissal of the complaint.
Petitioner Shoichi One submitted a separate answer raising similar arguments.
With regard to petitioner Ryohei Kimura, the trial court did not acquire jurisdiction over his person because he was recalled to the
principal office in Tokyo, Japan before the complaint and the summons could be served on him.
During the pre-trial conferences held on September 18 and October 16, 1989 and on January 24, March 15 and May 17, 1990, no amicable
settlement was reached. Trial on the merits ensued.
On April 29, 1993, the trial court promulgated a decision and ruled that respondent is entitled to a commission. Respondent was led to
believe that there existed an oral consultancy agreement. Hence, he performed his part of the agreement and helped petitioners get the
project. The dispositive portion of the decision reads:
WHEREFORE, defendants are ordered, jointly and severally, to pay to the plaintiff: (1) the amount of P6,000,000.00, with interest at the
legal rate (12% per annum) from January 10, 1989 until fully paid; (2) 20% of this amount to serve as reimbursement of plaintiffs
attorneys fees; and (3) to pay the cost of the suit.
SO ORDERED.
One of the projects handled by respondent Lirag, the Bureau of Post project, amounting to P100,000,000.00 was awarded to the
Marubeni-Sanritsu tandem.*8+ Despite respondents repeated formal verbal demands for payment of the agreed consultancy fee,
petitioners did not pay. In response to the first demand letter, petitioners promised to reply within fifteen (15) days, but they did not do
so.
Makati, Metro Manila, April 29, 1993.
*Original Signed+
Pursuant to the consultancy agreement, respondent claimed a commission of six percent (6%) of the total contract price, or a total of
P6,000,000.00, or in the alternative, that he be paid the same amount by way of damages or as the reasonable value of the services he
rendered to petitioners, and further claimed twenty percent (20%) of the amount recoverable as attorneys fees and the costs of suit.
In their answer, petitioners denied the consultancy agreement. Petitioner Ryohei Kimura did not have the authority to enter into such
agreement in behalf of Marubeni. Only Mr. Morihiko Maruyama, the general manager, upon issuance of a special power of attorney by
the principal office in Tokyo, Japan, could enter into any contract in behalf of the corporation. Mr. Maruyama did not discuss with
CMV
SALVADOR P. DE GUZMAN, Jr.

Pairing Judge*9+
On May 26, 1993, petitioners interposed an appeal from the decision to the Court of Appeals.[10]
113
After due proceedings, on October 9, 1997, the Court of Appeals promulgated a decision affirming the decision of the trial court. The
Court of Appeals ruled that preponderance of evidence favored the existence of a consultancy agreement between the parties. It upheld
the factual findings of the trial court, thus:
Plaintiffs evidence details the efforts he exerted after having been extended an appointment by Marubeni as its consultant. He
tendered a thanksgiving dinner for the defendants at the Nandau Restaurant; he and Napoleon Rama visited Marubenis Morihiko
Maruyama in the latters office during which they discussed the BOP II project. He arranged several conferences between the Marubeni
officials and Postmaster General Angelito Banayo. In one meeting which took place in the office of Mr. Banayo at Liwasang Bonifacio, a
Mr. Ida, the General Manager of Sanritsu, was conspicuously present. Mr. Banayo testified that Mr. Ida told him that Sanritsu was
representing Marubeni in the BOP II project (tsn., 6/11/90, pp. 15-17; 5/15/91, pp. 10-12). At least thirty (30) conferences between
plaintiff and defendants took place at the Marubeni offices, lasting at least two hours each meeting. Eventually, the bid was awarded by
the Bureau of Post to Sanritsu. Aware that Sanritsu represented Marubeni, and in fact Marubeni assigned Sanritsu to enter its bid,
plaintiff sent his bill for his services to the defendants in a letter dated April 20, 1988. This was followed by a letter dated September 26,
1990 of plaintiffs counsel. This time Mr. Tanaka asked for 15 days within which to contact their Head Office to seek instructions.*11+
We find the appeal meritorious.
In deciding this appeal, we rely on the rule that a party who has the burden of proof in a civil case must establish his case by a
preponderance of evidence.[17] When the evidence of the parties is in equipoise, or when there is a doubt as to where the
preponderance of evidence lies, the party with the burden of proof fails and the petition must thus be denied.[18]
As a general rule, factual findings of the Court of Appeals are conclusive on the parties and are not reviewed by the Supreme Courtand
they carry even more weight when the Court of Appeals affirmed the factual findings of the trial court. It is not the function of the
Supreme Court to weigh anew the evidence passed upon by the Court of Appeals.[19] Moreover, only questions of law may be raised
before the Supreme Court in a petition for review under Rule 45 of the Revised Rules of Court.[20]
However, the rule is subject to exceptions,[21] such as when the conclusion is grounded on speculations, surmises, or conjectures,[22] as
in the instant case.
The Court of Appeals relied on the doctrine of admission by silence[12] in upholding the existence of a consultancy agreement, noting that
petitioner Tanakas reaction to respondents September 26, 1988 demand letter was not consistent with their claim that there was no
consultancy agreement. On the contrary, it lent credence to respondents claim that they had an existing consultancy agreement.
Petitioner Tanakas response dated October 13, 1988 to the demand letter of September 26, 1988 reads:
Referring to your letter dated September 26, 1988, we are pleased to inform you that the issue is currently being reviewed by us and we
would like to reply to you within fifteen (15) days.*13+
The Court of Appeals observed that if indeed there were no consultancy agreement, it would have been easy for petitioners to simply
deny respondents claim. Yet, they did not do so. The conglomeration of these circumstances bolstered the existence of the oral
consultancy agreement. The dispositive portion of the decision reads:
An assiduous scrutiny of the testimonial and documentary evidence extant leads us to the conclusion that the evidence could not support
a solid conclusion that a consultancy agreement, oral or written, was agreed between petitioners and respondent. Respondent
attempted to fortify his own testimony by presenting several corroborative witnesses. However, what was apparent in the testimonies of
these witnesses was the fact that they learned about the existence of the consultancy agreement only because that was what respondent
told them.[23]
In civil cases, he who alleges a fact has the burden of proving it; a mere allegation is not evidence.[24] He must establish his cause by a
preponderance of evidence,[25] which respondent failed to establish in the instant case.
Assuming for the sake of argument that an oral consultancy agreement has been perfected between the parties, respondent Lirag could
not still claim fees on the project that has not been awarded to Marubeni.
WHEREFORE, the decision appealed from is hereby AFFIRMED.*14+
Hence, this appeal.[15]
In this appeal, petitioners raise the following issues: (1) whether or not there was a consultancy agreement between petitioners and
respondent; and corollary to this, (2) whether or not respondent is entitled to receive a commission if there was, in fact, a consultancy
agreement.[16]
CMV
If respondents contentions were to be taken as truth, he would be entitled to 6% consulting fee based on the total cost of the projects
obtained,[26] or on success basis.[27] However, even respondent admitted that the Bureau of Post project was not awarded to Marubeni,
but to Sanritsu.[28] Marubeni did not even join the bidding for the Bureau of Post project.
Respondent could not claim from Sanritsu because of the absence of any agreement between him and the latter. When asked to clarify
whether he has an existing consultancy agreement with Sanritsu, respondent answered in the negative, thus:
114
COURT:
My question is- do you know for a fact whether the impression you have about Japanese Trading Firm working through Agents was
the relationship between Marubeni and San Ritsu when Mr. Iida said that they were working together?
One clarificatory questionA: I did not know for a fact because I did not see any contract between Marubeni and San Ritsu presented to me.*31+
Do you have any consultancy service contract with Marubeni/San Ritsu do you have?
Hence, how could he be entitled to the 6% commission, when it was not his client who won in the bidding?
Contrary to the trial courts finding that petitioners led respondent to believe that they hired respondents services as consultant, the
evidence proved otherwise. Petitioner Shoichi One, one of the officers of Marubeni Phils., testified that at the onset, Marubeni Phils.
informed respondent that it had no authority to commit to anything, as it all depended on the decision of the principal headquarters in
Tokyo, Japan. However, respondent Lirag insisted on providing assistance to Marubeni to get coveted government contracts because
Marubeni might encounter difficulties due to discrimination from the government.[32] Despite such knowledge, respondent said that its
alright with him as he believes Marubeni was an old time friend so he wanted to work for those projects.*33+ Hence, how could
petitioners be guilty of misleading respondent on the acceptance of the latters offer of consultancy service?
Respondent tried to justify his commission of roughly about P6,000,000.00 in the guise that Marubeni and Sanritsu are sister
corporations, thereby implying the need to pierce the veil of corporate fiction. Respondent claimed that Marubeni as the supplier and
real contractor of the project hired and sub-contracted the project to Sanritsu.
With regard to the Court of Appeals ratiocination that petitioner Tanakas response dated October 13, 1988 to the demand letter of
September 26, 1988, amounted to an implied admission of the consultancy agreement, the records showed that, to the contrary, this fact
strengthened petitioners allegation that Marubeni Phils. lacked the requisite authority to enter into any binding agreement.
We believe that this line of reasoning is too far-fetched. Not because two foreign companies came from the same country and closely
worked together on certain projects would the conclusion arise that one was the conduit of the other, thus piercing the veil of corporate
fiction.
As explained by petitioner Shoichi One, Marubeni Phils. could enter into a consultancy agreement only after submitting a
recommendation to the principal headquarters in Tokyo, Japan. If the office in Tokyo, Japan agrees to hire consultants, it would then give
a power of attorney to its general manager in Manila authorizing the latter to enter into such agreement.
To disregard the separate juridical personality of a corporation, the wrongdoing must be clearly and convincingly established. It cannot be
presumed. The separate personality of the corporation may be disregarded only when the corporation is used as a cloak or cover for
fraud or illegality, or to work injustice, or where necessary for the protection of creditors.[30] We could not just rely on respondents
testimony regarding the existence of the Marubeni-Sanritsu tandem to justify his claim for payment of commission. This conclusion is
too conjectural to be believed.
In the instant case, the parties did not reach the second stage as the headquarters in Tokyo, Japan did not see it fit to hire a consultant as
they decided not to participate in the bidding. Hence, no consultancy agreement was perfected, whether oral or written. There was no
absolute acceptance of respondents offer of consultancy services.
A:
No, sir. I have only Consultancy Agreement on verbal basis with Marubeni.*29+
Assuming arguendo that the petitioner accepted respondents offer of consultancy services, we could not give legal imprimatur to the
agreement. The service rendered by respondent contemplated the exploitation of personal influence and solicitation on a public officer.
Aside from the self-serving testimony of respondent regarding the existence of a close working relationship between Marubeni and
Sanritsu, there was nothing that would support the conclusion that Sanritsu was an agent of Marubeni. Mr. Lito Banayo, whom
respondent presented to corroborate his testimony on this particular issue said, thus:
ATTY. VALERO
CMV
Respondent said that petitioners sought out his services because they needed somebody who can help them penetrate and establish
goodwill with the government.*34+ Petitioners found it difficult to arrange a meeting with Postmaster General Angelito Banayo because
of petitioners reputation of engaging in questionable transactions.*35+ Suddenly, through the intervention of respondent, the postmaster
general became accessible to petitioners. This became possible because of respondents close personal relationship with the postmaster
general, his trusted and long-time friend.[36] Respondent testified, to wit:
115
Q: In other words you are saying that Marubeni and San Ritsu representatives had a conference with the Post Master General Banayo in
connection with this Project?
No costs.
A: Yes and I was the one who made the arrangement.*37+
SO ORDERED.
In another instance, respondent said, thus:

G.R. No. L-42780
WITNESS:
January 17, 1936
MANILA GAS CORPORATION, plaintiff-appellant,

vs.
What we have done by that first, Mr. Banayo went to Tokyo and when he was in Tokyo we were able to arrange the Marubeni
representative in Tokyo to meet and talk with Mr. Banayo in Tokyo
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
DeWitt, Perkins and Ponce Enrile for appellant.
COURT:
Office of the Solicitor-General Hilado for appellee.

Mr?
MALCOLM, J.:
A. Banayo, the Post Master General and representatives of Marubeni in Tokyo - this was done because of my intervention.*38+
Any agreement entered into because of the actual or supposed influence which the party has, engaging him to influence executive
officials in the discharge of their duties, which contemplates the use of personal influence and solicitation rather than an appeal to the
judgment of the official on the merits of the object sought is contrary to public policy.[39] Consequently, the agreement, assuming that
the parties agreed to the consultancy, is null and void as against public policy.[40] Therefore, it is unenforceable before a court of
justice.[41]
In light of the foregoing, we rule that the preponderance of evidence established no consultancy agreement between petitioners and
respondent from which the latter could anchor his claim for a six percent (6%) consultancy fee on a project that was not awarded to
petitioners.
This is an action brought by the Manila Gas Corporation against the Collector of Internal Revenue for the recovery of P56,757.37, which
the plaintiff was required by the defendant to deduct and withhold from the various sums paid it to foreign corporations as dividends and
interest on bonds and other indebtedness and which the plaintiff paid under protest. On the trial court dismissing the complaint, with
costs, the plaintiff appealed assigning as the principal errors alleged to have been committed the following:
1. The trial court erred in holding that the dividends paid by the plaintiff corporation were subject to income tax in the hands of its
stockholders, because to impose the tax thereon would be to impose a tax on the plaintiff, in violation of the terms of its franchise, and
would, moreover, be oppressive and inequitable.
2. The trial court erred in not holding that the interest on bonds and other indebtedness of the plaintiff corporation, paid by it outside of
the Philippine Islands to corporations not residing therein, were not, on the part of the recipients thereof, income from Philippine sources,
and hence not subject to Philippine income tax.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals[42] is hereby SET ASIDE. Civil Case No. 89-3037 filed before
the Regional Trial Court, Branch 143, Makati City is hereby DISMISSED.
CMV
116
The facts, as stated by the appellant and as accepted by the appellee, may be summarized as follows: The plaintiff is a corporation
organized under the laws of the Philippine Islands. It operates a gas plant in the City of Manila and furnishes gas service to the people of
the metropolis and surrounding municipalities by virtue of a franchise granted to it by the Philippine Government. Associated with the
plaintiff are the Islands Gas and Electric Company domiciled in New York, United States, and the General Finance Company domiciled in
Zurich, Switzerland. Neither of these last mentioned corporations is resident in the Philippines.
For the years 1930, 1931, and 1932, dividends in the sum of P1,348,847.50 were paid by the plaintiff to the Islands Gas and Electric
Company in the capacity of stockholders upon which withholding income taxes were paid to the defendant totalling P40,460.03 For the
same years interest on bonds in the sum of P411,600 was paid by the plaintiff to the Islands Gas and Electric Company upon which
withholding income taxes were paid to the defendant totalling P12,348. Finally for the stated time period, interest on other indebtedness
in the sum of P131,644,90 was paid by the plaintiff to the Islands Gas and Electric Company and the General Finance Company
respectively upon which withholding income taxes were paid to the defendant totalling P3,949.34.
Some uncertainty existing regarding the place of payment, we will not go into this factor of the case at this point, except to remark that
the bonds and other tokens of indebtedness are not to be found in the record. However, Exhibits E, F, and G, certified correct by the
Treasurer of the Manila Gas Corporation, purport to prove that the place of payment was the United States and Switzerland.
corporation, which are paid and delivered in cash to foreign corporations as stockholders, are subject to the payment in the income tax,
the exemption clause in the charter of the corporation notwithstanding.
For the foreign reasons, we are led to sustain the decision of the trial court and to overrule appellant's first assigned error.
2. In support of its second assignment of error, appellant contends that, as the Islands Gas and Electric Company and the General Finance
Company are domiciled in the United States and Switzerland respectively, and as the interest on the bonds and other indebtedness
earned by said corporations has been paid in their respective domiciles, this is not income from Philippine sources within the meaning of
the Philippine Income Tax Law. Citing sections 10 (a) and 13 (e) of Act No. 2833, the Income Tax Law, appellant asserts that their
applicability has been squarely determined by decisions of this court in the cases of Manila Railroad Co. vs. Collector of Internal Revenue
(No. 31196, promulgated December 2, 1929, nor reported), and Philippine Railway Co. vs. Posadas (No. 38766, promulgated October 30,
1933 [58 Phil., 968]) wherein it was held that interest paid to non-resident individuals or corporations is not income from Philippine
sources, and hence not subject to the Philippine Income Tax. The Solicitor-General answers with the observation that the cited decisions
interpreted the Income Tax Law before it was amended by Act No. 3761 to cover the interest on bonds and other obligations or securities
paid "within or without the Philippine Islands." Appellant rebuts this argument by "assuming, for the sake of the argument, that by the
amendment introduced to section 13 of Act No. 2833 by Act No. 3761 the Legislature intended the interest from Philippine sources and so
is subject to tax," but with the necessary sequel that the amendatory statute is invalid and unconstitutional as being the power of the
Legislature to enact.
The appeal naturally divides into two subjects, one covered by the first assigned error, and the other by the second assigned error. We
shall discuss these subjects and errors in order.
1. Appellant first contends that the dividends paid by it to its stockholders, the Islands Gas and Electric Company , were not subject to tax
because to impose a tax thereon would be to do so on the plaintiff corporation, in violation of the terms of its franchise and would,
moreover, be oppressive and inequitable. This argument is predicated on the constitutional provision that no law impairing the obligation
of contracts shall be enacted. The particular portion of the franchise which is invoked provides:
The grantee shall annually on the fifth day of January of each year pay to the City of Manila and the municipalities in the Province of Rizal
in which gas is sold, two and one half per centum of the gross receipts within said city and municipalities, respectively, during the
preceding year. Said payment shall be in lieu of all taxes, Insular, provincial and municipal, except taxes on the real estate, buildings, plant,
machinery, and other personal property belonging to the grantee.
The trial judge was of the opinion that the instant case was governed by our previous decision in the case of Philippine Telephone and
Telegraph Co., vs. Collector of Internal Revenue ([1933], 58 Phil. 639). In this view we concur. It is true that the tax exemption provision
relating to the Manila Gas Corporation hereinbefore quoted differs in phraseology from the tax exemption provision to be found in the
franchise of the Telephone and Telegraph Company, but the ratio decidendi of the two cases is substantially the same. As there held and
as now confirmed, a corporation has a personality distinct from that of its stockholders, enabling the taxing power to reach the latter
when they receive dividends from the corporation. It must be considered as settled in this jurisdiction that dividends of a domestic
CMV
Taking first under observation that last point, it is to be observed that neither in the pleadings, the decision of the trial court, nor the
assignment of errors, was the question of the validity of Act No. 3761 raised. Under such circumstances, and no jurisdictional issue being
involved, we do not feel that it is the duty of the court to pass on the constitutional question, and accordingly will refrain from doing so.
(Cadwaller-Gibson Lumber Co. vs. Del Rosario [1913], 26 Phil., 192; Macondray and Co. vs. Benito and Ocampo, P. 137, ante; State vs.
Burke [1912], 175 Ala., 561.)
As to the applicability of the local cases cited and of the Porto Rican case of Domenech vs. United Porto Rican Sugar co. ([1932], 62 F. [2d],
552), we need only observe that these cases announced good law, but that each he must be decided on its particular facts. In other
words, in the opinion of the majority of the court, the facts at bar and the facts in those cases can be clearly differentiated. Also, in the
case at bar there is some uncertainty concerning the place of payment, which under one view could be considered the Philippines and
under another view the United States and Switzerland, but which cannot be definitely determined without the necessary documentary
evidence before, us.
The approved doctrine is that no state may tax anything not within its jurisdiction without violating the due process clause of the
constitution. The taxing power of a state does not extend beyond its territorial limits, but within such it may tax persons, property,
income, or business. If an interest in property is taxed, the situs of either the property or interest must be found within the state. If an
income is taxed, the recipient thereof must have a domicile within the state or the property or business out of which the income issues
must be situated within the state so that the income may be said to have a situs therein. Personal property may be separated from its
owner, and he may be taxed on its account at the place where the property is although it is not the place of his own domicile and even
though he is not a citizen or resident of the state which imposes the tax. But debts owing by corporations are obligations of the debtors,
117
and only possess value in the hands of the creditors. (Farmers Loan Co. vs. Minnesota [1930], 280 U.S., 204; Union Refrigerator Transit Co.
vs. Kentucky [1905], 199 U.S., 194 State Tax on Foreign held Bonds [1873, 15 Wall., 300; Bick vs. Beach [1907], 206 U. S., 392; State ex rel.
Manitowoc Gas Co. vs. Wig. Tax Comm. [1915], 161 Wis., 111; United States Revenue Act of 1932, sec. 143.)
G.R. No. L-78412
September 26, 1989
TRADERS ROYAL BANK, petitioner,

These views concerning situs for taxation purposes apply as well to an organized, unincorporated territory or to a Commonwealth having
the status of the Philippines.
Pushing to one side that portion of Act No. 3761 which permits taxation of interest on bonds and other indebtedness paid without the
Philippine Islands, the question is if the income was derived from sources within the Philippine Islands.
In the judgment of the majority of the court, the question should be answered in the affirmative. The Manila Gas Corporation operates its
business entirely within the Philippines. Its earnings, therefore come from local sources. The place of material delivery of the interest to
the foreign corporations paid out of the revenue of the domestic corporation is of no particular moment. The place of payment even if
conceded to be outside of tho country cannot alter the fact that the income was derived from the Philippines. The word "source" conveys
only one idea, that of origin, and the origin of the income was the Philippines.
In synthesis, therefore, we hold that conditions have not been provided which justify the court in passing on the constitutional question
suggested; that the facts while somewhat obscure differ from the facts to be found in the cases relied upon, and that the Collector of
Internal Revenue was justified in withholding income taxes on interest on bonds and other indebtedness paid to non-resident
corporations because this income was received from sources within the Philippine Islands as authorized by the Income Tax Law. For the
foregoing reasons, the second assigned error will be overruled.
Before concluding, it is but fair to state that the writer's opinion on the first subject and the first assigned error herein discussed is
accurately set forth, but that his opinion on the second subject and the second assigned error is not accurately reflected, because on this
last division his views coincide with those of the appellant. However, in the interest of the prompt disposition of this case, the decision has
been written up in accordance with instructions received from the court.
vs.
THE HONORABLE COURT OF APPEALS, HON. BALTAZAR M. DIZON, Presiding Judge, Regional Trial Court, Branch 113, Pasay City and
ALFREDO CHING, respondents.
San Juan, Africa, Gonzalez and San Agustin for petitioner.
Balgos and Perez for respondents.
GRINO-AQUINO, J.:
This petition for certiorari assails the Court of Appeals' decision dated April 29, 1987 in CA-G.R. SP No. 03593, entitled "Alfredo Ching vs.
Hon. Baltazar M. Dizon and Traders Royal Bank" nullifying the Regional Trial Court's orders dated August 15,1983 and May 24,1984 and
prohibiting it from further proceeding in Civil Case No. 1028-P.
On March 30,1982, the Philippine Blooming Mills, Inc. (PBM) and Alfredo Ching jointly submitted to the Securities and Exchange
Commission a petition for suspension of payments (SEC No. 2250) where Alfredo Ching was joined as co-petitioner because under the law,
he was allegedly entitled, as surety, to avail of the defenses of PBM and he was expected to raise most of the stockholders' equity of Pl00
million being required under the plan for the rehabilitation of PBM. Traders Royal Bank was included among PBM's creditors named in
Schedule A accompanying PBM's petition for suspension of payments.
Judgment affirmed, with the cost of this instance assessed against the appellant.
Hull, Vickers, Imperial, Butte, and Recto, JJ., concur.
CMV
On May 13, 1983, the petitioner bank filed Civil Case No. 1028-P in the Regional Trial Court, Branch CXIII in Pasay City, against PBM and
Alfredo Ching, to collect P22,227,794.05 exclusive of interests, penalties and other bank charges representing PBM's outstanding
obligation to the bank. Alfredo Ching, a stockholder of PBM, was impleaded as co-defendant for having signed as a surety for PBM's
obligations to the extent of ten million pesos (Pl0,000,000) under a Deed of Suretyship dated July 21, 1977.
118
In its en banc decision in SEC-EB No. 018 (Chung Ka Bio, et al. vs. Hon. Antonio R. Manabat, et al.), the SEC declared that it had assumed
jurisdiction over petitioner Alfredo Ching pursuant to Section 6, Rule 3 of the new Rules of Procedure of the SEC providing that "parties in
interest without whom no final determination can be had of an action shall be joined either as complainant, petitioner or respondent" to
prevent multiplicity of suits.
On July 9, 1982, the SEC issued an Order placing PBM's business, including its assets and liabilities, under rehabilitation receivership, and
ordered that "all actions for claims listed in Schedule A of the petition pending before any court or tribunal are hereby suspended in
whatever stage the same may be, until further orders from the Commission" (p. 22, Rollo). As directed by the SEC, said order was
published once a week for three consecutive weeks in the Bulletin Today, Philippine Daily Express and Times Journal at the expense of
PBM and Alfredo Ching.
PBM and Ching jointly filed a motion to dismiss Civil Case No. 1028-P in the RTC, Pasay City, invoking the pendency in the SEC of PBM's
application for suspension of payments (which Ching co-signed) and over which the SEC had already assumed jurisdiction.
In sum, since the SEC had assumed jurisdiction over petitioner in SEC Case No. 2250 and reiterating the propriety of such assumption in
SEC-EB No. 018; and since under PD 902-A, as amended by PD 1758, ... upon appointment of a ... rehabilitation receiver... pursuant to this
Decree, all actions for claims against corporation ... under management or receivership pending before any court, tribunal, board or body
shall be suspended accordingly ... respondent judge clearly acted without jurisdiction in taking cognizance of the civil case in the court a
quo brought by respondent bank to enforce the surety agreement against petitioner for the purpose of collecting payment of PBM's
outstanding obligations. Respondent bank should have questioned the SEC's assumption of jurisdiction over petitioner in an appellate
forum and not in the court a quo, a tribunal with which the SEC enjoys a co-equal and coordinate rank. (p. 27, Rollo.)
The Bank assails that decision in this petition for review alleging that the appellate court erred;
1.
in holding that jurisdiction over respondent Alfredo Ching was assumed by the SEC because he was a co-signer or surety of
PBM and that the lower court may not assume jurisdiction over him so as to avoid multiplicity of suits; and
2.
in holding that the jurisdiction assumed by the SEC over Ching was to the exclusion of courts or tribunals of coordinate rank.
Before the motion to dismiss could be resolved, the court dropped PBM from the complaint, on motion of the plaintiff bank, for the
reason that the SEC had already placed PBM under rehabilitation receivership.
The petition for review is meritorious.
On August 15, 1983, the trial court denied Ching's motion to dismiss the complaint against himself. The court pointed out that "P.D. 1758
is only concerned with the activities of corporations, partnerships and associations. Never was it intended to regulate and/or control
activities of individuals" (p.11, Rollo). Ching's motion for reconsideration of that order was denied on May 24,1984. Respondent Judge
argued that under P ' D. 902-A, as amended, the SEC may not validly acquire jurisdiction over an individual, like Ching (p. 62, Rollo).
Ching filed a petition for certiorari and prohibition in the Court of Appeals (CA-G.R. SP No. 03593) to annul the orders of respondent Judge
and to prohibit him from further proceeding in the civil case.
The main issue raised in the petition was whether the court a quo could acquire jurisdiction over Ching in his personal and individual
capacity as a surety of PBM in the collection suit filed by the bank, despite the fact that PBM's obligation to the bank had been placed
under receivership by the SEC.
On April 29, 1987, the Court of Appeals granted the writs prayed for. It nullified the questioned orders of respondent Judge and prohibited
him from further proceeding in Civil Case No. 1028-P, except to enter an order dismissing the case. The pertinent ruling of the Court of
Appeals reads:
Although Ching was impleaded in SEC Case No. 2250, as a co-petitioner of PBM, the SEC could not assume jurisdiction over his person and
properties. The Securities and Exchange Commission was empowered, as rehabilitation receiver, to take custody and control of the assets
and properties of PBM only, for the SEC has jurisdiction over corporations only not over private individuals, except stockholders in an
intra-corporate dispute (Sec. 5, P.D. 902-A and Sec. 2 of P.D. 1758). Being a nominal party in SEC Case No. 2250, Ching's properties were
not included in the rehabilitation receivership that the SEC constituted to take custody of PBM's assets. Therefore, the petitioner bank
was not barred from filing a suit against Ching, as a surety for PBM. An anomalous situation would arise if individual sureties for debtor
corporations may escape liability by simply co- filing with the corporation a petition for suspension of payments in the SEC whose
jurisdiction is limited only to corporations and their corporate assets.
The term "parties-in-interest" in Section 6, Rule 3 of the SEC's New Rules of Procedure contemplates only private individuals sued or suing
as stockholders, directors, or officers of a corporation.
Ching can be sued separately to enforce his liability as surety for PBM, as expressly provided by Article 1216 of the New Civil Code:
ART. 1216. The creditor may proceed against any of the solidary debtors or all of them simultaneously. The demand made against one of
them shall not be an obstacle to those which may subsequently be directed against the others, as long as the debt has not been fully
collected.
CMV
119
moral damages of P20,000.00; and further requiring the plaintiffs, jointly and severally, to pay to each of the defendants Century-Well
Phil. Corporation, Lourdes Chong, Chong Tak Kei and Uy Chi Kim attorney's fees of P20,000.00
It is elementary that a corporation has a personality distinct and separate from its individual stockholders or members. Being an officer or
stockholder of a corporation does not make one's property the property also of the corporation, for they are separate entities (Adelio
Cruz vs. Quiterio Dalisay, 152 SCRA 482).
Ching's act of joining as a co-petitioner with PBM in SEC Case No. 2250 did not vest in the SEC jurisdiction over his person or property, for
jurisdiction does not depend on the consent or acts of the parties but upon express provision of law (Tolentino vs. Social Security System,
138 SCRA 428; Lee vs. Municipal Trial Court of Legaspi City, Br. I, 145 SCRA 408).
WHEREFORE, the petition for review is granted. The decision of the Court of Appeals in CA-G.R. SP No. 03593 is set aside. Respondent
Judge of the Regional Trial Court in Pasay City is ordered to reinstate Civil Case No. 1028-P and to proceed therein against the private
respondent Alfredo Ching. Costs against the private respondent.
With costs in this instance against the plaintiffs-appellees.
SO ORDERED."[2]
The said decision reversed the disposition of the Regional Trial Court of Valenzuela, Branch 172 in Civil Case No. 2845-V-88 entitled "CKH
Industrial & Development Corporation vs. Century-Well Philippine Corporation, Lourdes Chong, Chong Tak Kei, Uy Chi Kim, and the
Register of Deeds of Metro Manila, District III (Valenzuela)." The trial court's decision stated pertinently:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered in favor of plaintiff:

SO ORDERED
[G.R. No. 111890. May 7, 1997]
CKH INDUSTRIAL AND DEVELOPMENT CORPORATION and RUBI SAW, petitioners, vs. THE COURT OF APPEALS, (FORMER 13TH DIVISION),
THE REGISTER OF DEEDS OF METRO MANILA - DISTRICT III (VALENZUELA), CENTURY-WELL PHIL. CORPORATION, LOURDES CHONG, CHONG
TAK KEI and UY CHI KIM, respondents.
DECISION
TORRES, JR., J.:
The present petition springs from a civil action instituted by herein petitioners, to rescind and/or annul the sale of two parcels of land,
from petitioner CKH Industrial and Development Corporation (CKH, for brevity) to private respondent Century-Well Phil. Corporation
(Century-Well, for brevity), for failure to pay the stipulated price of P800,000.00.
1. Ordering the rescission/annulment of the Deed of Absolute Sale of Realty.
2. Ordering defendants Lourdes Chong, Chong Tak Kei and Century-Well to pay plaintiffs moral damages in the sum of P200,000.00;
3. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay plaintiffs Attorney's fees in the amount of 15% of the
agreed price of P800,000.00 plus appearance fees of P500.00 per appearance;
4. Ordering defendants Lourdes Chong, Chong Tak Kei and Century Well to pay the costs of suit;
5. As the writ of preliminary injunction was denied, the defendant Register of Deeds of Valenzuela is hereby ordered to cancel the
certificates of title issued to Century-Well by virtue of the Deed of Absolute Sale of Realty and to reissue a new title in the name of CKH.
Petitioners specifically assail the Decision[1] of the respondent Court of Appeals, which denied the annulment of the sale. The appellate
court found that there was payment of the consideration by way of compensation, and ordered petitioners to pay moral damages and
attorney's fees to private respondents. The dispositive portion of the questioned decision reads:
"WHEREFORE, in view of all the foregoing, the appealed Decision is REVERSED. The complaint is DISMISSED with costs against the
plaintiffs. The plaintiffs jointly and severally are required to pay each of the defendants Lourdes Chong, Chong Tak Kei, and Uy Chi Kim
CMV
The case is dismissed as far as defendant Uy Chi Kim is concerned. His counterclaim is likewise dismissed considering that by his mediation
he took it upon himself to assume the damages he allegedly suffered.
SO ORDERED."[3]
120
WITNESSETH:
The records disclose that petitioner CKH is the owner of two parcels of land, consisting of 4,590 sq. m. and 300 sq. m. respectively, located
in Karuhatan, Valenzuela, and covered by Transfer Certificates of Title Nos. 8710 and 8711, Register of Deeds of Caloocan City (now
Register of Deeds District III [Valenzuela]).[4] CKH is a corporation established under Philippine law by the late Cheng Kim Heng (Cheng),
an immigrant of Chinese descent. Upon Cheng's demise, control over the petitioner corporation was transferred to Rubi Saw, also of
Chinese descent, and Cheng's second wife.
It also appears that before coming to the Philippines, Cheng Kim Heng was married to Hung Yuk Wah (Wah), who lived in Hongkong
together with their children, Chong Tak Kei, (Kei), Chong Tak Choi (Choi), and Chong Tak Yam (Yam). After Cheng immigrated to the
Philippines in 1976, and married Rubi Saw in 1977, he brought his first wife, Heng, and their children to this country, and established
himself and his Chinese family as naturalized Filipino citizens. Heng died in 1984.
On May 8, 1988, Rubi Saw and Lourdes Chong, the wife of Cheng's son, Kei, met at the 1266 Soler St., Sta. Cruz, Manila, the residence of
Cheng's friend, Uy Chi Kim, and executed a Deed of Absolute Sale,[5] whereby Rubi Saw, representing CKH, agreed to sell the subject
properties to Century-Well, a corporation owned in part by Lourdes Chong, Kei and Choi.[6]
That vendor is the registered owner of two adjacent parcels of residential land situated in the Bo. of Karuhatan, Municipality of
Valenzuela, Metro Manila, covered by Transfer Certificates of Titles Nos. B-8710 and B-8711 of the Registry of Deeds for Metro Manila
District III, and more particularly described as follows:
xxx
That for and in consideration of the sum of EIGHT HUNDRED THOUSAND (P800,000.00) PESOS, Philippine Currency, paid by VENDEE to
VENDOR, receipt of which is hereby acknowledged by the latter to its entire satisfaction, said VENDOR, by these presents, has SOLD,
CEDED, TRANSFERRED, and CONVEYED by way of absolute sale unto said VENDEE, its successors and assigns, the two parcels of land
above described and any and all improvements therein;
That the above-described parcels of land are free from liens and encumbrances of whatever kind and nature.
The pertinent portions of the Deed of Sale are hereby reproduced:
IN WITNESS WHEREOF, the parties hereto and their instrumental witnesses have hereunto set their hand on ________ at ________."
"KNOW ALL MEN BY THESE PRESENTS:
Rubi Saw signed on behalf of CKH, while Lourdes Chong signed for Century Well.[7] The document was notarized the day after the parties
signed the same, i. e., March 9, 1988.[8]
This Deed of Absolute Sale of Realty executed by and between:
CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a corporation duly organized and existing under and by virtue of the laws of the
Republic of the Philippines, with business address at 553 Bermuda St., Sta. Cruz, Manila, represented in this act by its authorized
representative, Ms. RUBI SAW, hereinafter referred to as VENDOR,
Claiming that the consideration for the sale of the subject properties was not paid by the private respondent-vendee despite several
demands to do so, Petitioners CKH and Rubi Saw filed the instant complaint[9] on May 23, 1988, with the Regional Trial Court of
Valenzuela, Branch 172, against Century-Well, Lourdes Chong, Chong Tak Kei and Uy Chi Kim. Petitioners prayed for the
annulment/rescission of the Deed of Absolute Sale, and in the meantime, for the issuance of a writ of preliminary injunction restraining
the Register of Deeds of Valenzuela from registering the Certificates of Title over the subject properties in the name of the private
respondent Century-Well.
- in favor of The trial court synthesized the petitioners' submissions as follows:

CENTURY-WELL PHIL. CORPORATION, a corporation duly organized and existing under and by virtue of the laws of the Republic of the
Philippines at least sixty (60%) percent of the subscribed capital stock of which is owned by Filipino citizens, duly qualified to own and
acquire lands in the Philippines, with office and business address at 66 F Bautista St., Valenzuela, Metro Manila and represented in this act
by its Treasurer and authorized representative, Ms. Lourdes Chong, hereinafter referred to as VENDEE,
CMV
"The complaint alleges the following:
121
Lourdes Chong and Rubi Saw agreed that the full payment of P800,000.00 as purchase price shall be in the form of a Manager's Check, to
be delivered to Rubi Saw upon the execution of the Deed of Sale, the preparation of which, Lourdes Chong undertook. On May 8, 1988,
the date agreed upon for the execution of the Deed of Sale, plaintiff Rubi Saw, accompanied by her friend Aurora Chua Ng, went to 1266
Soler St., Sta. Cruz, Manila which is the residence and place of business of defendant Uy Chi Kim, an elderly man of Chinese ancestry and
the place suggested by Lourdes Chong as their meeting place. During the meeting, Uy Chi Kim who was there presented to Rubi Saw a
Deed of Absolute Sale in favor of defendant Century Well for her signature. Before Rubi Saw signed the Deed of Absolute Sale she
inquired about the payment of the P800,000.00. Defendant Uy Chi Kim presented to her a personal check but she refused the same
because it was contrary to her arrangement with Lourdes Chong that the payment would be in the form of Manager's Check. Uy Chi Kim
then explained to Rubi Saw that since it was a Sunday that day, they were unable to obtain the Manager's Check. He assured her that he
had sufficient cash money at the first floor of his residence which is a store owned by Uy Chi Kim. Before Uy Chi Kim left on the pretext of
getting the money, he persuaded plaintiff Rubi Saw to sign the Deed of Absolute Sale and give the same to Lourdes Chong together with
the two Certificates of Title. Since Uy Chi Kim is an elderly Chinese whom Rubi Saw had no reason to mistrust, following Chinese custom,
plaintiff Rubi Saw acceded to the request of Uy Chi Kim, trusting that he had sufficient cash amounting to P800,000.00 kept in the first
floor of his residence. When Uy Chi Kim returned, he told Rubi Saw that he had only P20,000 on hand. He assured plaintiff, however, that
there was no cause for her to worry (as) he was certain he would have the entire amount ready by the next day when the banks would be
open. Again, trusting the elderly defendant Uy Chi Kim, Rubi Saw did not object and did not insist on the return of the Deed of Absolute
Sale that she signed, together with the Certificate of Title which she delivered to Lourdes Chong. The next day, May 9, 1988 Rubi Saw
called Lourdes Chong and Uy Chi Kim over the telephone but was told they were not around. She could not go to the residence of Uy Chi
Kim because she could not leave her office due to business concerns. On May 10, 1988 Rubi Saw repeatedly called the two but was
informed they were not around. On May 11, 1988 already anxious, she personally went to the residences and offices of the two
defendants but they were not around. On May 12, 1988 Rubi Saw wrote defendant Century Well advising Lourdes Chong of the rescission
and cancellation of the Deed of Absolute Sale because of lack of consideration. Lourdes Chong refused to receive the letter. Thereafter,
several demand letters were sent to the defendants but they refused to pay plaintiffs. Worried that defendants might surreptitiously
transfer the certificates of title to their names, Rubi Saw wrote the public defendant Register of Deeds on May 16, 1988, giving
information about the circumstances of the sale and requesting not to allow registration of the Deed of Absolute Sale, together with an
Affidavit of Adverse Claim. On May 20, 1988, plaintiffs' representative was informed by the Register of Deeds that defendants have made
representations with defendant to Register the Deed of Absolute Sale on May 23, 1988.
Plaintiff Rubi Saw filed this Complaint alleging that Lourdes Chong and Uy Chi Kim maliciously misled her to believe that they would pay
the P800,000 as consideration when in fact they had no intention to pay plaintiffs, and prayed that they should be awarded moral
damages; that defendants be restrained from registering the Deed of Absolute Sale, and be ordered to return to them the 2 titles of the
properties together with the Deed of Absolute Sale."[10]
The defendant Century Well filed its Answer stating that during the operation of plaintiff CKH, the latter borrowed from Chong Tak Choi
and Chong Tak Kei the total sum of P700,000.00 paying interest on P300,000.00 while the remaining P400,000.00 was interest free, and
upon the death of Cheng Kim Heng, it stopped making said payments. Defendant tried to prove that the source of this P700,000 was
Hung Yuk Wah while she was still residing in Hongkong, sent via bank draft from Hongkong to Chong Tak Choi and Chong Tak Kei on a
bank to bank transfer. Defendant likewise tried to prove that after the death of Cheng Kim Heng, Rubi Saw unilaterally arrogated to
herself the executive positions in plaintiff corporation such as President, Secretary, Treasurer and General Manager; thus effectively
shunting aside Hung Yuk Wah and her children in the management of plaintiff corporation. Family differences (arose) between Rubi Saw
on one hand, and Hung Yuk Wah and her children on the other hand which turned to worst after the death of Cheng Kim Heng. This
brought about the entry of Chinese mediators between them, one of whom is defendant Uy Chi Kim, a reason why the execution of the
Deed of Absolute Sale was to be done at the residence and business address of Uy Chi Kim."[11]
Uy Chi Kim, on the other hand, answered on his behalf, that:
"...his only participation in the transaction was as a mediator, he being one of the closest friends of Cheng Kim Heng; that because the
heirs of Cheng Kim Heng could not settle their problems he, together with Machao Chan and Tomas Ching tried to mediate in accordance
with Chinese traditions; that after long and tedious meetings the parties finally agreed to meet at his residence at 1266 Soler St., Sta. Cruz,
Manila for the purpose of pushing thru the sale of the properties in question as part of the settlement of the estate. Defendant Uy Chi
Kim corroborated the defense of his co-defendants that the purchase price of the properties was P800,000.00 the payment of which
consists in the form of P100,000.00 in cash Philippine Currency; and the balance of P700,000.00 will be applied as a set-off to the amount
borrowed by plaintiff CKH from Chong Tak Choi and Chong Tak Kei. He advanced the amount of P100,000.00 by way of his personal check
to Rubi Saw but because Rubi Saw refused, he gave Rubi Saw P100,000 in the form of P100 bills which Rubi Saw and Jacinto Say even
counted. After the P100,000.00 cash was given and the promissory notes, Rubi Saw signed the document of sale. It was during the
registration of the sale that a problem arose as to the payment of the capital gains (tax) which Rubi Saw refused to pay. The buyer
likewise refused to pay the same. The complaint against him is baseless and which besmirched his reputation. Hence his counterclaim for
damages."[12]
The trial court denied the petitioners' prayer for issuance of the writ of preliminary injunction in its Order dated August 4, 1988.[13]
After trial, the lower court rendered its Decision on February 4, 1991, finding that the annulment of the Deed of Absolute Sale was
merited, as there was no payment of the stipulated consideration for the sale of the real properties involved to Rubi Saw.
On the other hand, private respondents Century-Well, Lourdes Chong, and Chong Tak Kei alleged that:
"...the consideration for the two parcels of land was paid by means of off-setting or legal compensation in the amount of P700,000 thru
alleged promissory notes executed by Cheng Kim Heng in favor of his sons Chong Tak Choi and Chong Tak Kei (Exh. 6, 7, & 8) and payment
of P100,000.00 in cash.
CMV
In the first place, said the court, the Deed of Sale itself, which is the best evidence of the agreement between the parties, did not provide
for payment by off-setting a portion of the purchase price with the outstanding obligation of Cheng Kim Heng to his sons Chong Tak Choi
and Chong Tak Kei. On the contrary, it provided for payment in cash, in the amount of P800,000.00. The evidence presented, however,
did not disclose that payment of the said amount had ever been made by the private respondent. Moreover, there cannot be any valid
off-setting or compensation in this case, as Article 1278 of the Civil Code[14] requires, as a prerequisite for compensation, that the parties
be mutually bound principally as creditors and debtors, which is not the case in this instance. The rescission of the contract is, therefore,
called for, ruled the court.
122
executed in behalf of CKH in favor of Chong Tak Choi and Chong Tak Kei (Exhs. 6, 7 and 8) the accumulated interests thereon to be waived
as unstated consideration of the sale.
Upon appeal, the respondent Court of Appeals reversed the findings and pronouncements of the trial court. In its Decision[15] dated
April 21, 1993, the appellate court expressed its own findings, that the execution of the Deed of Absolute Sale was in settlement of a
dispute between Rubi Saw and the first family of Cheng Kim Heng, which arose upon Cheng's death. The appellate court described the
history of their dispute as follows:
"In 1977, Heng formed plaintiff-appellee CKH Industrial & Development Corporation (CKH), with his first wife Wah, children Choi and Kei,
and second wife Rubi as his co-incorporators/stockholders, along with other individuals (Exhs. C and D; ibid., p. 9 and pp. 10-13,
respectively). On April 15 and July 17 the following year, Heng, on behalf of CHK [sic], obtained loans of P400,000.00 and P100,000.00
from Choi, for which Heng executed two promissory notes in Choi's favor (Exhs. 6 and 7; ibid., p. 40 and p. 41, respectively). On
November 24, 1981, Heng obtained from his other son, Kei, another loan this time in the sum of P200,000.00 on behalf of CKH for which
he issued another promissory note (Exh. 8, ibid., p. 42).
After its incorporation, CKH acquired two parcels of land situated in Karuhatan, Valenzuela, Bulacan (now Metro Manila) covered by
Transfer Certificates of Title Nos. B-8710 (Annex A-Complaint; Record, p. 13) and B-8711 (Annex B-Complaint; ibid., p. 14), which are now
the subject of litigation in instant case.
On October 11, 1982, Kei was married to defendant-appellant Lourdes Chong nee Lourdes Gochico Hai Huat (Lourdes). During their
marriage, Kei and Lourdes resided in the house on Tetuan St., Sta. Cruz, Manila, which CKH was then utilizing as its office. At about this
time, Heng and Rubi had moved residence from Valenzuela, Metro Manila, to Bermuda St., Sta. Cruz, Manila.
Two years later, or in late 1984, Heng died. Thenceforth, there appeared to be a falling out between Heng's first wife Wah and their three
children on the one hand, and his second wife Rubi, on the other, which came to a head when, Rubi as president of CKH wrote a letter
dated August 21, 1985 to the mayor of Valenzuela, Metro Manila, to prevent issuance of a business permit to American Metals managed
by Chong Tak Choi, stating that CKH has not allowed it to make use of the property, and on November 7, 1985, when CKH, through
counsel, demanded that Wah, Choi and Yam vacate the residential and factory buildings and premises owned by CKH and located on one
of the subject lots on 76 F. Bautista St., Valenzuela, which the three and the corporation (of which two of them were stockholders), had
been allegedly illegally occupying (Exhs. 10 and 10-A; Folio, pp. 44-45).
Respected mediators from the Chinese community in the persons of defendant-appellant Uy Chi Kim, Ma Chao, Tomas Cheng and Johnny
Saw, were called in to mediate. The mediation efforts which resulted in the withdrawal by Rubi Saw of her letter about the withholding of
a license to American Metals, Inc. and much later, had culminated in the transaction now under litigation.
Having reached such agreement, on May 8, 1988, the parties met at the residence of Kim at Soler St., where the corresponding deed of
absolute sale of realty was executed (Exhs. 11, 11-A to 11-C; ibid., pp. 46-49), with mediator Cheng and CKH stockholder and Rubi's
secretary, Jacinto Say, signing as instrumental witnesses. After having received the cash consideration of P100,000.00 and the promissory
notes amounting to P700,000.00 Rubi had signed the deed, and thereafter delivered to Lourdes the document of sale and the owner's
copies of the certificates of title for the two lots. The deed having been executed on a Sunday, the parties agreed to have the same
notarized the following day, May 9, 1988. The parties again met the next day, May 9, 1988, when they acknowledged the deed before a
notary public."[16]
In sum, the appellate court found that there was indeed payment of the purchase price, partially in cash for P100,000.00 and partially by
compensation by off-setting the debt of Cheng Kim Heng to his sons Choi and Kei for P500,000.00 and P200,000.00 respectively, against
the remainder of the stipulated price. Such mode of payment is recognized under Article 1249[17] of the Civil Code.
As observed by the appellate court:
We are of the considered view that the appellees have not established what they claim to be the invalidity of the subject deed of sale.
The appellees are therefore neither entitled to the rescission or annulment of the document nor to the award made in their favor in the
decision under question and those other reliefs they are seeking.*18]
The question the Court is now tasked to answer is whether or not there was payment of the consideration for the sale of real property
subject of this case. More specifically, was there a valid compensation of the obligations of Cheng Kim Heng to his sons with the purchase
price of the sale?
To resolve this issue, it is first required that we establish the true agreement of the parties.
Both parties take exception to the provisions of the Deed of Absolute Sale to bolster their respective claims. Petitioners, while submitting
that as worded, the Deed of Absolute Sale does not provide for payment by compensation, thereby ruling out the intention of the parties
to provide for such mode of payment, submit on the other hand, that they had not received payment of the stipulated cash payment of
P800,000.00. The testimony of Rubi Saw during the hearings for preliminary injunction and during trial was submitted to advance the
submission that she was never paid the price of the subject lots, in cash or in promissory notes.
The formula for settlement in the dispute was for the Valenzuela properties of CKH to be sold to Century Well for the amount of
P800,000.00, P100,000.00 of which will be paid in cash and the balance of P700,000.00 to be set-off by the three (3) promissory notes
CMV
123
On the other side of the fence, private respondents, who, ironically, were the parties who drafted the subject document, claim that the
Deed of Sale does not express the true agreement of the parties, specifically with regard to the mode of payment. Private respondents
allege that the execution of the deed of absolute sale was the culmination of mediation of the dispute of the first and second families of
Cheng Kim Heng, over the properties of the decedent; that the price of the real property subject of the contract of sale was partly in cash,
and the reminder to be compensated against Cheng's indebtedness to his sons Choi and Kei, reflected in the promissory notes submitted
as Exhibits 6, 7 and 8 during the trial; that by virtue of such compensation, the sale has been consummated and the private respondent
Century-Well is entitled to the registration of the certificates of title over the subject properties in its name.
These contrasting submissions of the circumstances surrounding the execution of the subject document have led to this stalemate of
sorts. Still, the best test to establish the true intent of the parties remains to be the Deed of Absolute Sale, whose genuineness and due
execution, are unchallenged.[19]
Section 9 of Rule 130 of the Rules of Court states that when the terms of an agreement have been reduced to writing, it is considered as
containing all the terms agreed upon and there can be, between the parties and their successors-in-interest, no evidence of such terms
other than the contents of the written agreement.
The foregoing stipulation is clear enough in manifesting the vendors admission of receipt of the purchase price, thereby lending
sufficient, though reluctant, credence to the private respondents submission that payment had been made by off-setting P700,000.00 of
the purchase price with the obligation of Cheng Kim Heng to his sons Choi and Kei. By signing the Deed of Absolute Sale, petitioner Rubi
Saw has given her imprimatur to the provisions of the deed, and she cannot now challenge its veracity.
However, the suitability of the said stipulations as benchmarks for the intention of the contracting parties, does not come clothed with
the cloak of validity. It must be remembered that agreements affecting the civil relationship of the contracting parties must come under
the scrutiny of the provisions of law existing and effective at the time of the execution of the contract.
We refer particularly to the provisions of the law on compensation as a mode of extinguishment of obligations. Under Article 1231 of the
Civil Code, an obligation may be extinguished: (1) by payment or performance; (2) by the loss of the thing due, (3) by the condonation or
remission of the debt; (4) by the confusion or merger of the rights of creditor and debtor, (5) by compensation; or (6) by novation. Other
causes of extinguishment of obligations include annulment, rescission, fulfillment of a resolutory condition and prescription.
Compensation may take place by operation of law (legal compensation), when two persons, in their own right, are creditors and debtors
of each other.[23] Article 1279 of the Civil Code provides for the requisites of legal compensation:
The so-called parol evidence rule forbids any addition to or contradiction of the terms of a written instrument by testimony or other
evidence purporting to show that, at or before the execution of the parties written agreement, other or different terms were agreed
upon by the parties, varying the purport of the written contract. When an agreement has been reduced to writing, the parties cannot be
permitted to adduce evidence to prove alleged practices which to all purposes would alter the terms of the written agreement. Whatever
is not found in the writing is understood to have been waived and abandoned.[20]
Article 1279. In order that compensation may be proper, it is necessary:
(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;
The rule is not without exceptions, however, as it is likewise provided that a party to an action may present evidence to modify, explain,
or add to the terms of the written agreement if he puts in issue in his pleadings: (a) An intrinsic ambiguity, mistake or imperfection in the
written agreement; (b) The failure of the written agreement to express the true intent and agreement of the parties thereto; (c) The
validity of the written agreement; or (d) The existence of other terms agreed to by the parties or their successors in interest after the
execution of the written agreement.[21]
(2) That both debts consist in a sum of money, or if the things due are consumable, they be of the same kind, and also of the same quality
if the latter has been stated;
(3) That the two debts be due;

We reiterate the pertinent provisions of the deed:
(4) That they be liquidated and demandable;
That for and in consideration of the sum of EIGHT HUNDRED THOUSAND (P800,000.00) PESOS, Philippine Currency, paid by VENDEE to
VENDOR, receipt of which is hereby acknowledged by the latter to its entire satisfaction, said VENDOR, by these presents, has SOLD,
CEDED, TRANSFERRED, and CONVEYED by way of absolute sale unto said VENDEE, its successors and assigns, the two parcels of land
above described and any and all improvements therein;*22+
CMV
(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in due time to the
debtor.
124
Compensation may also be voluntary or conventional, that is, when the parties, who are mutually creditors and debtors agree to
compensate their respective obligations, even though not all the requisites for legal compensation are present. Without the confluence
of the characters of mutual debtors and creditors, contracting parties cannot stipulate to the compensation of their obligations, for then
the legal tie that binds contracting parties to their obligations would be absent. At least one party would be binding himself under an
authority he does not possess. As observed by a noted author, the requirements of conventional compensation are (1) that each of the
parties can dispose of the credit he seeks to compensate, and (2) that they agree to the mutual extinguishment of their credits.[24]
In the instant case, there can be no valid compensation of the purchase price with the obligations of Cheng Kim Heng reflected in the
promissory notes, for the reason that CKH and Century-Well the principal contracting parties, are not mutually bound as creditors and
debtors in their own name. A close scrutiny of the promissory notes does not indicate the late Cheng, as then president of CKH,
acknowledging any indebtedness to Century-Well. As worded, the promissory notes reveal CKHs indebtedness to Chong Tak Choi and
Chong Tak Kei.
Exhibit 6
Manila,
July 17, 1978
For Value received, we, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered domestic corporation in the City of Manila,
represented by its president, CHENG KIM HENG with residence certificate no. 118824650 issued at Manila, on 2-28-78 do promise to pay
on demand the sum of ONE HUNDRED THOUSAND PESOS ONLY (P100,000.00), Philippine currency with interest from the date hereof at
the rate of ten per cent (10%) per annum to Mr. CHONG TAK CHOI.
In witness hereof on the consents [sic] of the parties to this promissory note, I, CHENG KIM HENG, president of CKH INDUSTRIAL &
DEVELOPMENT CORPORATION do hereby affixed [sic] my signature below.
signed:
CHENG KIM HENG
Metro Manila, Philippines

April 15, 1978
Exhibit 8
For Value Received, We, CKH INDUSTRIAL & DEVELOPMENT CORPORATION, a duly registered corporation with postal address at Rm. 330,
MTM Bldg. 1002 C. M. Recto Avenue, Manila, promises [sic] to pay on demand to Mr. CHONG TAK CHOI, the sum of FOUR HUNDRED
THOUSAND PESOS, Philippine currency (P400,000.00)
Manila, Philippines,
To certify the correctness of the indebtedness to the party, I, CHENG KIM HENG, President of CKH INDUSTRIAL & DEVELOPMENT
CORPORATION, do hereby signed [sic] in behalf of the Corporation.
I, CHENG KIM HENG, President of CKH INDUSTRIAL & DEVELOPMENT CORPORATION, 831 Tetuan St. (2nd floor) Sta. Cruz, Manila,
promises to pay to CHONG TAK KEI, with postal address at 76 F. Bautista St., Valenzuela, Metro Manila, the sum of PESOS: TWO HUNDRED
THOUSAND ONLY (P200,000.00) Philippine Currency, with interest at the rate of Ten per cent (10%) per annum from date stated above to
a period of one year and I hereby consent to any renewal, or extension of same amount to a same period which may be requested by any
one of us for the payment of this note.
CKH INDUSTRIAL & DEVELOPMENT CORPORATION
November 24, 1981
I also acknowledge the receipt of the above sum of money today from MR. CHONG TAK KEI.
signed:
CHENG KIM HENG"
CKH IND. & DEV. CORP.

Exhibit 7
signed:
CMV
125
CHENG KIM HENG
President
In fact, there is no indication at all, that such indebtedness was contracted by Cheng from Choi and Kei as stockholders of Century-Well.
Choi and Kei, in turn, are not parties to the Deed of Absolute Sale. They are merely stockholders of Century-Well,[25] and as such, are not
bound principally, not even in a representative capacity, in the contract of sale. Thus, their interest in the promissory notes cannot be offset against the obligations between CKH and Century-Well arising out of the deed of absolute sale, absent any allegation, much less, even
a scintilla of substantiation, that Choi and Keis interest in Century-Well are so considerable as to merit a declaration of unity of their civil
personalities. Under present law, corporations, such as Century-Well, have personalities separate and distinct from their stockholders,[26]
except only when the law sees it fit to pierce the veil of corporate identity, particularly when the corporate fiction is shown to be used to
defeat public convenience, justify wrong, protect fraud or defend crime, or where a corporation the mere alter ego or business conduit of
a person.[27] The Court cannot, in this instance make such a ruling absent a demonstration of the merit of such a disposition.
Considering the foregoing premises, the Court finds it proper to grant the prayer for rescission of the subject deed of sale, for failure of
consideration.[28]
IN VIEW WHEREOF, the Court hereby RESOLVED to GRANT the present petition. The decision of the Court of Appeals dated April 21,
1993, is hereby REVERSED and SET ASIDE. The decision of the Regional Trial Court of Valenzuela, Branch 173 dated February 4, 1991, is
hereby REINSTATED, with the MODIFICATION that the award of moral damages and attorney's fees to Rubi Saw, and the order for
payment of costs are DELETED.
The parties shall bear their respective costs.
SO ORDERED.
CMV
126

Corpo Cases2

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Corporation.

Good Earth vs CA ..90

Alfafara vs Acebedo Optical..,,,2

Malayang Samahan ng Manggagawa vs Ramos ..96

Separate Juridical Personality; General Rule

Powton Conglomerate v Agcolicol ..104

Stockholders of F. Guanzon vs ROD Manila ..5

Lowe, Inc., et.al. vs CA107

San Juan Steel vs CA ..6

Piercing the Veil; Stockholders

Feliciano vs Commission on Audit .13

*(In syllabus: Padilla vs CA, 362 S 620)

Sulo ng Bayan vs Araneta .20

But 362 S 620 is Marubeni Corp. vs Lirag112

Piercing the Veil; Privileges

Concept Builders Inc. vs NLRC .27

Manila Gas vs Collector116

Villa Rey Transit vs Ferrer .32

Piercing the Veil; Obligations and Debts

Francisco Motors Corporation vs CA 38

Traders Royal Bank vs CA..118

PNB vs Andrada Electric .................41

CKH Industrial vs CA .120

Piercing the Veil; Subsidiary Corporations

Hacienda Luisita vs Presidential Agrarian ..126

Heirs of Fe Tan Uy vs International Exchange55

The petition has no merit.

Thus, the instant petition which must likewise fail.

Likewise, Section 6 of the Code of Ethics for optometrists states:

These provisions petitioners, through Acebedo, were found to have violated.

Corollarily, Republic Act No. 1998 pertinently provides:

WHEREFORE, petition is denied due course.

October 30, 1962

STOCKHOLDERS OF F. GUANZON AND SONS, INC., petitioners-appellants,

REGISTER OF DEEDS OF MANILA, respondent-appellee.

Ramon C. Fernando for petitioners-appellants.

BAUTISTA ANGELO, J.:

The number of parcels not certified to in the acknowledgment;

P430.50 Reg. fees need be paid;

P940.45 documentary stamps need be attached to the document;

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

This Agreement, made and entered into by and between:

SAN STRUCTURAL &

NENITA LEE GRUENBERG

Balance shall be payable on or before March 2, 1989;

Plaintiff is entitled to damages.*7+

4. Are respondents liable for damages and attorneys fees?

The Courts Ruling

1. Was there a valid contract of sale between petitioner and Motorich?

That was not asked of me.

Yes, just answer it.

Third Issue: Challenged Portion of TSN Immaterial

Q So, you signed in your capacity as the treasurer?

Damages and Attorneys Fees

G.R. No. 147402

January 14, 2004

Yes, sir, the check was paid in my name and I deposit[ed] it . . .

Yes, sir. *51+

and Controlled Corporations with Original Charters

The Ruling of the Court

MR. FOZ. And not under the general corporation law.

MR. ROMULO. That is correct. Mr. Presiding Officer.

MR. ROMULO. That is correct. (Emphasis supplied)